As Bitcoin streaks towards $6,000 I continue to think about what will drive it higher. In the near term, it struck me that Bitcoin is behaving as a Giffen good.
Giffen goods are defined as 'those goods whose demand rises as their price rises'. This is the opposite of how most goods behave - as prices rise, demand falls off. In the case of Bitcoin, it seems clear to me that we are in a stage where rising prices fuels further demand - like a Giffen good.
This makes sense, because as I have said, so many people I talk to are examining bitcoin (and cryptocurrencies) to see if they fit in their portfolio or not. As they search for information, they constantly run into the bitcoin 'evangelists' who adore cryptocurrencies and never have a bad word to say about them. Even problem is only a minor setback on the path to widespread acceptance and new highs. At the other end of the spectrum, they come across the 'bitcoin is a bubble' writing that is also prevalent. So they are torn whether we are still in the early stages of a brand new system that will revolutionize money as we know it, or we are creating values that will make the Tulip Mania seem reasonable.
I think higher prices, for now, will attract more interest. As prices rise, more people who question the validity, will decide it is worth a shot to invest. I currently think that behavior is how a Giffen good works, the detractors will quickly point out that a Giffen good and what makes a bubble occur is nonexistent. The detractors may be correct (I continue to believe that blockchain will be important over the long run - I am less convinced that Bitcoin will be viable in the long run - but that doesn't stop me from attempting to trade it).
The creation of a Bitcoin ETF would accelerate the price rise in the near term. Many of the potential buyers who I speak to, who are becoming more convinced that they are missing out on something as they see the price rise, would much prefer to invest (speculate) using more traditional vehicles - like an ETF in their brokerage account. Until that occurs, there will be some pool of potential buyers who just aren't willing to spend the time and effort to create wallets and truly join the crypto world (though that group is shrinking as prices rise).
So for now, rising prices will likely lead to more buyers, as doubters and skeptics become converted. The danger, is that falling prices will tend illicit more sellers, as fears that the 'bubble theory' is correct will resonate. For that to occur, I think we need to see another concerted attempt by governments or central banks to push back.
Some will say that the stock market behaves as a Giffen good - especially for momentum investors, but I disagree. Stocks have some long term metrics that investors understand. They may be willing to enter into new territory relative to that metric - but many investors will not buy merely because price is higher. Sellers will emerge as valuations become stretched. Something like Bitcoin, with no traditional valuation metrics is very different from the stock market.
Disclaimer: Any opinions expressed are those of Peter Tchir. This info is for educational and/or entertainment purposes only, so use at your own risk. He's not a broker-dealer or advisor of any kind.
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