How Satoshi Nakamoto created the world’s scarcest asset
The winning argument for Bitcoin Hodler is scarcity. As a finite commodity, the cryptocurrency has the edge over gold and could thus outstrip the precious metal sooner or later.
The article first appeared in the October issue of Kryptokompass. More information on the monthly magazine focusing on digital assets and blockchain technology Immediate Edge can be found in the Kryptokompass shop.
Bitcoin, the scarcest of all assets
The fact that a completely new, purely digital asset like Bitcoin can reach a market capitalisation of currently more than 440 billion US dollars within ten years gives even hardened Bitcoiners a headache. After all, its digital nature makes Bitcoin elusive – literally. In order to get to the bottom of the reasons for the increase in value as well as possible prospects for future price outlooks, it is worth focusing on one very specific aspect: scarcity.
Gabler defines scarcity as follows: “Scarcity follows from the fact that the quantity of goods necessary to fully satisfy human needs exceeds their availability.”
In essence, scarcity is a function of supply and demand, because goods that no one wants cannot be scarce in the true sense of the word – even if there are few of them. On the other hand, there are goods that are vital but not scarce. The obvious example of this is oxygen. At 30 per cent of the total share of all elements available on earth, it is the most common of all. The fact that no market can form for oxygen is therefore trivial – there is simply enough for everyone. Unless, of course, you find yourself on the summit of Mount Everest and realise that your oxygen bottle is running low. In that case, the climber would presumably be willing to pay any price for the vital gas.
So this is where price comes into play. Scarcity and price as ecomic variables are firmly linked. If the demand for a good increases, first the price rises, then the supply. So on the supply side, one tries to meet the demand signal until equilibrium is reached again.
The value of money
In economic theory, money is a commodity that must have certain characteristics in order to fulfil its function as a store of value, medium of exchange and unit of account. First of all, as you can imagine, money must be scarce. What happens when this is not the case is shown by a look at Venezuela or Argentina. The value of money dilutes with every peso or bolivar printed and ends inexorably in galloping inflation.
Therefore, monetary goods have prevailed in human history, proving their suitability as an inherently scarce commodity. Gold is the obvious example. As a precious metal, its supply on earth is physically limited; those who own gold can assume that the total amount will not increase significantly in the medium term.
At least so far. Because as soon as the demand for the precious metal provokes a significant price increase, the supply side will find ways and means to meet it. So-called “asteroid mining” may sound like science fiction. As soon as space costs are sufficiently low, human civilisation is likely to move from the earth’s crust to orbit in the exploitation of mineral resources – and there is gold in abundance.
Fortunately, there is Bitcoin
What makes Bitcoin unique in this context is that it invents two kinds of scarcity. Bitcoin is the first commodity in human history to create the symbiosis of digital and absolute scarcity. Not only is BTC the first commodity to be demonstrably finite, but it is also the first digital product to exhibit this characteristic. Before Bitcoin, the digital space was characterised in the opposite way; files, emails, photos on the internet – all copies. It must be said so clearly: all other goods in the universe (with the exception of time) are only relatively, but not absolutely, scarce. Bitcoin, with its limit of 21 million units, is an unprecedented commodity; a new asset class. Not only that, money supply growth is pre-determined with the mining of the Genesis block until the year 2140. So unlike comparable commodities like fiat money or gold, there is no doubt about how many units are in circulation and when. A real transparency advantage.