Bitcoin is the largest digital currency in existence today, both in terms of market capitalization and price. While a lot of people attribute Bitcoin’s value to different reasons, such as adoption and increased use, we can also agree that scarcity is one of the leading factors in Bitcoin’s value.
From the beginning, Satoshi Nakamoto, who is the creator of Bitcoin designed it in such a way that the product would be scarce. The reasons are deliberate, and over the years we have seen the effect of such reasons come into play.
Here is what Satoshi Nakamoto had to say with regards to making Bitcoin scarce:
“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: boring grey in colour, not a good conductor of electricity, not particularly strong [..], not useful for any practical or ornamental purpose … and one special, magical property: can be transported over a communications channel”.
In the above quote, you will notice that the key properties of Nakamoto’s description is that the “metal” is scarce, and can be transported over a communications channel. Those are the two fundamental platforms on which Bitcoin’s value is built.
To achieve the goal of making Bitcoin scarce, two key elements were implemented in the Bitcoin protocol:
- There is a limited number of Bitcoins that will ever be produced
- There is a systematic reduction in the amount of new Bitcoins produced, known as a Bitcoin Halving.
Limited number of Bitcoins
There will only ever be 21 million Bitcoins created. This is an intrinsic part of the protocol on which the cryptocurrency runs. Therefore, even when all the Bitcoins have been mined, as more people find use cases for it, the demand will increase and we know what that means. Increasing demand for a limited commodity makes it scarce, which automatically results in an increase in value. This is a basic economic principle.
Even while we have not yet mined all 21 million Bitcoins, what we have seen in the past decade is a reflection of this principle. The awareness of Bitcoin has grown over the years, especially in the later part of this past decade. More people have entered into the ecosystem and the demand for Bitcoin has increased. The result of this is quite obvious, as the value of the cryptocurrency has risen within this same period.
Apart from more people wanting a portion of the limited Bitcoins that are available, there are other factors that have led to increased scarcity. Wallets whose owners have lost their private keys, and even Bitcoin wallets whose owners have died, means that the number of Bitcoins have dropped. What does this imply? Increased scarcity. This explains how scarcity is one of the leading factors of Bitcoin’s value.
Again, if you are familiar with some of the important terms in the Bitcoin ecosystem, then Bitcoin halving would not be all that new to you. However, let’s dive into what Bitcoin halving really means.
Within the original Bitcoin protocol is a systematic method of introducing new Bitcoins into the network. This is the process that we call mining, where computer processors are used to solve difficult algorithmic problems. This process of finding solutions to the problems leads to the verification of transactions on the network. It is a competitive exercise for the computers involved, and the first to solve a problem is rewarded with new Bitcoins. This is what Bitcoin mining is all about.
From the beginning, solving these problems, which equates to finding a block, attracts a reward of 50 BTC to the miner. In order to implement scarcity, Nakamoto designed that this reward will reduce with time. Hence, after every 4 years, the number of Bitcoins that are earned per block is halved. So far, there has been two Bitcoin halving events, leading to a block reward of 25 BTC, and now 12.5 BTC per block. The next Bitcoin halving event will happen in May 2020, and the block reward will reduce even further to 6.25 BTC per block.
You have to bear in mind that while the rate of Bitcoin supply is diminishing, more people are finding their ways into the Bitcoin ecosystem. There is no mystery behind it, but simple common-sense economics. This is why you may have noticed a lot of investors using platforms like Vertex.Market to stock up on their personal Bitcoin supply.
Many people who are purchasing Bitcoin lately are doing so in anticipation of an increase in value down the road, especially with another Bitcoin halving event just around the corner. Especially coupled with the fact that the cryptocurrency is assuming the role of digital gold even more with its scalability issues.
Scarcity is one of the leading factors of Bitcoin’s value and it is an idea that was deliberately implemented from the beginning. Many key players in the industry are already making predictions about the future value of Bitcoin, having considered the effect of the scarcity along the way. In November 2018, ex-hedge funds manager, Mike Novogratz predicted that Bitcoin will recover and return to the $20,000 highs of late 2017.