“As Mr. Giffen has pointed out, a rise in the price… they consume more, and not less of it.”
— Alfred Marshall, Principles of Economics 1895

Bitcoin is famous for its astounding historical price increases that seemingly defy logic. Typically, demand for a good or service decreases as price increases. However, bitcoin sometimes does the opposite. Why does bitcoin seem to break the rules of traditional economics? Well, a dark time in Ireland's past may contain the answer.

From 1845 -1852, a tragic potato famine devastated Ireland. As potatoes died from blight, healthy potatoes became more scarce. Consumers reacted to rising potato prices by offering even higher prices, exacerbating the rise. What does bitcoin have in common with potatoes during a famine period? Let's dig a little deeper.

During the famine period, the potato defied traditional laws of economics and earned a new classification – the Giffen good. A Giffen good is a phenomenon where an income-constrained group reacts to a supply-constrained, homogeneous good (without any substitutes) by continually offering higher prices. Essentially, as a non-luxury good becomes more expensive, consumers are more willing to spend a greater percentage of their income on it. Visually speaking, a Giffen good has an upward-sloping demand curve (see image 2).

In the modern Western world, if the price of potatoes increases, individuals would substitute their potato consumption with a similar good, like rice or bread. However, 19th century Ireland lacked agricultural diversity, essentially forcing the population to be dependent on the potato. So, how are potatoes similar to Bitcoin?

Many Bitcoiners are aware of the fact that income inequality is rising in the Western world. An increasing proportion of the population lives paycheck to paycheck and depends on credit cards. As living expenses rise faster than incomes, scarce and stable assets needed to escape inflation, like real estate, are becoming increasingly unaffordable. While this situation in the West is less drastic than the Irish potato famine, middle-class Westerners are experiencing a combination of income, supply and cost constraints while the options needed to stay financially buoyant are out of reach or without substitutes. For the financially hungry middle class, bitcoin (and ASIC miners) is the potato to alleviate their financial hunger.

Potatoes are like bitcoin. Through the proof of work of farming, potatoes yield more potatoes. Similar to how an ASIC and proof of work yield bitcoin over time. BTC is both a scarce asset (think digital commodity or digital real estate) and money (a highly divisible medium of exchange). Since money is more liquid than any good, it can easily be converted into anything, such as food or other sustenance.

Due to the lack of perceived investment substitutes capable of uplifting the lower classes out of financial hardship, bitcoin offers the masses the promise of financial buoyancy. Furthermore, when the price of BTC increases, the market responds positively because Bitcoin seems to deliver on its 'promise.' As a result, the masses are increasingly eager to purchase more BTC – smashing that $100 market buy button and driving the price up even further.

While critics suggest that the tulip bubble better explains bitcoin's abnormal price behavior, Bitcoin satisfies the Giffen good phenomenon much better for several reasons:

  1. Tulips were a luxury good – a single bulb could dwarf a skilled laborer's annual income and only the rich could participate in the mania.
  2. Tulips were unique to one another, and traders often speculated on these differences. Bitcoin is perfectly homogeneous, and ASICs are mostly homogeneous.
  3. Perhaps most importantly, Bitcoin is a highly divisible commodity, and each satoshi is a fraction of a cent. Bitcoin's high single coin price is an aggregate measure, similar to a barn full of potatoes.
  4. A commodity has some intrinsic value. Bitcoin and gold have intrinsic value as commodities with monetary properties and long-term investment appeal. In fact, given the explanation above, the tulip bubble does a much better job at explaining the behavior of NFTs like Bored Ape Yacht Club (see image 3).

While bitcoin and ASICs are definitely not tulips or a mania-driven bubble about to burst, they can occasionally display seemingly illogical skyrocketing prices fueled by an apparent upwards sloping demand curve. Bitcoin serves as a modern day Giffen good where the income-constrained world continually demands to acquire more BTC - a supply-constrained good without any substitutes whose price historically continues to rise - fueling ASIC price and demand increases.
In a world of rising demand, Bitcoin miners stand to win because they can opportunistically resell their hardware at increasingly higher prices while they actively print potatoes (Bitcoin).