Easy Money and Veblen Goods

From $0.00099, the price implied by the first recorded BTC-for-dollars sale in October 2009 when 5,050 BTC went for $5.02, to an all-time high of $68,958.00 in November 2021, Bitcoin increased in value by approximately 6.9 billion percent.

Billions were raised for blockchain companies and projects, and cryptocurrencies surpassed $3 trillion in total market capitalization at their peak in late 2021.

According to Chainalysis estimates (which model realized gains from on-chain flows, so treat them as directional), over $160 billion in crypto gains was realized in 2021: $76.3B in ETH, $74.7B in BTC, and $11.7B in altcoins.

The boom produced large gains for some early holders and traders, followed by large losses for many participants when prices reversed.

Non-custodial wallets let users control the keys to certain on-chain assets in a practice known as self-custody.

That control also transfers security and recovery duties to the user. It does not make every asset decentralized, liquid, or free from issuer and protocol risk.

Crypto markets made access to highly volatile assets unusually easy.

Normal goods

Normal goods are purchased more often when incomes rise.

Discretionary spending refers to purchasing non-essential items.

Below are some examples of discretionary spending on everyday goods.

• Buying the newest iPhone when your current one works fine.
• Buying an expensive latte machine when your drip coffee maker works fine.
• Going on vacation.

An inferior good is one whose demand falls as income rises. The label describes an observed income relationship, not the quality of the product or the people who buy it.

Veblen goods

Some status goods may display a different relationship: Veblen goods, goods for which a higher price can increase demand because the price itself signals status or exclusivity. (The demand-curve chart at the top of this page illustrates that claimed dynamic conceptually; it is not plotted from data.)

Think about the white cotton T-shirt from TJMaxx that sells for $5 and compare it to the white cotton T-shirt from Prada that sells for $500.

Material quality may differ, but the Prada name also carries status and cultural meaning. The Prada name also carries status and cultural meaning. Some NFTs were marketed through similar signals of scarcity, membership, and public display.

Buyers may seek resale gains, art, access, identity, or community membership. Those motives cannot be inferred from price alone.

So, how can you value an NFT or a set of NFTs?

A speculative heuristic is to observe which communities show unusually strong identity and loyalty. That may help explain attention, but it cannot establish fair value, liquidity, or the durability of demand.

People notice the price going up and want to get in on it.

That attention can push prices higher until demand weakens. Thinly traded assets can then fall quickly, and some become nearly worthless. The cycle is common, but no fixed percentage applies to every token or NFT collection.

Why do people flock to gold when financial times get rough, even when rarer earth metals exist?

Gold demand reflects monetary history, liquidity, central-bank reserves, portfolio behavior, jewelry and industrial use, and collective belief. Rarity alone does not explain it.

Ethereum's gas

An argument for Ethereum is that users may pay a premium for access to its settlement network, applications, and liquidity. (A note on dating: at this essay's original publication Ethereum mainnet still ran on proof-of-work; staking lived on the separate Beacon Chain until the September 2022 Merge. This passage reflects a post-Merge revision.)

However, most users do not care about this; they care about fees and user experience.

When a user is willing to pay $100 for a transaction, they are paying a premium for something they can do on other networks for a fraction of the cost.

Calling Ethereum transaction fees a Veblen good is a metaphor, not a standard economic classification. Fees rise when demand for limited block space rises. Users may accept that premium because they value Ethereum's applications, liquidity, security assumptions, or social status. The first three are forms of utility; only the last resembles Veblen demand.

This is somewhat tongue-in-cheek, and it should not be mistaken for a claim that higher fees make Ethereum more useful.

Psychology

When income and confidence fall, discretionary spending often falls. A normal good does not automatically become a Veblen good during a boom; the Veblen label requires evidence that a higher price itself increased demand.

As prices go higher, people notice.

As people notice, more people buy higher, until they cannot.

If BTC is up 5%, some people will buy, but many will feel like they will have a chance to buy at a similar price later, so they do not have to buy now.

If BTC is up 20%, these same people may feel like they will not be able to pay less than the current price, so they buy now.

This behavior pattern is widely recognized in trading communities as FOMO-driven decision making.

The same goes for selling.

Market psychology can drive entry and exit decisions, particularly in volatile assets with uncertain cash flows. That makes the Veblen analogy useful as a question about status and demand, but incomplete as a valuation model.