GiffenCoin

Is Bitcoin displaying Giffen behavior?

Giffen goods are those that people consume more as the price rises, in violation of the law of demand where higher prices mean lower demand.

It happens that Giffen goods are really uncommon, to the point that it has been really difficult to prove their existence with little empirical evidence. One common (but disproved) example are the Irish potatoes in the 19th century and -more recently- subsidized rice in China, based with the works of Robert Jensen and Nolan Miller.

“As Mr.Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises the marginal utility of money to them so much that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.”
Alfred Marshall, Principles of Economics

Over the years there have been some theories and ideas of money displaying Giffen behavior, on a 2011 article by James Kwak, he argued that the effect of increased price of money (in terms of other goods and assets) has on investments will cause investors to shift some of those investments back to cash, so in theory our fictional investor would be consuming more money when the price rises.

One basic criterion for the rising of Giffen behavior is for the income effect to dominate the substitution effect, so products with little or no substitutes are the usual suspects when looking for the behavior. Now, in contrast with regular money, Bitcoins have no real substitutes (sorry, Dogecoin and Litecoin), right now the only substitute is no-bitcoins at all, so the income effect is in full effect, people will buy Bitcoins as its perceived potential for price increases is high so, as long as the price is on the rise people (ie crypto-currency buyers) will buy more and buy less when the price falls.

Another -now obvious- criterion to test for the behavior, is that the good in question must be an inferior good, in strict crypto-currency terms Bitcoins are inferior goods, people doesn’t drop high-priced Bitcoins to get -for example- low priced Dogecoins, nor will buy more Bitcoins when the price falls, but will try to sell them if they perceive that the price will fall even more.

1 Bitcoin will buy a whole lot of Dogecoins

So, being inferior goods with no real substitutes Bitcoins seems to be displaying Giffen behavior. A good mental exercise could be devising a theoretical cryptocoin whose supply will decrease as the price rises and increase when it falls, so people will have the incentive to buy more when the price is up and less when it’s down, GiffenCoin I will call it, perhaps I’d be able to use in my brand new side-chain.