Bitcoin Thought Experiment: Could a Competing Deflationary Currency Conquer Bitcoin?
As a thought experiment, imagine a digital currency with an identical codebase to that of Bitcoin’s, with one simple differentiating attribute: a smaller total supply cap. Would such a currency be able to dethrone Bitcoin as the world’s superior store of value, or do the answers to this question end up reinforcing several key aspects of Bitcoin’s value proposition besides just that of the supply element?
Bitcoin has a hard-capped total supply of 21,000,000 bitcoins, with a full issuance of the bitcoin supply expected by the year 2140. A finite total supply for a currency is a novel invention, digital scarcity being equally as novel. Prior to Bitcoin’s invention, virtually every money throughout history has had an inflation rate to some degree. Even gold and silver, two of the scarcest metals on Earth, have supplies that increase slightly each year. Additionally, these two commodities, which functioned as money for thousands of years, have supplies that are elastic to demand. This means that when gold and silver are in high demand, the inflation rates of their supplies will increase in some proportion to that demand. Bitcoin, conversely, has no such supply elasticity. In fact, Bitcoin is the first major monetary asset in human history to have a supply that is 100% inelastic to demand. In summary, Bitcoin is the hardest monetary asset in existence, at least it is the first to be so.
But what if another digital money came along that had a supply of say, 18,000,000, with all things being equal as code is concerned to Bitcoin?
This is where one must take into account the myriad of other traits which has made Bitcoin the best-performing asset since its inception. Bitcoin is the first digital currency to solve the double-spending problem, which is a situation where one spends their money and then is able to obtain it back to spend again. The solution to this problem is found in Bitcoin's use of proof-of-work, which is something we won't delve into too deeply at this time for the sake of brevity. Since Bitcoin is the first digital currency to successfully solve the key fundamental problem in the realm of digital money, it enjoys a first-mover advantage, and the subsequent value garnered from the network effects of being the largest digital monetary network. Because Bitcoin is the largest digital monetary network, it is also the most decentralized and secure, and the odds of the large number of various adversarial participants in the Bitcoin network ever cooperating to change the Bitcoin code (perhaps to inflate the supply, for example) are very low.
It is for this elementary reason, that Bitcoin is the largest blockchain, why competing digital currencies are doomed to fail. Even if a coin comes along with a smaller total supply than that of Bitcoin's, the percentage chance that such a coin would be able to reach a sufficient size to prevent malicious actors from altering or attacking the network are very slim. Coins that seek to compete with Bitcoin on a 1:1 scale simply lack the other integral characteristics that the Bitcoin network has developed over the course of its existence because Bitcoin has such a large head start. Why would economic actors choose the smaller, less liquid blockchain when they can participate in the largest, most secure, and most liquid blockchain in the Bitcoin network?
In brief, there is more to the Bitcoin value equation than just the 21,000,000 supply figure alone, though that figure (at least the concept of a hard-capped supply) is very important. Competing coins can implement a code that has a smaller total supply than Bitcoin, but they cannot create Bitcoin's valuable network out of thin air. The Bitcoin value proposition is the collection of a number of qualities which render the Bitcoin network the superior store of value in the world, and Bitcoin has earned many of these qualities throughout its existence. It is hard to envision a replacement to Bitcoin because Bitcoin was the first to solve the problem of money; therefore, competitors are seeking to solve a problem for which there is already a excellent solution. Rather than attempting to invent some superior form of Bitcoin, it's best just to buy Bitcoin instead.
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.