Money doesn’t grow on trees, because if it did we would call it leaves.

Everyone intuitively understands that in order for something to have value it must also be scarce, or hard to come by. It’s the same reason air is free and a Denny’s Grand Slam^TM isn’t.

Bitcoin has value because it is absolutely scarce – there is a cap of 21 million bitcoins that can ever be mined. Before bitcoin was invented, digital assets could be infinitely copied, there was no such thing as digital property, and scarcity in the digital realm was thought to be impossible.

The invention of Bitcoin marked a fundamental breakthrough in computer science and cryptographic systems, enabling absolute scarcity. And after 15 years and thousands of other cryptocurrencies, bitcoin remains the only money that is perfectly scarce and verifiably finite.

This is bitcoin’s unique value proposition.

Bitcoin is often compared to digital gold because of its scarcity, but unlike gold bitcoin is finite. There will only ever be 21 million bitcoin. This limit will never change thanks to bitcoin’s network effects, unparalleled decentralization, incentive structure, and governance model.

This limit is called bitcoin’s hard cap, it is written into Bitcoin’s source code and enforced by all participants running the bitcoin software.

You can think of bitcoin as the Mona Lisa, or a plot of land in Manhattan, or Wu-Tang Clan’s Once Upon a Time in Shaolin broken up into a couple quadrillion little pieces. When you own bitcoin you own a piece of something unique, something limited and one of a kind.

The reason this is so special is because no other money or digital asset possesses an unchangeable absolutely scarce monetary policy on the level of bitcoin. Bitcoin’s rules are set in stone, it’s the most certain, reliable, and credible monetary policy of any digital asset and of any currency.

Bitcoin is backed by its unique value proposition as being the only monetary good that ever has, and will ever be, absolutely scarce. This certainty of its supply and supply schedule is unique to bitcoin and can’t be recreated.

This fixed supply is the reason bitcoin is the perfect store of value, and is the best savings technology ever invented.

The intrinsic value of this one-of-a-kind absolutely scarce monetary policy, paired with bitcoin’s perfect supply inelasticity and unparalleled stock to flow ratio, will act like a game theoretic Schelling point to global bitcoin adoption.

As Chris Kuiper and Jack Neuruter of Fidelity Digital Assets describe in their report, Bitcoin First:

One of the primary reasons investors attribute value to bitcoin is its scarcity. Its fixed supply is the reason it has the ability to be a store of value.

Bitcoin’s predictable and fixed supply has been specifically cited by wealth managers like Paul Tudor Jones and financial institutions such as Fidelity and BlackRock to highlight this unique investment thesis.

The examples of legacy financial institutional involvement into bitcoin are vast, however notably Fidelity is adding bitcoin to its 401k products, and adding bitcoin trading to its brokerage platform, and BlackRock is providing its clients with direct bitcoin exposure as well as a spot bitcoin private trust and became the largest financial institution in the world to file for a spot bitcoin ETF. In addition to Blackrock several other financial giants have submitted their own ETF’s including VanEck, ARK Invest, WisdomTree, Valkyrie, Bitwise, Fidelity and Invesco – totaling over 27 Trillion in assets under management.

The sectors that bitcoin aims to disrupt are MUCH larger than you could possibly know, we’re talking multi-trillion dollar industries all over the world.

We’re talking pristine international collateral! A global monetary settlement machine, central bank reserve asset, corporate treasury reserve asset, pension and retirement fund savings technology, inflation hedge, fiat credit default swap insurance, seizure resistant store of value, emerging market currency, international remittance network, and even the base layer infrastructure of the entire global economy.

The 2020’s have so far seen massive institutional adoption as bitcoin’s supply cap, security, immutability, and revolutionary potential have been recognized by the larger financial ecosystem.

If scarcity makes money a good store of value, and the better the store of value the harder the currency, absolute scarcity makes bitcoin the hardest money ever invented.

Over time as the market prices in this unique property, the demand and liquidity will continue to increase. With a fixed and perfectly inelastic supply, the price of bitcoin will rise, drawing more people in, and fueling a positive feedback loop of adoption and price appreciation.

But but but, there are thousands of other coins?!

People who are new to Bitcoin and crypto misstate that bitcoin is not scarce because there are thousands of alternative cryptocurrencies. However, bitcoin isn’t fungible with these other currencies. It’s like saying the Mona Lisa isn’t unique because there are millions of other paintings.

It is true that cryptocurrencies on the whole are not scarce, but bitcoins on the bitcoin network are. Anyone can clone bitcoin’s open-source software at any time, launch their own coin, or split off of bitcoin’s main chain, but no one can carry over its acceptance, brand recognition, security or absolute scarcity.

In a similar way anyone can copy the game of chess and make up new rules, expand the board and include new pieces, but they would have to convince everyone else to buy new sets and learn the new rules. A feat far easier in concept than reality. In fact, people have been copying bitcoin’s code since 2011, yet no cryptocurrency has come close to matching bitcoin’s market capitalization and adoption. Currently, bitcoin makes up 94% of the market cap of all proof of work cryptocurrencies.

People will continue to value bitcoin specifically because of its unique and unchanging properties. Bitcoin has the largest network effect, highest liquidity, most reliable monetary policy, and is provably finite. It’s the most secure blockchain by many orders of magnitude and is the only cryptocurrency undeniably classified as a commodity. Once you understand that bitcoin has no competition, its unique value proposition of absolute scarcity will cut through the noise.

https://www.fidelitydigitalassets.com/research-and-insights/bitcoin-first-revisited

Why Bitcoin is the Only Money with Absolute Scarcity

Satoshi Nakamoto, the pseudonymous inventor of bitcoin, left the project in 2011 and the current maintainers of the project are numerous and decentralized. There’s no corporation, foundation, or group which controls the protocol. Bitcoin now runs on its own. And as the past few updates to the software have shown, it is now infeasible to change bitcoin’s consensus rules. The laws of bitcoin are as unchanging as the laws of physics.

Bitcoin was able to achieve this level of decentralization through years of obscurity afforded to it by being the first cryptocurrency. Bitcoin didn’t have a marketing team, it grew under the radar and didn’t have a market price for the first year of existence.

However, once people realized they could create their own monies, competition exploded.

The paradox of new blockchains is that centralization is necessary to manage their launch process, spearhead development, fund new coin marketing efforts, and to continuously grow their chain’s technological capabilities in response to this competitive environment. New crypto projects need to differentiate themselves from bitcoin, and from each other, in order to gain market share and drive adoption.

The challenge is not creating an absolutely scarce system. The technology is already invented, and bitcoin can be easily replicated. No, the challenge is a sociological one, making people care.

As with any new project, a considerable amount of investment is required to launch, grow, and maintain new cryptocurrencies. To bootstrap these projects it is necessary that these foundations and developers also maintain a significant level of governance over the protocol’s direction. Centralization is a natural outcome based on the efficiencies gained when monetizing these networks. To finance the growth of these cryptocurrencies pre-mines are common and these founders maintain a large fraction of coin equity, which further disincentivizes them from leaving their projects. True decentralization requires a relinquishing of power and an acceptance that their project could become irrelevant.

As a result, every other cryptocurrency created after bitcoin has a developer team, foundation, or a CEO with control over their networks and with the ability to roll back and hard fork the blockchain if necessary, or if mandated. They are centralized and susceptible to the whims of man. Similar to the monetary policies of Government fiat currencies, their rules can be altered by powerful special interests and their scarcity isn’t credible or certain.

It’s worth noting that most cryptocurrencies don’t even have a limited supply by design. Other crypto projects have moved on and are focused on other blockchain use cases. While some of these projects are incremental improvements in technology, they don’t come close to the long term investment potential that bitcoin does.

It’s now commonly understood in the crypto ecosystem that bitcoin is the sound money project, and other chains don’t really aspire to challenge bitcoin on this narrative. Doing so would be an uphill battle against its massive network effect, and would require centralization to get off the ground. Their hardness isn’t a selling point and their scarcity isn’t guaranteed.

Because of the unique launch of the bitcoin protocol, and the centralizing force of bootstrapping a new cryptocurrency, absolute scarcity can’t be replicated and is a once a human history event.

Why is Bitcoin Scarce?

Bitcoin’s main technological breakthrough was to solve the double spend problem and create uncopiable units of currency in cyberspace. The nature of information is that it can be copied indefinitely, and before bitcoin there was no way to limit someone from just counterfeiting digital money without repercussion. Sure you could trust a 3rd party like a bank or a corporation to keep track of your digital money, but debasement/counterfeiting of money has always been commonplace and absolute scarcity was impossible.

The problem with money is that those who control it are incentivized to make more of it for themselves.

Escape the arbitrary inflation risk of centrally managed currencies! Bitcoin’s total circulation is limited to 21 million coins.
Satoshi Nakamoto (v0.3 announcement 7/6/2010)

The beauty of bitcoin is that there is no trust required of a central institution, bitcoin’s scarcity is encoded in software. Satoshi designed bitcoin to be decentralized, trustless, and absolutely scarce to prevent humans from debasing the currency and inflating its supply.

The whole point of bitcoin is to remove the control and issuance of money from the hands of humans.

Bitcoin’s absolute scarcity is a guarantee that your money can’t be diluted by central banks or by special interests. It’s a protest against debasement, and a revolution in property rights.

How Does Bitcoin Ensure its Scarcity?

Immutability of the Consensus Rules

There are many different layers to bitcoin, which are all beautifully woven together in a ‘rube Goldberg machine’ type-of-way to ensure its absolute scarcity is protected.

Bitcoin acts as a trust machine, enforcing its ruleset through a self running computer software. Trust is removed entirely, this is a system that reaches consensus without human decision making. Everyone in the network enforces the rules independently in a decentralized fashion.

Decentralized means there is no center, there’s no head of Medusa to cut off, bitcoin is more like water existing everywhere all at once. No person, corporation or government controls the network. Because there is no center, there’s nothing to control, nothing to take over, and nothing to shut down. Bitcoin also has no geographical boundaries, it’s a global network that runs on top of the internet and exists outside of the jurisdiction of nation states. This makes bitcoin extremely resistant to censorship and control, and practically impossible to change. This decentralization is the key to bitcoin’s immutability.

Digital scarcity, the bitcoin ledger, it is real because there’s a consensus. Every node in the Bitcoin network runs the bitcoin protocol software independently, and will reject any blocks that don’t conform to the rules. In order to change the consensus rules you would have to convince tens of thousands of nodes to adopt these changes. Like chess, if you change the rules for yourself you do not change it for all other players around the world.

The network architecture brilliantly assigns those in charge of the consensus rules to have a strong incentive to resist any changes to bitcoin. Nodes run the bitcoin protocol because it’s in their financial interest as users of the currency to not debase their own supply. This is the powerful effect of bitcoin’s game theory at work.

Miners on the other hand, who would have an incentive to expand their supply, do not control the rules and are instead competing to mine the chain that people value. If there was a split in the network, where some nodes continued running the bitcoin software and others created a new coin without absolute scarcity, miners would choose the chain where they would most profit, an “if you can’t beat them, join them” game on a massive scale.

In fact this game theoretic outcome has been tested and validated, when, in 2017, a critical mass of bitcoin corporations and 95% of miners all flagged support to change bitcoin’s consensus rules to improve Bitcoin’s scalability. Ordinary users however, simply refused to update their nodes, and the hard fork was eventually defeated. The “blocksize war” of 2015-2017 is where bitcoin’s immutability was put to the test, and its outcome has forever cemented bitcoin’s absolutely scarce money supply.

Bitcoin’s Source Code

Bitcoin’s hard cap is mathematically determined due to a process known as the Halving. About every 4 years, or every 210,000 blocks, the mining reward is cut in half. That means the number of total bitcoin that enter circulation once a block is mined gets smaller and smaller as the total number of bitcoin approaches 21 million.

The timing of these halving events is assured by another hard coded bitcoin process known as the difficulty adjustment. Even if the number of miners multiplied by trillions in a couple of days, bitcoin’s difficulty adjustment would just change how much processing power it takes to mine a block, acting as an automatic pacemaker to keep the supply perfectly inelastic regardless of demand. Bitcoins difficulty adjustment is so powerful, all of the energy of the Sun could be funneled towards mining blocks and still no more bitcoin could be created any faster. The last ever bitcoin will take close to forty years to mine, and the final block reward will be sometime around the year 2140.

Why Scarcity is Vital for a Good Money

Bitcoin is money. It’s not a company or a product, therefore it doesn’t have cash flows and its value can’t be derived through familiar methods. Bitcoin is what’s known as a monetary good, and its value is instead derived from its ability to better satisfy the characteristics of good money. Some of these monetary attributes were described thousands of years ago by Aristotle and they still hold true to this day. They include durability, divisibility, fungibility, portability, verifiability, acceptability, and of course, scarcity.

Bitcoin has many qualities that make it good at being money and bitcoin’s absolute scarcity is one of the main differentiators. It is bitcoin’s superiority in satisfying these monetary attributes which makes it a better money than anything that has come before or since. Bitcoin’s mathematically provable absolutely scarce supply cap is the greatest assurance that value will be preserved into the future and can’t be diluted.

Economic actors are incentivized to choose the money that best holds its value across time, is most widely accepted, and most clearly conveys market pricing information. All three of these qualities are rooted in scarcity: resistance to inflation ensures that money retains its value and ability to accurately price capital across time, which leads to its use as an exchange medium
Robert Breedlove

When monies compete, scarcity often determines the winner. However scarcity isn’t about how rare an asset is, in fact commodities that are extremely rare to the point where no one owns them lack liquidity and therefore can’t even be used as money. Bitcoin has the advantage of being infinitely divisible so its rarity/finite supply doesn’t lessen it’s usefulness as money.

More important than rarity’s impact on scarcity is money hardness. Hard money refers to money that has an unforgeable costliness, where it isn’t easy to produce or counterfeit. Hard money also doesn’t loose it’s value quickly, but acts like a store of value for a long period of time. Money that grows on trees would be considered soft money, abundant and easy to make without much work, and inflates and loses value quickly. Gold is the classic example of hard money, because it takes a lot of work to mine, and can be stored for thousands of years without deteriorating.

If money is printed faster than the rate at which the economy grows, then each unit of currency will be worth less overall. This is the definition of inflation, and why bitcoin’s hard cap and halvenings make it inflation proof. A hard inflation proof money will always be more valuable in the long run than the alternative, which is why hard monies have historically replaced softer ones throughout history.

Stock-to-flow

Bitcoin’s halving events reduce the rate at which bitcoin is mined, where every four years the amount of bitcoin mined in each block gets cut in half. This means that the number of bitcoins produced per year will get smaller and smaller as the limit of 21 million is approached.

In fact, there is only about 10% left of the bitcoin supply to be mined over the next 118 years, as the rate of bitcoin grinds to a halt. This in effect means that the total number of bitcoin (the stock) is much greater than new bitcoin being created (the flow).

This ratio of stock-to-flow is what gives a money it’s hardness, since this rate determines how much more currency will enter the market and dilute the existing stockpile. The harder the money, the more resistant it is to change in supply.

The total supply of gold increases at about 1.6% per year. If you divide the total amount of gold ever mined by the amount produced each year, you would get a stock-to-flow ratio of approximately 62. The ratio measures how many years it would take to double the supply.

Gold currently has the highest stock-to-flow of any commodity on earth. Having a high stock to flow ratio is actually quite an uncommon feature for commodities. Elements like rhodium are actually much rarer than gold, but due to rhodium’s importance in industrial processes, the total stockpile gets used up quite quickly so its stock-to-flow is lower. Gold has the advantage of being extremely chemically stable so its stockpile doesn’t erode over time, it’s been mined by humanity for thousands of years, and it is difficult to mine quickly.

Bitcoin’s current inflation rate is 1.7% and it’s current stock to flow is 57 which is quite similar to gold. When the block subsidy halving occurs in 2024 bitcoin’s stock to flow ratio will roughly double to about ~120, and in 2028 it will roughly double again to about ~240. Unlike gold the total supply of bitcoin will never double, and its stock to flow will keep multiplying to infinity.

Because of bitcoin’s terminal supply and halving events, bitcoin is the hardest money that has ever existed.

Money Hardness and Competition

Throughout history many different items have been used as money. From beads and seashells, to stones, salt, and livestock. Over time, technological progress and financial incentives accelerated the production of these goods, decreasing their stock-to-flow, diluting their value and their usefulness as money.

However, interestingly enough, despite all improvements in technology the stock-to-flow ratio of gold and silver have remained relatively constant. This is because as we discovered better mining techniques easy deposits of these metals were depleted and only the harder to reach areas remained. As a result, gold and silver (whose stock-to-flow is second only to gold) were the main monies for thousands of years.

Whenever gold and silver (the monies with the highest stock to flow) came into contact with any other money, it was always gold and silver that won out. This is because as goods with the lowest debasement rate they were able to store their wealth better than other goods, making them more useful as money.

Eventually it was gold that succeeded over silver as the global reserve asset, as paper money derivatives made silver’s medium of exchange advantages obsolete. And then gold was of course eventually co-opted by governments and was replaced by fiat currencies due to their superior monetary attributes, divisibility, portability and verifiability. Weaknesses that bitcoin doesn’t have.

Price Impact

In the short run bitcoin’s supply issuance halvings historically have correlated with a cycle of price appreciation.

Every 4 years bitcoin’s price spikes and settles to new all time highs, closely following the supply shocks of the decrease in mining rewards. Additionally, bitcoin’s difficulty adjustment ensures perfect supply inelasticity, regardless of demand. This means that even though the monetary value of each block is increased, no matter how hard you dig you can’t inflate the supply. Any other commodity that rises in value incentivizes people to create more supply which then offsets the price rise.

Not so with bitcoin. As less bitcoin enters the market against its accelerating adoption rate, there isn’t enough supply to meet demand so the price rises. The price rise isn’t offset by increased production, so the price keeps rising. This accelerated rise usually follows a brief bout of hysteria and the price shoot higher than equilibrium in a FOMO mania that then results in a correction and a price crash.

It’s commonly understood that the real catalyst historically for price appreciation has been global liquidity, however as time goes on and accelerated global monetary liquidity continues to be entrenched, (either through transparent quantitative easing and yield curve control or via shadow liquidity injections through innovations in global financial plumbing) the inability for new bitcoin to be created will become an accelerated catalyst for price appreciation.

These cycles of user adoption, accumulation, supply decrease, and price appreciation are fed by bitcoin’s stock-to-flow ratio decreasing every four years, correlating with bitcoin hardening as money and growing increasingly scarce. Regardless of the short term volatility that the supply shocks initiate it’s bitcoin’s difficulty adjustment, perfect supply inelasticity, and hard cap which keeps bitcoin absolutely scarce and leads to its upward price trajectory over the long run.

However, the slowly dwindling new supply issuance isn’t the full story. The vast majority of bitcoin has already been mined so the largest amount of supply that could enter the market and dampen price appreciation would come from existing holders. A lot of great work has been done to examine the long term and short term holder supply and the potential impact on the market, specifically the work done by glassnode and The Rational Root. If you would like to explore those metrics further I can’t recommend their work highly enough.

In summary however, existing long term holders are the least likely to sell the majority of their holdings since these are exactly the people who understand bitcoin the most and are the most adamant of the evergreen price appreciation.

The absolute scarcity guarantees of bitcoin creates this feedback loop of bitcoin holder zealotry which in turn makes the asset even more scarce. We’ve recently hit an all time high in long term holder supply, with the vast majority of bitcoin locked up in cold storage.

I got a call [from billionaire hedge fund manager] Paul Jones and he says, “do you know that when bitcoin went from $17,000 to $3,000 that 86% of the people that owned it at $17,000, never sold it?” This was huge in my mind. So here’s something with a finite supply and 86% of the owners are religious zealots.
Stanley Druckenmiller

Bitcoin’s number-go-up (NGU) technology is driven by its absolute scarcity and exponential demand. And its exponential demand is driven by its fixed supply assurances. That’s far from the only reason, but it can’t be understated just how impactful a liquid and mathematically certain scarce monetary asset will be to the global financial system. Combining the fact that bitcoin is unique, its brand is one of the most recognizable in the world, and its adoption rate growing faster than the internet, its not long before bitcoin is impossible to ignore.

Bitcoin has no competition. No other money could ever match bitcoin’s level of scarcity. Its absolute scarcity will pull in value from all other store of value assets.

Money is a winner take all system, where the fewer monies to exchange is always preferred. And of course society will also have the incentive to adopt a good money over a bad ones. Government fiat currencies have failed over and over again over the course of hundreds of years, with the current epoch only existing for 50 years, a relatively short term economic experiment. They are prone to unsustainable leverage and inflation. Nation states have shown time and time again that they will always sacrifice monetary sustainability with short term political gain. This has ensured that government monies will always diminish in value over time.

Cryptocurrencies too don’t offer the same hard money assurances that bitcoin offers. The alternative future use cases for these cryptographic ledger technologies are vast and will be tested, however the use case for a superior money is by far the most disruptive on a global scale.

Absolute scarcity is a very layered phenomena that isn’t widely understood to date, and one which is very underestimated. There will never be more than 21 million bitcoin. That means there isn’t enough for each millionaire in the world to own a single bitcoin.

It is very hard to predict the impact bitcoin will have on the $10 trillion gold market, the $20 trillion art and collectibles market, the $100 trillion stock market, the $225 trillion real estate market and the $250 trillion bond market.
Alex Gladstein

Unlike gold or any money that came before it, because bitcoin is infinitely divisible it can store all of the value of the solar system, and still function as a liquid money, even with its supply cap.

It’s also important to note that prices are set by marginal sellers and buyers. One dollar into bitcoin doesn’t equal one dollar rise in price. As the price increases, if there are fewer and fewer people who would want to part with their bitcoin due to its superior hardness as money, the rate at which the price increase could be exponential.

As adoption climbs towards critical mass, and as bitcoin is identified as the global money with the greatest relative scarcity, bitcoin will shift more and more from a store of value asset into a medium of exchange. Its price will stabilize in an ‘S’ curve adoption fashion as its used less as a savings vehicle and more for the purchase of goods and services. This will cause the price to become moderately deflationary, matching the growth rate of the economy at large.

next post: The trust machine