Bitcoin has a finite supply—or so the story goes. At some point, production will stop at 21 million coins. But according to critics, this number means nothing and no value can be derived from it. Is the finite supply an illusion?
Is Bitcoin Not a Scarce Good? #
A key part of Bitcoin’s appeal is its scarcity. It has been predetermined how many bitcoin will ever be issued: 21 million. In this regard, Bitcoin is often compared to gold, which derives its value from its scarcity.
In reality, there is no real scarcity, according to some critics. Although at some point no new bitcoin can be added, it’s not the case that you can only own whole bitcoins. One bitcoin can be divided into one hundred million smaller parts, also known as satoshis. In that respect, the supply is almost endless.
The appeal of a whole bitcoin is psychological, which makes the finite supply of 21 million feel significant and Bitcoin seem scarce. According to critics, the divisibility of bitcoin undermines this narrative.
The Counterargument #
According to Michael Saylor, Bitcoin is indeed a scarce good. He argues that the demand for bitcoin is increasing, faster than new bitcoin is being created. And when demand is greater than supply, this has a positive effect on the value. In fact, according to Saylor, this is one of the most important drivers for Bitcoin’s price.
Expert James E. Thorne also refutes the claim that Bitcoin is not scarce:
“The fact that each bitcoin can be divided into smaller units does not change the overall scarcity of the total bitcoin supply. Bitcoin’s divisibility simply allows more flexibility in conducting transactions and does not affect the fundamental scarcity of the asset.”
Whether Bitcoin is a scarce good depends on your perspective. Arguments can be found on both sides of the debate. But however you look at it, the finite supply of 21 million is relevant because it contributes to a powerful belief in Bitcoin.
However, this is a narrative that can change, for example, if people start thinking more in terms of satoshis instead of whole bitcoins. Should the narrative change, it could potentially have an interesting effect on the price.