Scarcity is the condition of having only a limited amount of something. It can apply to physical goods, such as diamonds or oil, or to intangible goods, such as time or attention.
Bitcoin is a digital currency that is limited in supply. There will only ever be 21 million bitcoins created, and this number is hard-coded into the Bitcoin protocol. Lets discuss why scarcity is valuable.
There are many reasons why scarcity can make something more valuable:
- Scarcity creates demand. When something is scarce, people are more likely to want it. This is because scarcity creates a sense of urgency and exclusivity. People want what they can’t have, and they’re willing to pay more for it. In the case of Bitcoin, the limited supply creates a sense of urgency because it means that the value of Bitcoin is likely to increase over time. This is because as more people become interested in Bitcoin, the demand for it will increase, but the supply will remain the same. This will drive up the price of Bitcoin.
- Scarcity increases desirability. When something is scarce, it becomes more desirable. This is because scarcity is often associated with quality and exclusivity. People believe that if something is scarce, it must be good. This is certainly the case with Bitcoin. People believe that Bitcoin is a store of value that will hold its value over time. Bitcoin’s scarcity is an integral part of its appeal and value proposition. The dominant cryptocurrency mimics the properties of precious metals, such as gold, by having a finite supply, and the total number of bitcoins that will ever exist is limited to 21 million. This cap was implemented by Bitcoin’s creator, the pseudonymous Satoshi Nakamoto, to create a deflationary asset. This scarcity stands in stark contrast to traditional fiat currencies, which are inflationary and can be produced in unlimited quantities by central banks. This scarcity is further augmented by the process of Bitcoin halving, a crucial part of the mining process which occurs approximately every four years and reduces the rate at which new bitcoins are created and released into circulation, effectively enhancing its scarcity. This scarcity stands in stark contrast to traditional fiat currencies, which are inflationary and can be produced in unlimited quantities by central banks. This scarcity is further augmented by the process of Bitcoin halving, a crucial part of the mining process which occurs approximately every four years and reduces the rate at which new bitcoins are created and released into circulation, effectively enhancing its scarcity. For instance, the most recent halving in 2020 slashed the block reward paid to miners from 12.5 bitcoins to 6.25 bitcoins, thereby slowing down the creation of new bitcoins and enhancing scarcity. The next halving happens April 2024 when that block reward is cut to 3.125 bitcoins.
- Scarcity makes something unique. When something is scarce, it becomes unique. This is because it is no longer available to everyone. Uniqueness is often seen as a positive thing, and it can make something more valuable. Fiat currencies, such as the US dollar, are not scarce. Governments can print as much fiat currency as they want, which can lead to inflation. Inflation is a decrease in the purchasing power of money, which means that the same amount of money can buy fewer goods and services.
- Scarcity can create a sense of prestige. When something is scarce, it can create a sense of prestige for those who own it. This is because owning something scarce makes people feel special and exclusive. The fact that Bitcoin is a scarce asset makes it a status symbol for many people. This is why some people are willing to pay a premium for Bitcoin, even though it is not a physical asset. There are currently over 55million+ millionaires in the world as of today, if tomorrow each one decided they want 1 bitcoin this is impossible. The number of fiat currency millionaires is going up forever due to a constant increase in the supply of money and being a fiat millionaire is losing its prestige.
- Scarcity can be a marketing tool. Businesses often use scarcity as a marketing tool to create demand for their products. They do this by limiting the supply of their products or by making them available for a limited time only. As mentioned earlier, fiat currencies can be inflated by governments. This means that the purchasing power of fiat currencies decrease over time. Bitcoin, on the other hand, is not subject to inflation because the supply of Bitcoin is fixed. This makes Bitcoin a good way to protect your wealth from inflation. Bitcoin has no marketing department, however, governments and central banks do a lot of the marketing for Bitcoin by creating high inflationary periods and credit events that turn their citizens towards Bitcoin to preserve their wealth. Lost bitcoin can also add to its scarcity, with the cryptocurrency’s early history full of stories about people who lost their private keys. Once it’s gone, it’s gone forever, and that means that the maximum supply of 21 million bitcoin will never be fully available.
Overall, Bitcoin scarcity is an important factor that contributes to the value of Bitcoin. The limited supply of Bitcoin makes it a more desirable investment and a good hedge against inflation. Of course, not all scarcity is created equal. Some things are scarce because they are in high demand, while others are scarce because they are difficult to produce. Bitcoin covers both.
Scarcity can be a powerful force that can increase the value of something. However, it is important to remember that scarcity is not the only factor that determines value. Other factors, such as durability, portability, divisibility, fungibility, and acceptability play a role.
The influence of scarcity on bitcoin’s value
Bitcoin scarcity is one of the key factors that makes Bitcoin valuable. It creates demand, increases desirability, makes Bitcoin unique, can create a sense of prestige, and can be a hedge against inflation. These factors make Bitcoin a valuable asset that is worth investing in.
For money to function, it must be widely available, but hard to make more of. It must take effort. If money can be readily found and created, it has weak scarcity, and the trust and value of such a money will degrade over time. If a good is not widely available, it cannot support economic activity, and will not be used as money.
Since fiat currencies are either paper or digital, they have extremely low natural scarcity. To impose artificial scarcity on fiat currencies like the U.S. dollar the U.S. federal government declares that only the Federal Reserve can create legitimate U.S. dollars. However, by creating unbacked loans, private banks also increase the money supply at low to no cost.
Bitcoin, unlike any other commodity in history, pairs strict scarcity with a finite supply. Bitcoin’s difficulty adjustment algorithm ensures that new coins are always produced at a cost. This cost remains close to the real price of bitcoin. Bitcoin’s halving algorithm guarantees that there will never be more than 21 million bitcoin. This means that, no matter how high demand for bitcoin rises, the supply is fixed, and thus, the value of Bitcoin can ascend indefinitely. Scarcity makes money a more accurate measure of value.
As bitcoin matures as an asset, macro factors will increasingly influence its price. Bitcoin’s market is still relatively young and volatile. It is subject to regulatory changes and technological advancements that could impact bitcoin’s value. It is always evolving but what a journey so far!
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