Among the thousands of cryptocurrencies, one asset stands out with an exceptional trait: Bitcoin.
Beyond the buzz, the hype, and the headlines, there's a fundamental element that sets Bitcoin apart from the rest - its fixed supply of 21 million coins.
In this blog, we discuss the significance of this supply cap, how it mirrors the characteristics of sound money like gold, and why scarcity is a critical concept in understanding the value of not only Bitcoin but also various assets in our everyday lives.
Bitcoin Scarcity - The Genesis of 21 Million
To truly appreciate the importance of Bitcoin's fixed supply, let's begin with the number 21 million itself. This isn't an random figure but a deliberate design choice buried at the heart of Bitcoin's code.
Unlike traditional fiat currencies issued and controlled by governments, Bitcoin follows a strict algorithmic monetary policy.
The magic number, 21 million, serves as the maximum supply cap for Bitcoin. In simpler terms, there will only ever be 21 million Bitcoin in existence. No more, no less. This fixed supply is one of the core features that underpins Bitcoin's value proposition.
It must be easy to just create more, right?
You might wonder, "Why not just create more Bitcoin?" This is a common mistake among beginners and sceptics. As humans, we tend to trust what we can see, touch, and feel. The saying "seeing is believing" resonates with many, which is why individuals with limited knowledge might question the idea of a fixed supply.
However, the reality is quite different. Bitcoin may be digital, but it operates on a transparent code that anyone can inspect. Within this code, there's an unchangeable supply limit of 21 million. The reason why some find it challenging to accept this fact is twofold:
They might lack an understanding of cryptography to verify it themselves, and, unlike physical assets, Bitcoin can't be seen with the naked eye, which can make its digital nature seem suspicious.
The Parallels With Gold
Bitcoin's 21 million supply cap draws intriguing parallels with another widely recognised store of value throughout human history - gold.
Gold, like Bitcoin, is finite in supply, and its scarcity has played a pivotal role in its status as a store of value for thousands of years.
For centuries, gold has been treasured for its rarity. Unlike the money in our bank account, it cannot be created out of thin air or printed like paper money. In addition, gold is a precious metal with unique elemental characteristics that makes it nearly indestructible.
To acquire gold, one must mine it. This is a process that becomes increasingly challenging and resource-intensive over time. As a result, gold is inherently scarce, and this scarcity has preserved its value over millennia.
It's worth noting that gold's true value lies in its scarcity, not merely its gleaming, golden appearance—though that does add to its allure!
The Everyday Importance of Scarcity
Scarcity isn't just a concept that applies to precious metals like gold or digital assets like Bitcoin; it's a fundamental aspect of our daily lives.
We interact with scarce resources and goods regularly, and these interactions can offer profound insights into why scarcity is so crucial in the world of money and value.
Consider a vintage sports car, a limited-edition vinyl record, a unique Chanel bag, or an original Picasso painting.
What do all these examples have in common?
These items have value not solely due to their intrinsic qualities but also because they are scarce. In other words, while the design and feel of a Chanel bag make it special, its true uniqueness stems from the fact that only a limited quantity is ever produced.
Their rarity sparks immense demand, particularly among collectors and enthusiasts. In these instances, scarcity drives demand, which, in turn, drives value.
Bitcoin is no different. Out of the fixed 21 million total supply, approximately 19 million coins have already been mined. An estimated 4-5 million coins are forever lost due to password (private key) issues, leaving only roughly two million coins available on exchanges.
So, what does this mean?
In straightforward terms, there's not much Bitcoin to go around. Additionally, Bitcoin is addressing real-world problems, particularly in developing nations. When you combine its utility in these areas with the fact that a significant portion of HODLers treat Bitcoin as a long-term store of value, its potential becomes even more apparent, especially when considering its fixed supply.
Money and Scarcity
Now, let's circle back to money. Money, in its most basic form consists of three things:
A Medium of Exchange - Ability to transact with one another
A Unit of Account - Standardised unit to measure and compare value
A Store of Value - Maintaining its value over time
For something to effectively serve as money, it must be scarce. If money literally grew on trees, it would lose its value rapidly. This is why central banks aim to control inflation and maintain the scarcity of their respective currencies. (Spoiler alert: They're failing)
As we explore in our beginner-friendly courses, throughout history, money has taken various forms, from seashells and cattle to gold and fiat currency. In each case, scarcity has played a pivotal role in the function and value of money.
When a society loses faith in the scarcity of its money, inflation often follows, eroding the value of savings and leading to economic instability.
This, in turn, wipes out public trust in the currency, prompting individuals to seek alternatives as a means of preserving their wealth and achieving financial security. Unfortunately, we've already witnessed such scenarios in countries like Lebanon, Argentina, and Turkey, where rampant inflation has eroded the purchasing power of the local currency.
Assets that possess scarcity inherently carry what's known as a "scarcity premium." This premium represents the additional value attributed to an asset due to its limited availability.
As previously mentioned, gold serves as a prime example. Investors often turn to gold during times of economic uncertainty, viewing it as a hedge against inflation precisely because of its scarcity.
It's unsurprising that gold outlasted seashells and cattle as a superior, scarcer form of money, primarily due to technological advancements that exposed their limitations. With the growth of industrialisation, using cattle as a form of money became impractical for cross-border trade.
Unlike cattle, gold does carry a scarcity premium, making it valuable in international transactions. That said, as technology evolves, we naturally gravitate toward the most efficient and effective forms of money. Currently, we are arguably undergoing a transition from gold to Bitcoin in this regard.
Bitcoin's Scarcity Advantage
Now, let's turn our attention back to Bitcoin. With its fixed supply of 21 million coins, Bitcoin not only shares the scarcity traits of gold but also enhances them in the digital age.
Unlike gold, which requires physical storage and transport, Bitcoin can be stored and transferred across borders with ease.
For instance, consider moving £50,000 worth of Gold and £50,000 worth of Bitcoin from one part of the world to another. Moving gold involves transportation costs, security, auditing, and more, whereas Bitcoin can be securely stored in your digital wallet or even...your head!
Earlier, we emphasised that the best forms of money must be easily divisible (a medium of exchange). Dividing gold is expensive, time-consuming, and inefficient, while each Bitcoin can be divided into 100,000,000 smaller units with ease and speed.
This digital scarcity, combined with its decentralised nature, makes Bitcoin a ground breaking evolution of sound money.
Bitcoin's scarcity is verifiable, transparent, and incorruptible. No entity can suddenly decide to print more Bitcoin, making it immune to the inflationary pressures that affect traditional fiat currencies. This scarcity premium is one of the key reasons why Bitcoin has gained so much attention and value.
In a world full of choices, scarcity shines as something valuable. Whether it's a rare collectible, a precious metal, or a ground breaking digital asset like Bitcoin, scarcity has the power to captivate our imagination and preserve value over time.
The fixed supply of 21 million Bitcoin perfectly casts a light on the concept of scarcity, making Bitcoin not just a digital currency but a store of value for the ages. As we continue to navigate the complex landscape of Bitcoin, inflation, economics and finance, let's not forget the timeless lesson of scarcity - a lesson that has guided humanity's perception of value throughout history.
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