The Bitcoin Mail #2 - Bitcoin's Scarcity
Why is there a limited number of bitcoins, and what is the impact?
Hello and welcome to the second edition of The Bitcoin Mail, the newsletter to keep you up-to-date with what's happening in the space, and learn a few things about Bitcoin.
In The Bitcoin Mail #2, we’ll talk about Bitcoin’s monetary policy, considered by some as its most valuable characteristic. Enjoy!
Latest News in Crypto
Cryptocurrency Market Overview
Bitcoin went from $38,000 down to $29,000, and has spent the last few days consolidating between $30,000 and $33,000. On the 28th, price was around $32,000.
Ethereum has been going back and forth between $1,000 and $1,400 for the past two weeks, after reaching its previous all time high of $1,424.
The global crypto market is down from its $1T high and back at around $900B. Bitcoin dominance went down from 70% to 63%.
Big Investment Funds Looking at Bitcoin
On January 20th, BlackRock filed documents to the SEC to allow some of its funds to invest in Bitcoin derivatives products. It’s the largest fund in the world, managing more than $8tn in assets. More recently, Bridgewater’s founder Ray Dalio also showed positive interest toward the digital currency.
This takes place after a few companies added Bitcoin to their treasury, considering it a “reserve asset”. These are signs that institutional interest keeps growing, and that the skeptical opinions are gradually fading.
Elon Musk Shows Support
On January 29th, Elon Musk added #bitcoin to its bio. We can see two sides to the Bitcoin-Musk love story:
More people, including Tesla’s CEO, are realizing the importance of having censorship-resistant money not requiring trusting a third-party service. It was highlighted by the recent trading ban put in place by Robinhood, actually preventing many individual traders to trade as usual.
The other is wether or not Tesla is actually considering allocating some of its cash to bitcoin as a hedge, like other companies have done. This would put together two of the best performing assets of the past decade, and should be fun to watch.
Topic of the Week: Why is there a limited number of bitcoins, and what is the impact?
Bitcoin's scarcity and decreasing inflation rate
One very important specificity of Bitcoin is its monetary policy, which has two main features: bitcoins are strictly limited to 21 millions, and the quantity being produced daily is divided by two every four years (events called halvings). But why was it created this way?
To start with, the currencies we are used to today can be printed out of thin air. They have no intrinsic value except that there are useful, and used by everyone. The fact that any amount can be created at any time don't make them less useful, but surely makes each unit less valuable.
On the contrary, precious metals like gold or unique art pieces take some of their value from their built-in scarcity: they are limited and very hard, sometimes impossible, to produce.
Bitcoin's creator thought that for a digital currency to be valuable, it had to be, like gold, scarce. This is why Bitcoin supply is limited and its production rate is divided by two every four years. As of today, the quantity of bitcoins produced daily has been halved three times already, with 900 bitcoin being produced every day for an inflation rate of 1.8% per year. It's already harder to produce than gold.
The impacts of Bitcoin's monetary policy
As we just noticed, a certain number of bitcoins is produced every day: it has a fixed daily supply. On the other side of the equation, the demand for bitcoin is highly elastic, varying a lot from an extreme to another and depending on people's view about it, which can change very fast.
Its fixed supply and varying demand, coupled with the fact that the new supply is drastically reduced every four years, make bitcoin's price very volatile when demand starts growing.
In other words, bitcoin isn't volatile because it is risky, or risky because it is volatile. It is volatile simply because its supply is fixed, and said risky because people usually associate risk with volatility.
Another notable impact of Bitcoin's singularity is that is has no intrinsic valuation model. As a monetary good, it derives value from adoption as a store of value and, later on, a mean of payment.
Coupled with the fact that bitcoin is in a price discovery phase, we can't say what is the fair price of bitcoin yet. If it stops working tomorrow, it will probably be zero. If it doesn't and is widely used in 10 years, why not $500,000 or $1,000,000?
If you want to read more:
About Bitcoin volatility: https://river.com/learn/why-is-bitcoin-volatile/
About valuing Bitcoin with scarcity: https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25
One last note: many people already see bitcoin as "expensive" because one unit is worth X thousands of dollars. However, bitcoins are divisible and thinking about it as a whole, like we would for an apple or a computer, doesn't make sense.
Bitcoins are purely digital and can be split into 100,000,000 units called sats, short for Satoshi (Bitcoin's creator). Today, 1 sat = 0,00032 $. You can find a recent article from Cointelegraph here about the topic.
I hope you enjoyed this second edition of The Bitcoin Mail. If you have any suggestion about the newsletter, don't hesitate to reach out! Have a good weekend and see you in two weeks 👋🏼