Digital Luxury – Bitcoin. It makes perfect sense to want to own something rare that has increased in value 13-fold in the last year, even if there’s nothing tangible about that product. So where does its value come from? Is it safe to say that most of Bitcoin’s value is driven by the social status it brings?
A recent study conducted by Bernstein Research suggests just that. Market analysts agree that ‘scarcity’ plays a big role in Bitcoin’s price surge. However, it appears that it is the social standing that comes with owning the digital cryptocurrency that is making investors ‘join the hype’ and chose Bitcoin over other more rewarding currencies.
“Bitcoin does not provide investors with cash-flows or any other fiat-based benefits. Yet, the maximum supply of Bitcoins is fixed which drives the price up by speculations on the possible growing demand for Bitcoin, said Sam Adams from Cryptocore”
Digital Luxury – Bitcoin, A Veblen Good
As it is the case with rare diamonds, deluxe cars, and luxury garments, Bitcoin follows the same ‘Veblen effect’ – named after its discoverer, Thorstein Bunde Veblen (1857-1929) – which is caused either by the belief that higher price means higher quality, or by the desire for conspicuous consumption (buying expensive, prestigious items), often called as ‘snob factor.’ To back up the research, data shows that ‘Veblen’s demand’ is the third most important motivator of brand choice for consumers.
Similarly, Bitcoin is perceived as difficult to understand for those who aren’t ‘in the know.’ Thus, owning Bitcoin gives the owner immediate ‘snob value’ or social status, implying greater intelligence and insight in the business of cryptocurrencies and blockchains.
Famous stock picker Ronnie Moas points out that “the number [of available Bitcoins] is a lot lower than what people think it is. A lot of the Bitcoins have been lost and some are not mined yet, and then you have a lot of people like me that won’t sell their Bitcoin at any price.”
In the case of Bitcoin, it is estimated that less than 1,000 people hold almost 40% of all available BTC coins.
Digital Luxury – Donkey Skin
In a strange comparison, the research paper compares Bitcoin to E.Jiao. a traditional Chinese medicine extracted from donkey skin. In 2016, China produced 5,000 tons of E.Jiao, which required 2.5 million donkey skins. The demand has lead to a scarcity of donkey skins on the market and the appearance of cheap imitations.
As a direct result, the original manufacturer, Dong E-E.Jiao, has been able to raise the price of its ‘medicine’ 18 times over the last decade proving that scarcity led to a growing demand thus an increase in value.
Digital Luxury – Dot-com Hype?
Bitcoin is the first to hit the market thus seen as the ‘poster child’ for crypto which lets it benefits from the brand name recognition, way ahead of any other crypto names but then again, is that justified?
Another example points to the early 90s, at the dot-com boom. Just as it is the case with Bitcoin where there is no tangible, physical good to show, there was a certain social standing that came with being involved in the new tech wave and running a technology company.
Right now there is a trend that sees companies linking their names to Blockchain tech or startups, not for the benefits, the technology might bring but for the exposure, their brand name might get. To the researchers, this trend highlights a new wave of unjustified interest drawing social status from the idea of being seen as a company that is in the cryptocurrency space. Let us know your thoughts in the comment boxes below.