• TennHedge

Bitcoin and Absolute Scarcity

Bitcoin is the first monetary asset in history to have the trait of absolute scarcity, as there will only ever be 21,000,000 bitcoins in existence. Amidst the modern backdrop of easy money, this positions Bitcoin uniquely in the macroeconomic universe, offering a novel trait at the very time in which something truly novel is most needed. Such a situation begs the question: how does one assign value to an absolutely scarce monetary instrument?

Absolute scarcity is a novel concept for monetary goods, as even the scarcest monetary asset throughout human history, gold, is not absolutely scarce, and the theoretical supply of gold is infinite.


Moreover, Bitcoin's supply, unlike gold or any other monetary asset, is inelastic to demand (meaning the fresh supply rate is unaffected by an increase in demand). On the contrary, if the demand for gold increases, then gold miners will spool up more production, and the fresh supply rate of gold will rise.


Bitcoin's fresh supply rate is fixed by the Bitcoin open-source software. The new supply of bitcoins began as 50/block, with a new block being generated roughly every 10 minutes, and halves every 210,000 blocks (roughly 4 years) until eventually all Bitcoin in existence will have been issued, around the year 2140. The current Bitcoin fresh supply rate is 6.25 BTC/block.


A valuation has never before been assigned to a monetary good that is absolutely scarce and is recognized widely as a medium of exchange, and we see this paradigm in action through Bitcoin's erratic price discovery.


Bitcoin's superior monetary attributes, such as its scarcity, immutable monetary policy, and portability will attract (and is already attracting) capital flows out of other assets currently being used as stores of value. This 'demonetization event' is occurring in things like precious metals, real estate, and bonds.


The take-home is that capital is flowing into an absolutely scarce asset, which has a supply schedule that is unaffected by changes in demand, which has a constant upward pressure on the price. With a fixed supply, the floor for the Bitcoin price continues to rise based on long-term adoption and value storage (supply that becomes inert), with the ceiling being virtually limitless.


I'm not so sure an accurate valuation can be provided to Bitcoin at this early stage in its adoption, but I can say with confidence that any valuation is likely to be far too low.


-TH


You should always consider seeking financial advice from a licensed advisor before making decisions with your money, and you should not consider anything I write as financial advice but merely my opinion. Getting your financial house in order is a prerequisite for Bitcoin saving, in my opinion.


Disclosure: nothing in this article should be considered financial advice and I am not a financial advisor. Do your own research as everything in finance carries risk.