Bitcoin & the Law of Supply and Demand
Bitcoin’s Supply is Limited
Bitcoin is the only major currency in the world that has a capped supply. There will only ever be 21 million bitcoin in existence, ever! But wait, isn’t it computer code? Can’t some computer whiz just create more out of thin air? These are some of the questions I had about Bitcoin early on in my crypto journey. I was hesitant to take the plunge and buy some Bitcoin because I thought that my investment could easily become diluted when some “mythical computer hacker” felt the need to print more digital Bitcoin. I later learned that there will only ever be 21 million Bitcoin ever created, no more and no less. Ironically, my fears around Bitcoin are more or less what The Federal Reserve does with the US Dollar on a regular basis. The Fed just created 1.2 trillion dollars out of thin air in 2020, with another 1.9 trillion on the way for 2021. My mythical hacker fear is false, but what we should really fear is central banks printing unbacked paper currency to the tune of trillions.
Bitcoin is created by a process called mining. Specially designed computers around the world run complex algorithms to validate transactions on the Bitcoin Network. These computers compete against one another to be the first to solve a complex mathematical formula to earn the right to process the transaction and create the next block in the blockchain, thus validating the authenticity of the transaction and the Bitcoin network as a whole. Their reward is paid in Bitcoin. The owner of the winning computer is awarded 6.25 newly mined bitcoin, or roughly $350,000 (at the time of this writing). New blocks are added every 10 minutes or 6 blocks per hour, allowing 900 bitcoin to be earned every 24 hours. Don’t worry if all that sounds confusing, because it is. That is why I wrote a short book to help distill confusing cryptocurrency topics. The Dad Guide: How to Buy Bitcoin covers this in more detail in Chapter 3.
But if 900 bitcoin are created each day, what’s the problem with supply? That is almost $50 million a day at today’s Bitcoin prices. What is important to know is, since its creation, Bitcoin has had a decaying reward rate. This decay rate is hard baked into its computer code and cannot be changed. If you mined Bitcoin at the beginning in 2009, the mining reward was 50 bitcoin per block, producing 7,200 bitcoin a day. However, roughly every 4 years, or 210,000 blocks mined, the reward rate is cut in half. It has gone from 50 to 25 then 12.5 and in May 2020 it went down to our current level of 6.25 bitcoin. It will continue to decay until the year 2140 when the reward rate reaches the ninth decimal place. Remember that one bitcoin is divisible up to the eighth decimal place. In the year 2140, a Bitcoin miner will earn 0.00000001 bitcoin per block. After that last halving event, no more Bitcoin can ever be created. Period. Exactly 21 million bitcoin will have been mined into existence from 2009 to 2140 (it’s all just complicated math and computer code, neither of which I was ever very good at). After that, Bitcoin miners will be paid in transaction fees to keep the Bitcoin blockchain running.
Ok, all of that is pretty hard to grasp. Don’t worry if those paragraphs seemed like mumbo jumbo. Just remember that there will only ever be 21 million Bitcoin ever created, with about 18.5 million already mined. That leaves only 2.5 million to be mined over the next 120 years. Starting to sound scarce? Not to mention that experts guess that around 3–4 million bitcoin have been lost forever, taking the number of available Bitcoin even lower.
To put it in perspective, there is roughly 2.5 billion ounces of gold bullion that is currently above ground. A gold coin weighs 1 Troy ounce, or 1.09 ounce, which means if you minted all that gold bullion into gold coins you would have about 2.3 billion gold coins. That is 100x more gold coins than the 21 million bitcoins, making Bitcoin far more rare than gold.
I never profess to be a business expert. I am just a stay-at-home dad that is trying to help average people start out on their own crypto journey by sharing my own. But we all know the law of supply and demand. This ironclad law of business states: if supply is low and the demand is high, the cost has to go up. That is what is happening with Bitcoin. For those that don’t understand the limited nature of Bitcoin, its skyrocketing prices seem unfounded, a bubble, or worse, a giant internet Ponzi Scheme. When you understand the limited nature of Bitcoin, however, you realize that it is simply supply and demand… and the demand will only continue to rise.
The US alone boasts over 18 million millionaires; what will happen when they all want to add Bitcoin to their portfolios? There just isn’t enough circulating Bitcoin for all of them to own even 1 whole Bitcoin. What about the world’s 46 million millionaires? Pretty soon Bitcoin will be harder to purchase than toilet paper was in April of 2020. As strange as it sounds, I believe owning at least one whole Bitcoin will come to be seen as a status symbol in the years to come.
If the thought of every millionaire out in the world striving to acquire Bitcoin didn’t light a fire under you. Then consider all the business and corporations jumping into the fray. Tesla just bought $1.5 billion worth of Bitcoin and probably paid around $35,000 to $40,000 per Bitcoin. Meaning Tesla just gobbled up around 37,500 bitcoin with a single purchase. And other corporate CEOs are taking notice. What will happen to the available Bitcoin when Apple, or Amazon or Microsoft start buying up Bitcoin? The FOMO around Bitcoin is real and will only increase as time goes on. (Side note: at Bitcoin’s current price of $55,000, Elon Musk just made over half a billion dollars in about 2 month’s time.)
Canada just launched the first Bitcoin ETF on its stock exchange, and the US is not far behind. Which means that soon anyone with a Robinhood account or a 401k will be able to easily add Bitcoin to their portfolios. Bitcoin isn’t a bubble, and it’s not going away either. It is a legitimate asset and for those that fully grasp its limited supply and its increasing demand, it could possibly be the best performing asset of this century. (It was already the best asset of the past decade) This is why the chance to own Bitcoin now is most likely a once in a lifetime opportunity.
I sincerely believe that Bitcoin ownership will change your life over the next 5–10 years. Don’t worry if you don’t have an extra $55,000 lying around to buy 1 whole bitcoin, who does? Most people don’t realize this, but you can purchase just a fraction of a Bitcoin, down to the eighth decimal if you like. That means that 1/100th of a Bitcoin is $550 and 1/1000th is about $55 dollars. makes buying Bitcoin for the first time as quick and easy as possible. In just a 30 minute read you can gain enough tools to start your crypto journey.
If you have been on the fence, or think it’s too late to get in the game, trust me, it’s not. I just recommend getting in now, before the world wakes up to the power of cryptocurrencies. The most conservative financial experts expect Bitcoin to exceed $100,000 by the end of 2021. And because there are plenty of people out there who, like me, aren’t planning to sell their Bitcoin anytime soon, prices have nowhere to go but up.
If I can do it, then so can you.
B.J.
Originally published at https://www.thedadguides.com on March 17, 2021.
