Ep. 32 - Scarcity & the value of money

One of Bitcoin’s most defining (and arguably its most important) features is its absolute scarcity. There is only 21 million Bitcoin, and thus a predetermined supply, which will be fully mined come 2140. This characteristic quite literally means Bitcoin’s price will continue to appreciate in value as demand increases. Once institutional adoption becomes mainstream and more nation-states accumulate Bitcoin for reserve purposes, the demand will shift the price much, much higher.

However, before we dig into Bitcoin’s relationship with scarcity, let’s first define what scarcity is, and how it currently relates to fiat currencies (CAD and USD) and gold.

First, scarcity is the gap between limited resources and the theoretical limitless wants of humans. However, with scarcity comes relative, and absolute scarcity, which is a very different phenomenon. Let's first look at relative scarcity while using gold as an example.

Gold has a high stock to flow ratio [Stock to flow, or S2F, is defined by Glassnode as a “model that assumes that scarcity drives value. It is defined as the ratio of the current stock of a commodity and the flow of new production"].

In order to be considered 'sound money' the currency/store of wealth must have a high stock-to-flow ratio. A low stock-to-flow ratio insinuates that the flow of new funds/resources is relatively easy, therefore decreasing the purchasing power of the current 'stock' (i.e., 40% of the money in the US has been printed in the last sixteen months. Thus, low stock-to-flow has led to inflation, and a decrease in purchasing power). Although gold has a high stock-to-flow ratio, its relative scarcity poses one major problem. If demand for gold spikes in the short-term, then gold miners, financiers, and speculators will be rushing into the space to increase production, create better technology for extraction, and explore new reserves. Eventually, supply will increase due to increases in production from producers, and demand will subside back to normalized levels. Therefore, the initial demand shock was triggered by a limited supply of resources to produce more gold, but once these resources are received, more gold is mined to meet demand. This is why commodities often follow a boom and bust cycle as follows: Demand for Gold is low, as is the price --> Producers cut production to save on operating costs --> Decrease in supply then occurs --> Reduction in supply eventually leads to higher prices, as demand creeps back --> Higher prices lead to increased production, and therefore increased supply. And so on.

On the contrary, absolute scarcity can be viewed as numeric scarcity. There is no set amount of gold ounces, therefore there will never be absolute scarcity. Although arguments have been made that the world is "running out of natural resources" - this is just not the case. Production and supply have met the demand of commodities (including oil) decade after decade. As technology continually improves, exploration and discovering new resources become more efficient and easier. But for Bitcoin, there is absolute scarcity because there are only 21 million. It's impossible to make more. You can't find more anywhere. Better technology will not increase the number. It's fixed.

Another example would be to think of the Mona Lisa. There is only one original. If demand for the Mona Lisa all of a sudden surges, then the price would surge along with demand, as no more Mona Lisa’s can ever be made.

This is what makes Bitcoin immutable money.

Then there are fiat currencies. Fiat currencies are anything but scarce because central banks can print them at will. This is the exact opposite of Bitcoin, and to an extent, gold. Every time there is a new bill (i.e., the $1.2T infrastructure bill), this money is printed with no real work being required. Just as new share issuances for companies dilute existing shareholders (which people hate), new money issuances dilute existing savers.

Thinking of Bitcoin this way helped me understand its true value and envision what the future could look like on a 'Bitcoin Standard'. Lets quickly highlight a few changes that would occur:

There would be no inflationary pressure (because no more can be printed/created);
Reduction of crony capitalism (when new money is printed, it usually falls into the hands of the rich first, and the 'trickle-down effect' is a false narrative);
No more 'oil wars';
A decentralized system where the owners are you and me - not Trudeau, Biden, and Nancy Pelosi;
A system that rewards value creation, not those who already own assets, borrow at low rates, and acquire more assets; and
A level playing field.

Closing

This is a little off-topic but does have some relevance to the above discussion on scarcity.

I’ll leave you with a snippet of everything that’s gone wrong recently in our socio-economic world. Tesla’s share price sky-rocketed this past week bringing it to a market cap over $1T (crazy). Elon Musk is the richest person in the world ($300+B net worth). So of course with that comes scrutiny. Look at CNN’s headline below:

Now first, this is BS. If world hunger could be solved with $6B it would have been a long time ago. Second, Elon challenges them to no avail. And third, the US has printed $3T this year, so why haven't they solved world hunger 500 times over?

The excess money in the system and continuous printing has led to the misallocation of resources. Fiat is everything but scarce. More money does not mean better outcomes. The idea that we need more money printed into the system each year is false. Money printing is just a hidden tax that destroys the savers and furthers the wealth gap between those with assets, and those without.