What is Bitcoin? Ever heard of people who had huge economic losses because they bought Bitcoin and lost their password? Bitcoin, put simply, is a form of cryptocurrency. It has three unique qualities: 1) it is limited, 2) incredibly hard to earn, and 3) very easy to verify.
In class, we talked about how economics is the study of how scarce resources are allocated to satisfy unlimited wants. Something has value if it satisfies two conditions: scarcity and utility. Scarcity means that there is a limit to the amount of the good. In this case, Bitcoin is scarce; there are only 21 million bitcoins in this world. By making Bitcoin scarce, it is automatically more desirable to the people. The utility lies in its potential to become a more efficient commodity than we already have (at least, some economists believe that). Bitcoin is independent of government interference, meaning that no single person has control over it. Furthermore, the code that Bitcoin is built on is constantly being modified and improved.
But for others, Bitcoin has no real value. Through the lens of microeconomics, we know that usually when prices of a good go up, demand decreases. This is called the demand curve, which reflects the law of demand - when more people buy more of a product, its price falls. However, for Bitcoin, we see that higher prices actually lead to more demand which generates even higher prices. In other words, the rising prices of Bitcoin is attracting more consumers. This is what we call a “bubble.” Once the bubble pops, the market crashes and the prices for Bitcoin will go down.
So does Bitcoin have value or not?
I think this is very interesting to think about, especially as we have started studying supply and demand. Since there is a relatively small quantity, there is a high price. Since bitcoins are so hard to mine, the supply is currently far to the left, so the supply curve is cut short. This means that the curves don't meet and the amount of bitcoins is not at the equilibrium point and there is instead a shortage, but there is no one large organization that is going to lower the prices or make more, making it a special case.
ReplyDeleteThis is a really interesting example, using Bitcoin and relating it to multiple economic concepts. I like how you mention supply and demand and show how Bitcoin is actually playing out opposite what the demand curve expects it to be, which shows that many economic ideas are what happens most of the time, not always. This Bitcoin example enforces the idea that these are predictions of how the market may play out and there are times when the opposite happens.
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