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Understanding the scarcity of Bitcoin

A fundamental characteristic

When we talk about the essential conditions for something to be considered a currency, scarcity appears as one of the main points.

Throughout history, everything used as currency met this primary condition to a greater or lesser extent. Yet, even today, after thousands of years of experience using various types of assets as money, many people insist that scarcity is not too important. (Incredibly, many economists today keep saying that issuing more money does not generate significant problems).

The indiscriminate and unbacked monetary issuance is unsustainable since, in the long run, it ends up undermining the value of the currency as a whole, causing its holders to lose purchasing power day by day, as prices tend to increase permanently since the unit of measure expands all the time. It is like trying to construct a building with an extensible measurement pattern. The building (the economy) would get bigger and bigger in its successive stages until finally, it would collapse under the weight of the structure itself. That is exactly what is happening in the global fiat economy nowadays, and we are reaching the breaking point.

Fortunately, in January 2009, Satoshi Nakamoto launched a global monetary network known as Bitcoin, which uses the currency of the same name as the unit of measurement. It was proposed as a system to combat the terrible deficiencies that fiduciary money has been carrying since the departure from the gold standard.

The monetary issuance of Bitcoin is preset from its inception and has a maximum total issuance limit that cannot be exceeded. An impossibility of monetary expansion, which was never seen before. The way in which new bitcoins are introduced into the economy is the reverse of what we are used to in the fiat world. The monetary issue of Bitcoin is decreasing over the years, while fewer bitcoins are issued, the effect it produces on prices is also inverse to what we see in the current world economy. Prices start to decrease if viewed from the prism of Bitcoin, as the currency is gaining more and more value over time, precisely because it is becoming scarcer and more desirable by the general public, given its other features that virtuously surpass what is offered by the current system, and to which we will refer in subsequent articles.

So radical is the scarcity of Bitcoin that we have not seen anything like it in all of human history! Everything used as currency throughout history was always susceptible to inflating when the political elites and their financing needs required it. It happened in the great empires of the past as well, as it continues to happen today. A paradigmatic example of which currently occurs in countries such as Venezuela or Argentina, and to a lesser extent in others such as Turkey or Zimbabwe, though unfortunately, it is also beginning to be perceived in central European and North American countries.

All this shows us that the fiat money controlled by the world’s governments is far from complying with one of the basic premises of good money: scarcity.

Not even precious metals fulfill this premise in an absolute way. A typical example is the elasticity of the gold supply. Each time the price of gold rises due to the increased demand, mining companies are encouraged to increase production volumes, heading to more remote sites or using increasingly complex techniques to obtain the metal, as the extraction and refining costs are lower than the revenue received from the sale of the new material. In this way, gold stocks expand, but at the same time, this increase in supply tends to balance prices since the new supply compensates for the aggregate demand.

This flexible supply dynamic is impossible in Bitcoin because even if the price of Bitcoin soars, miners are unable to obtain larger amounts of BTC even if they invest much more mining power. This unique characteristic, determined by what is known in Bitcoin as “Difficulty adjustment”, is another wonder of Bitcoin. This simple and exquisitely designed algorithm does “complicate” or “facilitate” the miners’ work so that they cannot obtain more or less amount of bitcoins than what is previously established in the protocol.

To understand this in practice, we can draw a gold mining parallel: Imagine the existence of an imaginary magnetic force that would “attract” or “repel” the metal towards the inside or outside of the earth according to the increasing or decreasing power of the excavators, causing that the same amount of gold is always obtained per unit of time.

In general terms, it can be said that Bitcoin enjoys “absolute digital scarcity”, a characteristic practically impossible to obtain in the physical world, making Bitcoin a unique kind of monetary system.

At Hodl Hodl, we are aware of the importance of safeguarding each satoshi (the smallest part of Bitcoin) because we understand how critical the scarcity is. For this reason, we especially focus on the security of the multi-signature addresses used to store your bitcoins during the course of your deals.

Bitcoin is the scarcest asset on the face of the earth, and we must treat it with appropriate responsibility.

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Hodl Hodl

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