Crypto Investors Can Learn from Jevons Paradox on Demand Elasticity
William Jevons' prediction, known as the Jevons paradox, suggests that greater efficiency leads to increased consumption rather than conservation. This concept applies across various sectors:
- Fuel-efficient cars led to more driving.
- Efficient lightbulbs resulted in more installations.
- Improved HVAC systems encouraged larger homes.
The digital revolution has amplified this effect, particularly with computing. As costs decrease under Moore's law, usage has escalated, benefiting industries like semiconductors and cloud computing. Microsoft's Satya Nadella noted that efficiency gains from AI advancements have not diminished demand for GPUs and cloud services.
However, not all sectors have seen positive investor outcomes despite efficiency increases. For instance:
- Airline traffic has surged since the 1950s, yet airline stocks remain unattractive investments.
- Internet traffic grew significantly from 1997 to 2003, but investors in companies like Level 3 Communications faced substantial losses.
In the cryptocurrency space, the expectation is that lower-cost blockspace will drive demand. While cheaper blockspace has spurred activity on networks like Solana and Ethereum layer-2s, much of this is attributed to short-term trends like memecoin trading, which may not sustain long-term growth.
Ethereum's transaction costs have decreased over 90% since 2021, yet transaction volumes have remained stable. Additionally, fees from layer-2 solutions do not compensate for losses in layer-1 Ethereum fees, indicating a failure to realize the Jevons paradox within the ecosystem.
This situation highlights the importance of understanding that while certain efficiencies can lead to increased usage, they do not guarantee profitable investment outcomes.