The most popular cryptocurrency bitcoin also referred as digital gold, has had an exciting and sumptuous year. Bitcoin’s price grew over 1500 percent in past 12 months, making it one of the best investment options. The digital asset is now used as a social status boosting element due to its escalating price.
Bernstein Research has compared China’s status boosting alcoholic drink Baijiu that could define the economics of bitcoin. To further understand what actually raises demand, the researcher also compares the virtual currency to the traditional Chinese medicine dubbed E Jiao.
The Bernstein analysts said:
“Bitcoins do not provide investors with cash-flows or other benefits, but the maximum supply of bitcoins is fixed, and so the price is driven by speculation on the potential demand for bitcoin.”
Limited supply is key factor
Bitcoin has a supply limit of 21 million coins after which it can only be exchanged but not mined. As it reaches the end point, the complexity increases to mine the currency. Therefore, miners have to use more resources to receive a smaller reward. Additionally, the crypto market has unreliability on what the actual demand of the cryptocurrency is? Many experts claim that around 1,000 people, commonly referred as crypto whales, control 40 percent of the market. Moreover, the crypto market is uncertain of the future.
The unpredictability nature of bitcoin causes the volatility in its price. Also, Bitcoin exchanges around the world have different prices which could result in sudden drop and peaks in its value.
The analysts pointed “In this world, investors vacillate between the holy grail of bitcoin pricing becoming widely adopted and the price ‘going parabolic’ and the risk that actual value is close to zero.”
Bitcoin compared to E Jiao
E Jiao, a Chinese traditional medicine, is extracted from donkey skin which is mainly used for anti-aging and blood enrichment. The analysts compared bitcoin’s demand with the popular E Jiao medicine.
As per the researchers, in 2016 China churned out 5,000 tons of E Jiao from 2.5 million donkey skins. This has considerably decreased the population of donkeys, leading to entry of fake medicines made out of cow and horse skin. The demand has benefited the E Jiao which increased its price by 18 times over the last ten years.
Limited Supply = Credible Scarcity
Bernstein calls the limited supply situation as “credible scarcity,” something that can relate to bitcoin which also has a limited supply. The only upper hand E Jiao has it that it has predictable demand.
Whereas the demand for the popular Fetien brand of baijiu, a high-end Chinese liquor falls between bitcoin and E Jiao. According to Chinese social status serving the drink indicates a higher status, similar to that of Veblen goods.
“This sort of Veblen demand was one of the factors which drove the consumer price of Fetien up by around 400 percent between 2007 and 2012 and is once again contributing to the 64 percent rise over the last 12 months,” said the analysts.
The Veblen Demand
The ‘law’ of demand and supply states that when prices of particular good falls, more it is purchased. However, for Veblen goods, the higher the price the more it is alluring. Therefore we see people buying luxury products at unusual prices. Bernstein refers this value of the product as “snob value.”
According to analysts, bitcoin is showcasing similar features that of Veblen goods. People owning bitcoin feel superior and cool and even more exclusive as the price rises. Owning bitcoin, the digital gold indicates the social status of a person.
Bernstein analysts said:
“In mid-2017, we conducted a consumer survey of 1,070 Chinese Premium Goods Consumers which showed that Veblen Demand is the third most important motivator of brand choice in Ultra Premium Baijiu brands like Fetien and its key competitor, Wuliangye. 32 percent of respondents cited ‘serving it shows respect to my guests’ as a key reason for choosing the brand. ‘It is appropriate for people like me to drink this brand’ also came in the top five cited by 23 percent of respondents.”
In the end, be it bitcoin, Fetien or E Jiao, all have gained its value due to the idea of limited supply. The first half of 2018 will be important and interesting for crypto enthusiasts on how the bitcoin market plays.
The increasing popularity around the world has already put it under surveillance of governments and regulatory authorities. South Korea and Australia recently have tightened their grip on crypto traders. Although, it is uncertain how much will the regulatory movement affect the speculative demand for bitcoin.
Is the road ahead for bitcoin difficult or smooth? Let us know your opinion in the comments section.