Bitcoin is Not Scarce – At Least Not as Scarce as You Think

It is generally considered that for something to be valuable, let alone be a good form of money, it needs to be scarce and unforgeable. Gold, waterfront property, antiques, even baseball cards are valuable because they are scarce and limited. This is usually the argument made in favor of Bitcoin and its value as well.

The Bitcoin Scarcity Argument 

Over the last decade, Bitcoin has grown from a small-scale experiment by a group of nerds, into the dominant leader of a new asset class. With a market capitalization nearing $200 billion, bitcoin has the potential to revolutionize many aspects of the financial and political infrastructure.

Bitcoin, like Gold, is considered to be inherently scarce. As mentioned in an earlier article, discussing the relationship between Gold and Bitcoin, Bitcoin is a limited digital asset. The value of Bitcoin and Gold is partly attained due to its limited availability and partly due to their application in daily life. While Gold historically played a central role in economies driven by physical exchange, the world we live in today is digital. As our money and payment systems evolve, Bitcoin has emerged as the forerunner for the ultimate store-of-value asset. It has established itself as an instigator for the next financial revolution.

Just as new deposits of gold are discovered every day, new bitcoins enter circulation roughly every ten minutes. Unlike Gold, however, we know for a fact that the total supply of bitcoins that will ever enter circulation is limited to 21 million coins. As of October 19, 2019, 18 million bitcoins have been mined which account for 85% of the total planned supply.

“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: boring grey in color, not a good conductor of electricity, not particularly strong [..], not useful for any practical or ornamental purpose .. and one special, magical property: can be transported over a communications channel” — Satoshi Nakamoto

But when Satoshi said “Bitcoin is Scarce” what do they mean? How scarce is bitcoin, if it is scarce at all?

It is Not Scarce, It is Capped!

Bitcoin was built with a specific incentive mechanism in mind. By limiting supply over the years and decelerating the rewards for long term commitment, this strategy allowed Bitcoin to guarantee an exponential unit price increase, provided it remained relevant enough. The protocol behind Bitcoin was established with a supply cap nearing 21,000,000. Additionally, the reward mechanism was designed such that a huge chunk of the token would be mined in the initial years, with the laggards fighting to scrape off the crumbs in the later years.

Any amount of money supply is optimal if prices can adjust to any level.

But then, along with limiting supply and strategizing rewards, Bitcoin was also devised to be immensely divisible. The protocol allows bitcoin to be denominated up to eight decimal places, meaning each bitcoin can be divided into 100,000,000 (100 million) smaller parts. This feature, without question, has ensured Bitcoin to be relevant no matter how large the unit price increases or drops.

The smaller units are then classified based on their denomination. A satoshi is currently the smallest unit of the bitcoin currency recorded on the bitcoin blockchain. It is one hundred millionth of a single bitcoin (0.00000001 BTC). The unit has been named in collective homage to the original creator of Bitcoin, Satoshi Nakamoto.

Further denominations can be included if the need arises, which would need the consensus of the entire network and a fork that wouldn’t be contended.

As per bitcoin.org, the following are the names given to other denominations of bitcoin

By this implementation, the scarcity of bitcoin is based on the perception of the individual looking at it. The denomination dictates the scarcity. If one counts the number of bitcoins, then the number will always be too less for everyone on the planet to lay hands on. But if denominated in smaller units, scarcity starts to dissolve. Bitcoin doesn’t remain a scarce asset anymore, but a capped one!

Let’s do the Math

Before moving forward, let us make a few assumptions. Let us consider for a moment that Bitcoin has somehow managed to reach a market price of $1 million per bitcoin. This could be a bitcoin maximalist’s wet dream, but also too good to be true (don’t take my word for it, though). But let us just assume for the moment that it is. Now, considering that Bitcoin can be divided into smaller denominations, up to 8 decimal places with a satoshi (0.00000001 bitcoin) being the smallest unit, each satoshi will be worth $0.1. Also, let us assume that none of the total bitcoins mined so far is lost, i.e., all the bitcoins are accounted for.

And so, we now calculate the total number of satoshis in the bitcoin protocol:

100,000,000 Satoshis/Bitcoin * 21,000,000 Bitcoin = 2,100,000,000,000,000 or 2.1 quadrillion Satoshi

To help in perceiving, let us shift our perception of Bitcoin. We are used to thinking that Bitcoin has a limit of 21,000,000 units. But that’s only when we measure its denomination in ‘bitcoin’. Say we measure it in dollars and say one bitcoin is $1,000,000. Now the argument is that bitcoin is too scarce for everyone on the earth to own and use. But what if we stop calling it bitcoin and start calling it satoshis? Each bitcoin has 100 million satoshis and the total number of Bitcoins is 21,000,000. Thus there are 21,000,000,000,000 satoshis in total.

The value and scarcity of Bitcoin (the asset) depends upon the denomination we use in our daily life. If we denote Bitcoin (the asset) as one bitcoin (denomination), then there will only ever be 21,000,000 bitcoins. But, if we push the bar lower, maybe due to the increase in unit price or any other factor, the scarcity seems to disappear. If we view the asset as satoshis, then we have no reason to worry about scarcity as 2.1 quadrillion satoshis are more than enough for the entire human race to use Bitcoin as a currency.

Assuming the population of the human race to be 8 billion, there are enough satoshis for everyone to own at least 262,500 satoshis or $26,250. Talk about a fully decentralized, non-inflationary, strong money.

The Stack Sats Movement

Long term followers and proponents of bitcoin often hold a strong and persistent optimism towards its future. They believe in bitcoin’s ability to unify the global monetary structure by acting as a fully decentralized alternative for sovereign mediums of exchange. But in order for Bitcoin to do so, it has to transcend the scarcity opinion that is so prevalent in the community. Bitcoin is scarce, yes, but not as scarce as most people think it is.

The Stacking Sats Movement is one such stride towards a future where individuals and entities realize the potential of bitcoin and start boarding the train. Bitcoin, in its current denomination, will be too minuscule for everyone to effectively be involved with it. This scenario will eventually lead to two outcomes, one where bitcoins price increases at a tremendous pace, and the second where the increase in unit price will open door for smaller denominations. People will start flocking to lay their hands on it.

By Stacking satoshis or sats, community members are cementing their stance in such a future. Individuals who had realized before hand will be thankful to their younger self for having an open and long term outlook towards bitcoin.

Eventually, Bitcoin’s “scarcity” will be the reason for its global adoption.

Image Source: Shutterstock

Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Authors may own the crypto currency they discuss. The information and content are subject to change without notice. Visionary Financial and its affiliates do not provide investment, tax, legal or accounting advice. This material has been prepared for informational purposes only and is the opinion of the author, and is not intended to provide, and should not be relied on for, investment, tax, legal, accounting advice. You should consult your own investment, tax, legal and accounting advisors before engaging in any transaction. All content published by Visionary Financial is not an endorsement whatsoever. Visionary Financial was not compensated to submit this article Please also visit our Privacy policy; disclaimer; and terms and conditions page for further information.