How to understand Bitcoin’s scarcity

Bitcoin is clearly scarce, and appears to be getting scarcer over time.

However, perhaps due to the current bull run, doubts about both these ideas seem to be spreading among Bitcoin skeptics. There are many criticisms, but chief among them is the argument that Bitcoin cannot be scarce because it is highly divisible. This particular line of reasoning has also been the subject of a particularly colorful discussion on Twitter lately.

In this article, I want to clarify the scarcity of Bitcoin. First, let’s talk about what scarcity means.

What is scarcity?

Scarcity is a core concept in economics, as evidenced by its frequent presence in the characteristics of the discipline.

For example, in his book Basic Economics, Thomas Sowell defined economics as "the study of the allocation and alternative uses of scarce resources."

In a little more detail, Paul Samuelson in Economics describes the characteristics of this discipline as: "Economics is the study of how people and society ultimately choose to use scarce production resources that may have other uses, with or without the use of money, to produce various goods and distribute them to various people and groups in society for consumption now or in the future. It analyzes the costs and benefits of improving the resource allocation pattern."

Both Sowell and Samuelson draw on Lionel Robbins’ famous characterization of the discipline in his “Essay on the Nature and Significance of Economic Science” in the early 20th century: “a science of human action as a relation between ends and scarce means of various uses.”

The concept of scarcity in all these features of the economics discipline can be roughly summarized as follows:

Humans have various desires, such as living by the sea, playing Nintendo every day, eating delicious food, socializing with friends, owning the latest gadgets, becoming a good basketball player, etc. Fulfilling these desires requires both material and non-material resources, including time, money, labor, raw materials, land, mobile phones, refrigerators, etc.

In some cases, the resources we need to fulfill our desires are abundant.

For example, everyone desires to breathe in order to sustain life. On Earth, this desire requires nothing more than the air that covers the surface of our planet. While air may be finite in a physical sense, in terms of human desire, it is essentially infinite. Therefore, air is not scarce, but abundant. (Of course, one could argue that “clean air” is not abundant).

In contrast, the resources required for most human desires are scarce, or limited given that all human desires might need to be met. Importantly, we are not just talking about some physical limitation here—breathable air is a physical limitation in this sense. Rather, resources must also be limited in relation to actual human desires.

Importantly, scarcity and abundance are contextual concepts. While air may be abundant in our standard human environment, it may not be abundant for a human colony on Mars. Air is certainly not abundant for a deep-sea diver.

Likewise, while oil may be generally scarce in the modern world, it was not truly scarce for most people before the 19th century, when its applications began to emerge. Farmers who found oil on their land might even consider it a nuisance.

To understand the concepts of scarcity and abundance more clearly, let’s look at an example from Sowell’s Basic Economics.

In principle, many people want to buy a house by the sea. However, the land by the sea is limited. So, even if we built houses on all the suitable land by the sea, we would not be able to meet everyone's desire to own a seaside property. This proves that land by the beach is scarce, and some of the people's needs will not be met.

In addition, the limits of land next to the beach could be further expanded. For example, it could be used to build natural parks, marine research facilities, hotels, entertainment facilities, etc., but if all suitable land is used for seaside real estate, it will inevitably affect these also common human desires.

Why does all this matter so much to economics?

Alternative uses for scarce resources require an economic system: one that makes production and allocation decisions to meet human needs. Whether it is a free market, a feudal system, or a communist utopia, every society must make these choices when resources are scarce and alternative uses are available.

If resources were not scarce, there would be no need for economics or a science to study these resources. Hence, the concept of scarcity has a central place in the discipline.

If you compare various economics textbooks under a microscope, you'll probably find that they don't all use the term "scarcity" in exactly the same way. But all of them roughly mean what I've explained above with the word, and that's enough for our purposes.

Is Bitcoin scarce?

Given the above description of scarcity, we must conclude that almost all resources we commonly use are scarce. Things like air are the exception, not the rule. Therefore, it is not surprising that Bitcoin is scarce.

Simply put, if I had 1,000 bitcoins, I would be happy. I think most people would be like me. However, in reality, it is impossible for each of us to own 1,000 bitcoins.

Given the variety of purposes we can use Bitcoin for, buying a house, a car, a vacation, storing wealth or whatever, the desire to hold Bitcoin should be obvious. All relatively commonly used currencies, even if they experience more monetary inflation than Bitcoin, are scarce.

Importantly, the fact that Bitcoin, like most other commonly used currencies, is highly divisible (which I think is a prerequisite for being a decent currency), does not make it abundant. There are undoubtedly more people who want to own 1,000 Bitcoins than there are in existence.

Imagine a group of people walking in the desert with a bucket of water and a syringe that can easily divide the water into many, many smaller amounts. Does this make water less scarce in some way? Of course not. Under the blazing sun, they will definitely have less water than they would ultimately want.

Bitcoin is becoming increasingly scarce

Scarcity is not just a binary concept. We can also plausibly talk about resources becoming more scarce. And this can be a product of changes in supply and demand.

For example, suppose a major earthquake destroyed much of the beach in a region, reducing the amount of land along the beach. Then, as long as the demand for beachfront land remained relatively constant, it would be quite reasonable to say that “there is less and less land along the beach.”

In other words, in this case, “scarcity” simply means that the amount of land has indeed decreased relative to our desire for that land to create waterfront properties, marine research facilities, hotels, entertainment facilities, and so on.

In what direction has Bitcoin’s scarcity been developing? And how will it develop in the future?

Bitcoin still has a small amount of monetary inflation, about 2% per year , which has been higher in the past. This is a factor that reduces its scarcity from the supply side. However, people lose and find previously lost Bitcoins, so it is difficult to say what impact this has on Bitcoin's historical scarcity trend.

Sometimes Bitcoin is accused of monetary inflation through a backdoor: after all, one can copy the code, change a few parameters, and then launch a new digital currency. Of course, this criticism is meaningless. No one would argue that printing Monopoly money somehow creates monetary inflation for the dollar.

The most important thing about Bitcoin's scarcity is that the desire for Bitcoin has been increasing over time (although with great fluctuations). This increase in demand has certainly outweighed any effect of changes in Bitcoin's supply. Therefore, the scarcity of Bitcoin will continue to increase over time.

And I kind of hope that this trend of increasing scarcity will continue.

Bitcoin has a transparently encoded supply function, with low monetary inflation at present, and this monetary inflation rate will further decrease over time. Given the strong consensus on this production function, this demand is unlikely to change in the future. In addition, Bitcoin also provides people with new means of financial freedom and sovereignty.

This is all pretty interesting in a world where money supply is not particularly transparent, unpredictable, and widely monitored and controlled. And it makes me think that demand for Bitcoin will continue to increase over time. Given the strict supply function, I would not be surprised to see the scarcity of Bitcoin continue to rise. In the future, many people may only own a small amount of Bitcoin.

Of course, this trend is not inevitable. Perhaps something will break Bitcoin’s production algorithm and produce rampant monetary inflation. Or, after the current bull run, demand will begin to decline permanently and never recover. While I don’t think this is likely, it’s certainly not impossible.

Divisibility and Scarcity

We have already established that Bitcoin’s divisibility does not mean it is not scarce. However, we need to explore this further because divisibility does affect scarcity.

For example, imagine if there was only one Bitcoin, and it was completely indivisible. Then, there would be no money to be made from owning this Bitcoin. In this case, there would not be any demand for Bitcoin, and accordingly, Bitcoin would not be as scarce as it is now.

Alternatively, suppose there are 21 million bitcoins, but you can no longer divide them. Then, further assume that demand conditions are relatively similar to those that currently dominate the market. Then, if the marginal utility of owning bitcoins is diminishing, bitcoins will become more scarce than they are today.

Untangling the relationship between divisibility and scarcity can be a bit complicated for Bitcoin or any other resource. In any case, while we can acknowledge that Bitcoin’s current level of divisibility does impact its scarcity compared to alternatives, it is certainly inaccurate to claim that the current level of divisibility completely negates Bitcoin’s scarcity.

in conclusion

Bitcoin is scarce. This fact does not change because it is divisible.

Of course, I make these claims based on the standard economic understanding of the term “scarcity.” But I think the same conclusions must be drawn for any other reasonable sense of the term. To claim that Bitcoin is not in fact scarce would certainly require a rather strange understanding of the term “scarcity.” And one that is likely to be meaningless and useless for scientific analysis.

Even though the system is subject to constant monetary inflation, Bitcoin’s scarcity will increase over time , simply because demand for Bitcoin will also increase over time (although, admittedly with some serious volatility).

I expect this trend toward increasing scarcity to continue, as its transparency, predictability, consensus, and censorship resistance make Bitcoin a unique monetary asset, although it is not inevitable.

By Jan-Willem Burgers

Compiled by: Public account @萌眼财经