Bitcoin is obviously in short supply. And it seems to be getting scarcer over time.
But perhaps because of the current bull run, doubts about these two statements seem to be mounting among Bitcoin skeptics. There are different flavors of criticism. The main one I’ve seen argues that Bitcoin cannot be scarce because it is highly divisible. Recently, this particular argument has been the subject of particularly colorful discussions on Twitter.
In this article I want to clarify the scarcity of Bitcoin. Let’s start with what the concept of scarcity actually means.
What is scarcity
Scarcity is a core concept of the economy. This is confirmed by the frequent appearance of the concept in characterizing the discipline.
Thomas Sowell, for example, characterizes economics as “the study of the allocation of scarce Resources with Alternative Uses ”in his book“ Basic Economics ”.
In the book “Economics”, Paul Samuelson characterizes the discipline in somewhat more detail as “Economics is the investigation of how people and society choose employment with or without the use of money scarce productive resources that could have alternative uses to produce various goods and to distribute them now or in the future for consumption among various people and groups in society. It analyzes the costs and benefits of improving resource allocation patterns. “
Both Sowell’s and Sameulson’s characterizations borrow from the famous characterization of the discipline that Lionel Robbins made in his “Essay on the Nature and Importance of Economics” in the early twentieth century: “The science of human behavior as the relationship between purpose and behavior Purpose investigated. ” scarce Funds that have alternative uses. “
The concept of scarcity in all of these characterizations of economic discipline can be roughly summarized as follows:
People have a variety of needs, such as living on the beach, playing Nintendo every day, eating good food, connecting with friends, having the latest gadgets, becoming a good basketball player, and so on. Both tangible and intangible resources are required to meet these needs: time, money, labor, raw materials, land, cell phones, refrigerators and so on.
The resources we need to meet our needs are located in some contexts Abundance.
For example, everyone wants to breathe in order to live. On earth, that only needs the air that covers the surface of our planet. While air may be limited in the physical sense, it is essentially unlimited in the face of human needs. Therefore, air is not scarce but abundant. (One could of course argue that “clean air” is not abundant.)
In contrast, most human goals require resources that are in place scarceThat is, they need resources that are limited in fulfilling all of the human desires that could aid them in fulfilling them. It is important to understand that this is not just a physical limitation – air to breathe is also physically limited in this sense. Instead, the resource must also be limited in terms of what people actually want.
What is important is that scarcity and abundance are contextual concepts. While air is abundant in our normal human environment, it may not be abundant for a human colony on Mars. For a deep sea diver, it is certainly not abundant.
While oil is generally scarce in the modern world, it wasn’t really scarce for most people before the 19th century when uses for it emerged. Farmers who discovered it on their land likely found it a nuisance.
To better understand the concepts of scarcity and abundance, let’s work through an example that Sowell does in Basic Economics:
Lots of people would basically want a house on the beach. But there is only a limited amount of land on the beach. Even if we built houses on all of the suitable land adjacent to our beaches, we might not be able to accommodate everyone’s beachfront property needs. Therefore, land on the beach is scarce. A certain demand for it must remain unsatisfied.
However, the restrictions of the land next to our beaches go further. It can also be used to create natural parks, oceanic research facilities, hotels, recreational facilities, etc., for example. Dedication of all land suitable for beachfront properties affects these latter human needs, which are also common.
Why is it all so important to the economy?
Scarce resources with alternative uses require an economic system: a system that makes decisions about production and distribution in order to meet human needs. Whether a free market, a feudal system or a communist utopia, every society has to make these decisions in the face of scarce resources with alternative uses.
If resources were not scarce, economies and scientific discipline would not be required to study them. Hence the centrality of the concept of scarcity within the discipline.
If you compare different business textbooks under the microscope, you will likely find that they do not use the term “scarcity” with complete consistency. But all of them mean roughly something, as explained above with the term, and that is sufficient for our purposes.
Is Bitcoin Scarce?
Given the scarcity characterization described above, we must conclude that virtually all of the resources we commonly use are scarce. Something like air is the exception rather than the rule. And so it should come as no surprise that Bitcoin is in short supply.
To put it fairly simply, I would be very excited about 1,000 Bitcoin. I suspect I could probably find some other people who would be happy with 1,000 Bitcoin. So many that we can’t all own 1,000 bitcoins.
Given the multitude of goals we can accomplish with our Bitcoin – a home, a car, a vacation, keeping our wealth or whatever – this desire to hold Bitcoin should be obvious. Any money that is used relatively frequently – even if it has more money inflation than Bitcoin – is also in short supply.
Importantly, the fact that bitcoin, like most other money in use, is highly divisible – a requirement for decent money, I would argue – doesn’t make it plentiful. It will still not be a problem to find more people who want 1,000 Bitcoin than there are Bitcoin.
To make a clear comparison, consider the following: Suppose a group of people are walking with a bucket of water and a syringe in a desert that can easily break that amount of water into very many, very small amounts. Doesn’t this somehow make the water scarce? Of course not. Surely they have less than what they ultimately want in the scorching sun.
Bitcoin is getting scarcer
Scarcity is not just a binary concept. It seems that we can also reasonably speak of resources becoming more or less scarce. This can be the product of changes in supply and demand.
For example, let’s say that major earthquakes have destroyed much of the beaches in a given area, leaving less land on the beach. As long as the demand for land on the beach remained relatively constant, we can rightly state that “land on the beach has become scarcer”.
In other words, “less scarce” in this example just means that the amount of land has decreased in relation to our desires for that land – to create beachfront properties, oceanic research facilities, hotels, recreational facilities, etc.
In which direction has the bitcoin scarcity developed? And how will it develop in the future?
Bitcoin currently still has low monetary inflation – around 2 percent per year. This has been even higher in the past and has reduced the supply side scarcity. People lose and also find previously lost bitcoin. It’s hard to say how this has affected the historical trend of bitcoin scarcity.
Sometimes Bitcoin is accused of having money inflation through the back door: after all, you can copy the code, change some parameters and start a new digital currency. Of course, this criticism makes no sense. Nobody would argue that printing monopoly money somehow leads to monetary inflation for the US dollar.
Especially with regard to the Bitcoin scarcity, the desire for Bitcoin has increased over time – albeit with strong fluctuations. That growth in demand has certainly outweighed the impact of changes in the supply of Bitcoin. Hence, Bitcoin scarcity has increased over time.
And I expect something that this trend of increasing scarcity will continue.
Bitcoin has a transparently coded supply function that is currently showing low monetary inflation and that monetary inflation will continue to decrease over time. Given the strong consensus on this production function, it is unlikely that this will change in the future. Bitcoin also offers people new means of financial freedom and sovereignty.
All of this is quite interesting in a world where the money supply is not particularly transparent, unpredictable, and subject to extensive monitoring and control. I think the demand for Bitcoin will continue to grow over time. Given the rigid supply function, I wouldn’t be surprised if the bitcoin scarcity continued to grow. Many people will likely only be able to own a small amount of Bitcoin in the future.
Of course, this trend is not inevitable. Perhaps something else could break the Bitcoin production algorithm and cause rampant money inflation. Or maybe the demand for this current bull run will steadily decline and never recover. While I don’t think such scenarios are likely, they are certainly not impossible.
Divisibility and scarcity
We have already established that Bitcoin is not uncommon due to its divisibility. We need to study the problem a little further, however, as divisibility affects the level of scarcity.
For example, imagine that there is only one bitcoin and that it is completely indivisible. That wouldn’t make very good money, so I would expect that in this case there would be little or no demand for Bitcoin. Therefore, Bitcoin would not be as rare as it is now.
For example, suppose there were 21 million bitcoin, but you couldn’t break them down any further. Let us further assume that the demand conditions were relatively similar to the current dominant ones. Assuming the marginal utility of owning Bitcoin diminishes, Bitcoin may actually be rarer in this situation compared to the current situation.
Figuring out the relationship between divisibility and scarcity for Bitcoin – or really any other resource – can be a little tricky. While we can acknowledge that Bitcoin’s current level of divisibility affects the level of scarcity compared to alternatives, it is certainly imprecise to claim that the current level of divisibility completely negates its scarcity.
Bitcoin is scarce. This fact is not changed by their divisibility.
Of course, I make these claims against the usual economic understanding of the term “scarcity”. But I think any other reasonable sense of the term would have to draw the same conclusions. It would certainly take a rather strange understanding of the term “scarcity” to claim that Bitcoin is actually not scarce. One that is likely to be meaningless and unproductive to scientific analysis.
Bitcoin scarcity has also increased over time, despite the fact that the system has been exposed to monetary inflation. This is because the demand for Bitcoin has increased over time (albeit with some high volatility).
I would expect this trend of increasing scarcity to continue as its transparency, predictability, willingness to consensus, and censorship resistance make Bitcoin a unique monetary value. Although none of this can be taken for granted.
This is a guest post by Jan-Willem Burgers. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.