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This guide will discuss one of the abnormal economic situations in the global financial market, which is the Veblen effect, and its relationship with cryptocurrency.
In economics, there are several laws that guide people’s psychological reactions to the goods they purchase. Popular Scottish economist Adam Smith devised three important natural laws of economics: the law of supply and demand, the law of self-interest, and the law of competition. However, there are contemporary theories that contradict Smith’s law of demand. The law of demand states that at a higher price, consumers will demand a lower quantity of a good. The Veblen effect and Giffen effect counter the law of demand.
This guide will discuss the Veblen effect and its relationship with cryptocurrency. It is a common practice among consumers to buy expensive goods for their aesthetic value. Most times, there are goods with more functionalities than heavily purchased ones. For instance, the price tag of an iPhone attracts many consumers to buy the phone, as it defines the financial cadre of the owner. Although there are cheaper phones with better hardware, consumers still prefer the iPhone. Funny enough, most iPhone users cannot maximize the phone’s software prowess. Interestingly, once Apple releases a successive iPhone series with negligible upgrades, consumers buy them irrespective of the price increase. This scenario gives a perfect description of what the Veblen effect entails.
The Veblen effect simply describes a positive influence on the price of a commodity when the demand increases. It is one of the abnormal economic situations in the global financial market. Other irregular economic behaviors include the snob effect and the bandwagon effect. While the snob effect refers to consumers who buy items based on exclusivity, the bandwagon effect describes consumers who purchase items based on popularity. This effect works contrary to the law of demand. It is synonymous with the Giffen effect, but unlike Giffen goods, Veblen goods are expensive. In addition, the price of Giffen goods stays the same after reaching a certain price level. In plain terms, the Veblen effect means the higher the price, the greater the demand for an item or commodity.
The Veblen effect originated from a study about conspicuous consumption; it entails spending money on luxury goods or services to show financial power, wealth, and social status. An American economist and sociologist, Thorstein Veblen, carried out this in-depth study in the 19th century. He launched his idea about conspicuous consumption through his book titled “The theory of leisure class: An economic study in the evolution of institutions.” Veblen was eager to connect the relationship between the economy, society, and culture.
One may wonder why consumers fall under the umbrella of the Veblen effect. According to Veblen’s research on conspicuous consumption, there are two major reasons behind consumers’ behavior. First, many consumers perceive that expensive luxury goods and services have higher quality. Subsequently, an increase in the price of such an item is mistaken for an increase in quality against the normal increase in demand. Another reason consumers deliberately buy expensive things is to show they are wealthy to buy what few people can afford. Sometimes, buyers indirectly increase the demand for a particular good by exhausting the widely distributed supply. These stated reasons counter the natural law of demand proposed by Adam Smith.
Artworks are popular Veblen goods. Possession of contemporary artwork shows the financial capability of the purchaser. Artworks of famous artists of ancient times, like Leonardo da Vinci, Basquiat, Damien Hirst, and Banksy, have sold for millions of dollars. The price of such artwork continues to increase. The one-time controversial blockchain concept, non-fungible tokens (NFTs), is based on artworks.
Another example of Veblen goods is luxury watches which are great symbols of wealth and power. Designers make these watches from precious mineral stones like gold, silver, diamond, and sapphire. The rarity of these gems affects the price of these watches. Top designers craft these expensive luxury accessories with high expertise and extreme finishing. Popular luxury watchmakers are Rolex, Omega, Jaeger-LeCoultre, Patek Philippe, and TAG Heuer.
Clothing apparel and handbags are also expensive items consumers purchase to show wealth. The price tag of these fashion items reflects the quality of the material used and the fashion brand. Consumers also splash a lot of cash by buying fashion items like sneakers, shoes, and bracelets. Some of these popular luxury fashion brands like Louis Vuitton, Nike, Parade, D&G, Chanel, and Gucci.
Sometimes, services qualify as Veblen goods. Some Veblen services include tuition for educational institutions, haircut charges, home cleaning services, etc. Not only adults buy Veblen goods but also youth, children, and teenagers. They love attending expensive colleges, wearing designer clothes, and even riding exotic cars.
Other examples of Veblen goods may include edible items like exotic wines.
To sum up, Veblen goods are expensive and experience a constant exponential increase in price in reaction to demand. People of higher financial class showcase their affluence at the slightest opportunity while acquiring any of these goods, commodities, or services.
A quick review into how Bitcoin (BTC) debuted on the financial market gives a green light that BTC is a Veblen good. Initially, the price of the world’s largest cryptocurrency by market cap was around $0.25. Then BTC was in low demand because market participants considered it worthless. However, when the price of BTC increased, people saw it as a valuable asset. After that, the more BTC’s price increases, the more valuable it becomes and the more demand. The increased demand pushed the price of BTC to an ATH of over $67,000. This perfectly fits into the law of the Veblen effect. In fact, many countries, firms, and individuals are currently amassing chunks of BTC to their threshold making them top crypto whales.
Furthermore, the migration of artwork from the physical world to blockchain technology brought about innovative blockchain assets called NFTs. NFTs solved authenticity and ownership issues popular among artists and creators. Without mincing words, NFTs are Veblen goods, as the price depends on their rarity and popularity. Introducing NFTs as a digital good received criticism from traditional economists and artifact collectors. The fierce retaliation continued until Mike Winkelmann (Beeple) sold his “Everydays: The First 5000 Days” for a whooping sum of $69.3 million. It took him 13 years to finish this artwork. Since then, NFTs have spiked in price to a net worth of over $2 billion. The recent spike in the number of NFT creators like Yuga Labs and CryptoPunks has increased the price of NFTs alongside the demand.
A clear cut into the Veblen effect, its causes, and its relation with cryptocurrency have highlighted the importance of investing in blockchain assets. More adoption of blockchain technology will indirectly push the demand for crypto assets soon. Buyers will continue to maintain their conventional attitude of buying expensive things to show financial prowess, even in the crypto sector. Individuals, firms, and governments are proud owners of NFTs and a huge amount of BTC.
As earlier explained, many Veblen goods purchasers buy based on societal impulses. The involvement of top celebrities across different sectors will push crypto newbies or on-lookers to possess NFTs and BTCs. With the help of the Veblen effect, the finance sector can welcome crypto assets as viable goods or commodities.
The Veblen effect is an economic phenomenon whereby the prices of goods and commodities increase alongside the demand. This economic abnormality counters the popular law of demand, which states that the higher the price, the lower the demand.
Thorstein Veblen created the Veblen effect. The Norwegian-American economist and sociologist created this concept while carrying out studies about conspicuous consumption. He published his idea in a book titled: “The theory of leisure class: An economic study in the evolution of institutions.”
Veblen goods are expensive luxury goods and services that experience demand as the price increases against the law of demand. Consumers often buy Veblen goods to show a sense of class or showcase wealth. Many consumers regard an increase in the price of Veblen goods as an increase in quality. Examples of Veblen goods are artworks, luxury watches, clothing apparel, handbags, bracelets, wines, and luxury cars. In most cases, there are cheaper items with better utility.
According to the Veblen effect, there are two reasons consumers buy conspicuous goods: to show they are wealthy and also to a social class. The social and cultural environment controls consumers around the Veblen effect. A larger percentage of Veblen goods consumers buy these goods based on impulses especially when models and celebrities purchase them.
BTC and NFTs are Veblen goods because the market demand increases regardless of the increasing price. Initially, the financial market tagged both assets as worthless. The demand for BTC increased after the asset gained a 121% rise in price in 2016. NFTs broke the bias after Beeple NFT sold ‘Everydays: The First 5000 Days” for $69.3 million. Many investors, governments, and firms are heavily purchasing these blockchain assets. There is a possibility the price of these assets will skyrocket when blockchain becomes fully adopted.