It makes perfect sense to want to own something that has grown in value 13 times in the last year, but part of Bitcoin's value is due to the social status it gives you?
A study recently undertaken by Bernstein Research suggested just that. Analysts agree that limited supply plays a large role in price growth, but the social position that comes along with having Bitcoins may also be causing investors to join the hype:
"Bitcoin does not provide investors with cash flows or other benefits, but Bitcoins' maximum offering is fixed and therefore the price is driven by speculation about Bitcoin's potential demand."
A well Veblen
Like the finest liqueur, fashionable cars and fashion brands, Bitcoin is acting as a Veblen good. The higher prices for certain goods can be attributed to the reinforcement in the social status associated with the product, something that Bernstein calls "snob value."
"In the middle of 2017, we conducted a consumer survey of 1.070 Chinese consumers of first-rate products that showed that Veblen's demand is the third most important driver of brand choice among brands."
Demand Curve of a Veblen Good
Bitcoin is perceived as difficult to understand for those who are not "inside." Thus, possessing Bitcoin immediately gives a "snob value," implying greater intelligence or perception.
Just like the remedy
In an odd but practical comparison, Bernstein compares Bitcoin to E.Jiao - traditional Chinese remedy derived from donkey skin. In 2016, China produced 5,000 tons of E.Jiao, which required 2.5 million donkey skins. This has led to a shortage of donkey skins and cheap imitations coming to market.
The main manufacturer of the original product - Dong E-E.Jiao - managed to raise the price of its product 18 times over the last decade because of the good quality of Veblen who adhered to it because of its scarcity.
How do dotcom hype?
Although not necessarily good, in the early 1990s, with the dotcom boom, there was a certain high social status bid that came with participating in a technology company. People were partly caught up in the hype because they wanted to join the early elite that were shaking everything up when it came to technology.
It has already been witnessed that companies that simply add the word "Blockchain" to their name receive large waves of unwarranted interest and again this could be compared to the social status that comes with participating in a company that is in the cryptos space.