Why does Bitcoin's scarcity matter? Especially when new coins (which are not Bitcoin) can be created out of thin air


#1

From Wikipedia

In a fully decentralized monetary system, there is no central authority that regulates the monetary base. Instead, currency is created by the nodes of a peer-to-peer network. The Bitcoin generation algorithm defines, in advance, how currency will be created and at what rate. Any currency that is generated by a malicious user that does not follow the rules will be rejected by the network and thus is worthless.

I can’t get around the fact that 21 million shouldn’t be given the importance that it gets. If it were the only coin then I would agree. The problem in my mind is that it’s not. We see many groups creating “money” (coins) out of thin air.
The argument that I hear often is, if people designate Bitcoin as the valuable coin then it wins, consensus. So it makes sense that 21 million is one of the drivers in value. This is not the case in my view. We can see this from the many other coins that have considerable value and followings surrounding them. People are putting value in places other than Bitcoin. If we look at Bitcoin in a bubble, then I agree. Once we add other coins with value then 21 million doesn’t really mean much of anything.
I also know that many of these coins will not be around come some Sunday but they are now and nothing shows us that another won’t come along and be the new hotness.
I really would like a discussion around this topic of scarcity. It seems trivial but I can not get away from this thought. The thinking that there is no real scarcity value that should be applied to Bitcoin and it is very overplayed.

I look forward to the replies. This is what keeps me from being a bystander and looking upon Bitcoin as a novelty. Resource links of discussions on this topic, from both sides, would be appreciated. Thanks!


#2

The crypto intelligentsia came up with elaborate concepts to describe why the 21 million coins is important, such as calling it a schelling point. I am not as fancy as they are, but I’ll do my best to explain my thoughts.

In my opinion, the 21 million is given importance because it represents the illusion of scarcity. The fact that Satoshi picked 21 million, over some other number, was most likely arbitrary. I don’t think the number being 21 million is any different than the number being 20 million or even 2 million. Furthermore, the fact that a bitcoin can be divided down up to 8 decimal points is most likely arbitrary as well (i.e. why not 7? why not 9?).

Because of Bitcoin’s scarcity, and because of the ideological make up of many of its early adopters, a narrative has been constructed to claim that Bitcoin is “hard money”. The community that develops, uses, and builds on top of Bitcoin generally support this narrative. The literature that has been written about Bitcoin (ex. The Bitcoin Standard) also support this narrative. Narratives surrounding the defense of hard money often become ideological. For example, other contending stores of value, such as gold, have their own cultish followers, often dubbed “gold bugs”. Money is by necessity driven by ideology, since money itself (whether US dollars or gold) has minimal intrinsic value.

Therefore, because of the narrative, Bitcoin’s main application right now is a potential store of value to compete with gold. Other coins that are coming to market do NOT cultivate the store of value narrative. Most cultivate a web 3.0 narrative, or in other words, that blockchain technology will herald a new way to perform business just like Uber and Airbnb have done in web 2.0 and just as Google and Facebook did in web 1.0 (I am not a venture capitalist, so I could be getting these artificial boundaries around web x.x slightly wrong). The developers of these projects are motivated by the web 3.0 vision, the funders are motivated by the web 3.0 vision, and the early users are motivated by web 3.0 vision. They are not mostly motivated by the hard money vision that motivates many people in the Bitcoin community.

In reality, the scarcity of Bitcoin is an illusion. The 21 million could theoretically be altered, or the amount of decimal places it could be divided into could be increased. Furthermore, a new coin could be hard forked from Bitcoin (let’s say it is called Bitcoin2), with the same properties as the original except only 20 million coins could ever be mined. I would argue that even if the artifical scarcity of Bitcoin2 is superior to artificial scarcity of Bitcoin, it will still lose against Bitcoin in the store of value use case.

A narrative that is told over and over again, regardless of it’s logic or validity, eventually holds truth in the people who say it (democracy, freedom, religion, communism, etc.). ESPECIALLY if that narrative makes them money. The more abstract the narrative (i.e. it means something different from person to person but people still glob on to it), the better, since then everyone can see what they want to see in the product.

Bitcoin’s narrative, in my opinion, has gained more followers than any other competing narrative tied to a blockchain. Every year that narrative survives, and gains new followers, the more “real” it becomes. Other coins will compete with Bitcoin, and I believe that the narratives surrounding those coins might also gain salience, but I do not think they will compete with Bitcoin on the store of value/digital gold narrative.


#3

I think initially the goal for bitcoin was to just follow basic economic theory where supply/demand rules had to be programmed in to avoid a runaway devaluing of the coin. The crypto space has changed and added on immensely, and maybe 21m is not even that important of a number anymore.

I remember trying to think of ten ways someone could make a better version and take over. Many have tried but I’m not sure it has ever lost the number 1 spot.


#4

Thanks for replying. I agree with all you have said and appreciate a thoughtful response and not the “Your just an idiot” response I normally get when asking this question.


#5

I’m not sure if anyone has made a better version as of yet but I am sure that someone will. I think the fact that Bitcoin is supposed to be a one world currency actually hurts it in the scarcity respect. Cryptocurrencies being worldwide are competing against each other for the same pool of monetary value. Doesn’t really matter now but what if each nation-state didn’t have their own currency and crypto was the only currency? Creating another coin with people giving it value would have a huge impact.


#6

True. Come to think of it, if bitcoin was the only currency, would it be decentralized? My brain is bent on this question :thinking:


#7

It would have a monopoly on decentralization :wink: :stuck_out_tongue:


#8

when compared to other cryptocurrencies, I don’t think bitcoin’s specific numbers regarding scarcity (21 million divisible by 10^8) matters as much as its brand.

FatTony has pretty much got this response covered; even if a new coin came up with the exact some properties (or “better”) than bitcoin, it takes a lot of social/societal energy to move from one network to the next.

I’ll add a crude analogy to social networks as a parallel. https://www.statista.com/statistics/272014/global-social-networks-ranked-by-number-of-users/

Facebook is “king” with the most users, and has been for a long time. People still use other social networks like twitter and instagram, but for slightly different purposes than what they use facebook for. and just because they do use twitter and instagram, it doesn’t mean they are leaving facebook. Some company could make an exact replica of facebook today + some added features to make it “better”, but why would anyone hop on to this facebook clone when all their friends are still on facebook? one individual would have to convince themselves and all their friends (and those friends would need to convince their friends and on and on) that this new facebook which hasn’t faced the test of time and has none of their friends, is where they should all go to continue their social networking.

The case is similar with bitcoin. The 21 million number itself is not uniquely amazing, but the longer the bitcoin brand holds value, the more bound its users are to each other and to bitcoin.


#9

in my opinion, bitcoin’s scarcity is one of the best innovations of the technology. nakamoto robustly created digital scarcity with little to no counterparty risk. independent of all economic principles relative to the coin price/mining reward this is a very useful property and a tremendous feat. maybe 21m is a random number, 20m really is not that much less of a random number. i doubt nakamoto was optimizing for quicker mental math calculations. its possible this was the largest integer that could hold off mining all the coins through 2100. things that appear arbitrary dont need to be. even with the 8 decimal places there is a finite supply and therefore the economics are manipulated by supply and demand. the scarcity is also a shield against inflation. its difficult to be an effective store of value if scarcity can be controlled. even if the system could change in the future (it would have to be a fork though?) at present the price and incentive economics are substantially impacted by the finite supply.
i think bitcoin solves so many difficult societal problems in a very elegant way. but i am not fully on the btc max boat bc i dont think it has a clear competitive advantage that cant be overcome by a competitor. i think all the cool properties: consensus (trust), scarcity etc can be copied. while btc does have first mover adv i would think if someone else could add a property that could be a competitive adv while copying all the good properties from btc they could overtake btc very quickly. an example would be the privacy fork zcash allowing the ecosystem to go from pseudonymous to anonymous. (not saying zcash actually wins just an example) i also think given the lack of capital controls on btc it would be quite easy for btc to disappear overnight if it became dominated. instead of trying to come up with the exact properties that will be the game changer ill just say i think without some sort of a proof of dominance by btc it would be safe to say there are quite a few existential threats. with so many possible ways to tackle the problem more effectively and each having such a small probability of success its hard to pin down exactly which one is the most potent. an example proof of dominance would be if there was a security proof for btc/POW but maybe POS did not have a security proof. however, in that specific example i think the cardano foundation proved that btc is secure in 2015 and POS was just as secure recently.
its funny whenever i argue with finance ppl about crypto they are always so excited to point out flaws in btc that also exist in fiat currencies. i agree money has little intrinsic value. intrinsic value is almost exclusively subjective. water seems intrinsic but what’s water to a rock?


#10

All those are good points. My issue is the importance put upon the 21 million and how that makes it a better store of value or makes Bitcoin worth more. My point is it doesn’t. If, like most Crypto people forsee, Fiat is not around and there is only Crypto then there will not be only be Bitcoin. It can be recreated at will. It doesn’t matter if it is not as significant as Bitcoin only that it is worth “something.” This means that it has taken value from Bitcoin and in essence has created more.
The biggest reason most state that Bitcoin is better money is that you can not create more. This is just flat out untrue. We could even say that every coin created is inflation because it devalues Bitcoin and creates more. This of course is just my opinion.


#11

@dumdumdev I disagree with your argument that because we can create a coin easily at anytime, Bitcoin is easy to devalue.

Have you ever heard of the term Lindy effect?

The Lindy effect is a concept that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.

If a book has been in print for forty years, I can expect it to be in print for another forty years. But, and that is the main difference, if it survives another decade, then it will be expected to be in print another fifty years. This, simply, as a rule, tells you why things that have been around for a long time are not “aging” like persons, but “aging” in reverse. Every year that passes without extinction doubles the additional life expectancy. This is an indicator of some robustness. The robustness of an item is proportional to its life!

Bitcoin has been around for 10 years now. People are familiar with it. People trust it. We shouldn’t underestimate the power of this network effect and trust Bitcoin has built around itself. It would be difficult for a new coin to all of the sudden show up and for people to switch over it.


#12

What does that say about Ethereum and all the other coins? Do these not take value from Bitcoin? If they were not around wouldn’t most of their marketcap be reflected in BTC? Do you think in the end there will only be Bitcoin then?
I ask this out of pure ignorance and trying to get my mind wrapped around this.


#13

Great question @dumdumdev.

I’d argue Ethereum also falls into the bucket of having a Lindy effect. The top coins also potentially have similar staying power. I guess I think of this as less about Bitcoin vs. Ethereum, and more about Bitcoin vs. [insert any recent ICO coin].

My main point is that creating another coin today or in the future that gets just as much adoption as Bitcoin, Ethereum or other top coins is probably not as easy as you make it seem. Because they have been around for a while now and have the Lindy effect going for them.

Of course, if a new coin launches and goes a good job of building something useful and getting network effects around it (which takes time), then it’s certainly possible to become valuable.