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Author Topic: GiffenCoin - Is Bitcoin displaying Giffen behavior?  (Read 1871 times)
Vencoin
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April 29, 2014, 01:25:25 AM
 #1

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.

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.

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, I’ll spent the rest of the night thinking about it.
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Malin Keshar
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April 29, 2014, 02:31:00 AM
 #2

btc is a finite asset. More people using, selling and buying stuff for btc, more service providers and people accepting jobs for btc,more ppl trading and holding it = more reason for more prople enter the market = more demand = higher price. Ppl doesn't buy btc only because their future rise in price, but because they can use them.

Bitcoins transfer are way more effective than with fiat, and cheaper, especially for people with less than millions of $. Tax are too high, and the bureocracy to open international bank accounts is so high, and keep the account open is so expensive. This is the intrinsic advantage of btc.

Others coins don't replace btc because they aren't as accepted as btc, not because they have less $ value. I personally like litecoin(less tranfer taxes). If bitcoin succeds, another(s) currency(ies) will appear to fill the gap of small transfer with acceptable taxes
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April 29, 2014, 02:41:49 AM
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I understand your point, but my point is that people doesn't sell bitcoins to buy litecoins (or viceversa), this means that there's no substitution effect, the reason -as you pointed- is mainly because no one accepts litecoins. The question in the article is a theoretical one, Giffen goods remain mainly in the theoretical realm of economics, and right now Bitcoins seems to be following the behavior and it could be a issue of interest in the quest of providing cryptocurrencies with a theoretical base. 
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April 29, 2014, 03:03:58 AM
 #4

Sounds like another GRQ-scheme sorry
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April 29, 2014, 04:57:18 AM
 #5

...

Gold is a Giffen good for many ranges of income.  Rich people tend to buy more of it than the middle class who buy more than the poor.

Once someone becomes a billionaire that is less true though.  See the Rothschild family (big owners of gold, but also of castles, banks and vineyards).

***

I am going to guess that BTC would also tend to be bought more by the rich, the more money you have, the more BTC you will likely buy.  As money comes in for me, I will likely be buying more BTC as well as gold.
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April 29, 2014, 05:39:37 AM
 #6

Gold behaves as a Veblen (not a Giffen) good for some income ranges, some people buy it because it's expensive, there's no income or substitution effect directly in action. The essential characteristic of a Giffen good is that it must be a inferior good, which Gold is not. Gold is a normal good when it's considered a luxury good, when prices fall people will buy more and less when the prices rises.

The nature of Giffen good is quite complex, and requires for the income effect to dominate the substitution effect, Gold has plenty of substitutes as a luxury item, Bitcoin does not have substitutes as a cryptocurrency, i.e. if the price of bitcoin is too high people doesn't turn to buy litecoins instead, as a matter of fact they will buy even more bitcoins since people considers high prices to be an indicator of greater future value and low prices as a sign that Bitcoin could fail.
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April 29, 2014, 05:00:43 PM
 #7

...

(OROBTC revealed an essential ignorance of the term "Giffen Good" it looks like.)

What I wanted to say is that more gold is purchased as income goes up, until you get to the very, very rich.

***

As far as BTC being an inferior good, well, I plan to buy more as I get more money...

I recall from ECON 101 that baloney (bologna) is an inferior good, the more money you make, the LESS you buy.
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April 30, 2014, 02:43:49 AM
 #8

Gold is unique, thats the whole point of it I think.   Obviously it is elemental and bitcoin is not quite that, it can be replaced though unlikely right now but there are competitors or clones at least

As a luxury there are many but they are not gold.    
Quote
Giffen goods are those that people consume more

This seems off from the start, btc is not consumed.    Maybe it should be you might argue to make it more transactional.    The Fed would agree, inflation is essential in their eyes to stoke the economy into consumption not storage or retention of wealth.  
      The paradigm for Bitcoin is the network economy, its value is from its distribution, knowledge and use by people and this is mostly what raises or lowers its price and value even. www.en.wikipedia.org/wiki/Network_economy

Quote
i.e. if the price of bitcoin is too high people doesn't turn to buy litecoins instead,

I would have to disagree.    This is the basis for many alt coins.   Just on a very simple take, I dont want to deal with fractions of a coin when I can simply have 10,000.   Same difference but I think thats why people talk about mBTC and so on.  Tiny decimals are awkward, in the world of geek no doubt my objection is pitiful but Im mostly stressing thats its the average public who determine worth of many things in the end.  Simple things I think matter when you talk about cash.  It is about ease of use largely, that will determine btc value

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Vencoin
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May 01, 2014, 12:09:50 AM
 #9

Bitcoins are bought and sold, that was I meant with "consumed", my approach on this matter was more theoretical, my main objective is to understand how bitcoins behave from the perspective of the consumers.

The example you give with the altcoins is true, but it has nothing to do with the substitution effect, you buy mBTC because it's more practical not because it represents more real value than bitcoins (as a matter of fact the have the same value), the rise or fall of the BTC doesn't make you dump your BTC's to buy mBTC's or litecoins, that's my point.

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May 01, 2014, 11:22:00 AM
 #10

Unlikely. Bitcoin is held mostly by enthusiasts and speculators at this stage. It's very high up on Maslow's hierarchy of needs.  I doubt that a lot of people feel compelled to buy more BTC when their income drops.

Bitcoin is a lot more like a Veblen good.

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May 01, 2014, 03:11:02 PM
 #11

Timo Y, Veblen goods are normal goods, and so far Bitcoins are behaving like inferior goods.

I don't know if a lot of people "feel compelled to buy more BTC when their income drops", but if we limit our universe to crypto-currency buyers they do feel compelled to do it. So far each time China bans something bitcoin the price falls and people stop buying out of fear, but when the price rises again people starts buying again. Now remember that a rise in prices is a fall on the relative income of people, so technically speaking people (crypto-currencies buyers) are buying more when their income falls.
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