Written by Jason Deane
With only 21,000,000 bitcoin ever going to be available, the logical conclusion is that we will “run out” of bitcoin if, for example, 21 million people decide they want to own one.
In fact, the situation is even worse than that since it will take another 120 years to mine the last 3.5 million coins AND we’ve collectively lost somewhere between 3.5 and 4 million coins (source: Chainalysis), almost certainly for good. In our lifetime, therefore, the best we can hope for is around 16 million coins being available.
Because even that assumes the early adopters with large balances, Grayscale, Microstrategy, PayPal and an ever increasing list of high net worth individuals plan to keep at least part of their newly acquired bitcoin in circulation, especially as they are currently absorbing more than miners are producing.
But this is probably not going to be the case.
Supply vs Demand
Bitcoin is an extremely unusual asset — by design of course — and the more you understand about it, the more incredible it reveals itself to be.
Bitcoin is both money AND payment system built into one. Bitcoin is backed by network power and perfect mathematically executed transactions, which is far more than our day-to-day fiat currency actually is.
But most importantly, it is the only asset on the planet that has no supply variation at all, regardless of demand level.
We’re in completely uncharted territory here because, in every other case, as soon as there is a big enough increase in price, individuals, companies and even sovereign states will move Heaven and Earth to produce some of the asset in question and profit from it. Supply increases as a result, demand is eventually satisfied, price falls and equilibrium is restored. That’s simply how market forces work.
But with Bitcoin this is impossible. Whether the fiat equivalent of bitcoin is $1 or $1,000,000, the same exact number will be produced in each time period, currently 900 new coins a day, down from 1800 in May after the last halving. And there is not a single thing any individual, organization or even country can do about it, no matter their power or influence.
This extraordinary situation has always had the potential to create problems with market dynamics.
Initially this meant an excess supply because in the early days, enormous amounts of bitcoin were produced (production started at 7,200 a day back in 2009) at a time where no-one wanted to take them. So desperate were the early communities to create demand, they were given away for free from ‘faucets’ — a fact that seems incredulous in these different times.
Now, however, we are entering a new era. Not only are we on the cusp of global “user” adoption, initially through limited (but user familiar) services such as PayPal, but also on the cusp of significant institutional adoption. As each day passes, new names join the list.
First, MicroStrategy, then Square, then a slew of other organizations with at varying levels. Today, as I write this article, the Massachusetts Mutual Life Insurance Co announced it’s own investment into Bitcoin of $100m. That’s an enormous “play it safe” insurance conglomerate investing in Bitcoin — unthinkable only six months ago.
But here’s the problem:
These are very large purchases that are hoovering up bitcoin at a faster rate than it can be produced. Not only that, but many of these organizations have made it clear that they intend to keep it “for the long term” or to create a “Bitcoin standard.” This means that anything they acquire is not likely to make it back to the market any time soon.
Logically speaking, we must therefore run out of bitcoin. And probably quite soon.
But is that really the case?
Here’s where it gets interesting. Although Bitcoin's total supply is strictly limited, the market supply actually isn’t.
There will always be bitcoin available to purchase should you wish to do so. But with no increase in production possible, it’s just a question of what you’re prepared to pay.
In short, bitcoin availability is determined entirely by demand. That demand sets the price and in turn that price sets the level of supply.
At the moment, for example, the collective purchases of PayPal, Grayscale, MicroStrategy and others are exceeding the amount of new bitcoin that is entering the market each day. The result is a demand driven price increase to the levels we have seen thus far. As more players enter the market, the upwards pressure is only likely to increase.
Since extra bitcoin is required to fulfil those orders that is over and above what the miners produce, existing holders must be tempted to part with theirs. They are tempted, quite simply, by higher fiat exchange rates.
The price at which each seller is prepared to release their bitcoin is entirely dependent on what their agenda is. There are, for example, many early adopters who hold vast amounts who have, as yet, not been tempted to release it to the market. However, as the old adage goes:
All men have their price and all women their figure
At some point, it is likely that some of that bitcoin will be released when the fiat equivalent is high enough. And, of course, the higher that price is, the less of their reserve they need to achieve substantial wealth in fiat terms.
The reality is that the days of easy and relatively cheap bitcoin acquisition are probably coming to an end.
The “Everyone HODLs” Scenario
There is one other aspect to this. Since Bitcoin is so scarce, it is theoretically possible (although unlikely given the market forces above) that almost all bitcoin could be put into cold storage and never recirculated.
But even if just a few Satoshi were left in the open market, it would become the new equivalent of ‘Bitcoin.’ Effectively, since Bitcoin is entirely digital, we would simply create new decimals of the very same asset we have before, dividing it infinitely, and repricing each unit as the market dictates.
At the moment, quantities of bitcoin are usually represented in an eight digit format thus:
but in this scenario, we’d simply extend it to any level that the market considers appropriate. In theory, it could be any limit and we’ll probably even “coin” (pun intended) a new name for the decimal points of a Satoshi. Perhaps we should start taking suggestions now.
Of course, at no time would any additional bitcoin actually be produced, we’d just be moving the decimal point and repricing it accordingly, thereby perfectly demonstrating the power and flexibility of digital scarcity.
In the physical world, this is just not possible. You could, for example, keep cutting gold bars in half and repricing them in the same way, but there is a point where this become a practical impossibility. Bitcoin is simply a far more elegant and efficient solution.
In reality, the chances are that it will simply be too expensive and too valuable for the majority of people to use or own entire bitcoin in the future should the current rate of adoption continue as is. Instead most of will use whatever fraction becomes the norm.
But at the end of the day, does that even matter?
After all, whatever unit we actually use, the strength, power and certainty of Bitcoin will transcend the decimal point entirely.
And that brings reassurance at any level.
Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency.
Jason is also an analyst atQuantum Economics, specializing in Bitcoin and macro economics.
Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.
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