Bitcoin is obviously scarce. And it seems to be becoming scarcer over time.
But, perhaps due to the current bull run, doubts about both of these propositions are seemingly on the rise among bitcoin skeptics. Criticisms come in a few different flavors. The main one that I have seen argues that bitcoin cannot be scarce because it is highly divisible. Recently, that particular line of reasoning was subject to some particularly colorful discussions on Twitter.
In this article, I want to clarify bitcoin’s scarcity. Let’s start with what the concept of scarcity actually means.
What Is Scarcity?
Scarcity is a core concept within economics. This is attested to by the concept’s frequent appearance in characterizations of the discipline.
Thomas Sowell, for instance, characterizes economics as “the study of the allocation of scarce resources with alternative uses” in his book “Basic Economics.”
Somewhat more elaborately, in the book “Economics,” Paul Samuelson characterizes the discipline as “Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. It analyzes the costs and benefits of improving patterns of resource allocation.”
Both Sowell’s and Sameulson’s characterizations borrow from the famous characterization of the discipline made by Lionel Robbins in his “An Essay on the Nature and Significance of Economic Science” in the early twentieth century: “The science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
The concept of scarcity in all of these characterizations of the economics discipline can be roughly summarized in the following way:
Humans have a variety of wants, such as living by the beach, playing Nintendo every day, eating great food, socializing with friends, having the latest gadgets, becoming a good basketball player and so on. Both material and non-material resources are required for realizing these wants: time, money, labor, raw materials, land, mobile phones, refrigerators and so on.
In some contexts, the resource(s) we require to achieve our wants are in abundance.
For instance, everyone desires to breathe in order to live. On Earth, that just requires the air which covers the surface of our planet. While the air might be limited in a physical sense, it is essentially limitless given human wants. Hence, air is not scarce, but abundant. (One might argue, of course, that “clean air” is not abundant.)
By contrast, most human ends require resources that are scarce: that is, they require resources which are limited given all of the human wants that it might support in fulfilling. It is important to understand that we are not just talking about some physical limitation here — air to breathe is also physically limited in this sense. Instead, the resource must also be limited with regards to what humans actually desire.
Importantly, scarcity and abundance are contextual concepts. While air might be abundant in our standard human setting, it might not be abundant for a human colony on Mars. It certainly is not abundant for a deep-sea diver.
Similarly, while oil might generally be scarce in the modern world, it was not really scarce for most people before the 19th century when applications for it began to emerge. Farmers that discovered it on their lands probably thought it was a nuisance.
To understand the concepts of scarcity and abundance more clearly, lets work through an example that Sowell makes in “Basic Economics”:
Many people in principle would want a house by the beach. But there is only a limited amount of land by the beach. So, even if we constructed houses on all of the suitable land next to our beaches, we would still not be able to meet everyone’s desires with respect to having beachfront property. Hence, land by the beach is scarce. Some demand for it will have to be left unsatisfied.
But the limitations experienced from the land next to our beaches extend further. It, for example, can also be used for creating natural parks, oceanic research facilities, hotels, recreational facilities and so on. Dedicating all of the land that is suitable to beachfront property impinges on these latter human wants that are also common.
Why is this all so important to economics?
Scarce resources with alternative uses mandate an economic system: that is, a system which makes decisions on production and distribution in order to meet human wants. Whether a free market, a feudal system or a communist utopia, every society must make these choices given scarce resources with alternative uses.
If resources were not scarce, there would be no need for economies or a scientific discipline to study them. Hence, the centrality of the concept of scarcity within the discipline.
Compare various economics textbooks under a microscope and you will probably see that they do not use the term “scarcity” completely consistently. But all roughly mean something as explained above with the term and that is sufficient for our purposes.
Is Bitcoin Scarce?
Given the characterization of scarcity above, we must conclude that practically all of the resources we commonly use are scarce. Something like air is the exception, rather than the rule. And so it should not come as a surprise that bitcoin is scarce.
To put it fairly simply, I would be very happy with 1,000 bitcoin. My guess is that I could probably find quite a few other people that would be happy with 1,000 bitcoin. So many, in fact, that we cannot all own 1,000 bitcoins.
Given the wide variety of ends we can achieve with our bitcoin — buying a house, a car, a holiday, storing our wealth or whatever — this desire to hold bitcoin should be obvious. All money that is in relatively common use — even if it experiences more monetary inflation than bitcoin — is also scarce.
Importantly, the fact that bitcoin, as most other monies in common use, is highly divisible — a precondition for being decent money, I would argue — does not make it abundant. It will still be no problem to find more people that want to have 1,000 bitcoin than there are bitcoin in existence.
Consider the following for an illustrative comparison: Suppose a group of people is walking in a desert with a bucket of water and a syringe that can easily divide that amount of water into very many, very small amounts. Does this somehow make the water non-scarce? Of course not. Surely, they have less than what they ultimately want in the burning sun.
Bitcoin Is Becoming Scarcer
Scarcity is not just a binary concept. It seems that we can also sensibly speak of resources becoming more or less scarce. That can be the product of both supply and demand changes.
For instance, suppose that heavy earthquakes destroyed much of the beaches in a particular area, so that there is less land by the beach available. As long as demand for land by the beach stayed relatively consistent, we are fairly reasonable in stating that “land by the beach has become scarcer.”
Put differently, “less scarce” in this example just means that the amount of land relative to our desires for that land — for creating beachfront property, oceanic research facilities, hotels, recreational facilities and so on — has decreased.
In what direction has bitcoin’s scarcity been heading? And how will it develop in the future?
At the moment, bitcoin still experiences a small amount of monetary inflation — about 2 percent per year. This was even higher in the past and has been a decreasing factor on its scarcity from the supply side. People also lose and find previously lost bitcoin. It’s difficult to state how this has impacted the historical trend of bitcoin’s scarcity.
Sometimes bitcoin is charged with having monetary inflation through the backdoor: one can, after all, copy the code, change some parameters and start a new digital currency. That criticism, of course, makes no sense. No one would argue that printing monopoly money somehow creates monetary inflation for the U.S. dollar.
Most importantly with regards to bitcoin’s scarcity, the desire for bitcoin has been increasing over time — though admittedly with heavy fluctuations. This growth in demand has surely outweighed any of the impact from changes in Bitcoin’s supply. Hence, bitcoin’s scarcity has been increasing with time.
And I am somewhat expecting this trend of increasing scarcity to continue.
Bitcoin has a transparently encoded supply function which currently has low monetary inflation, and this monetary inflation will decrease further over time. Given the strong consensus over this production function, it is unlikely to change in the future. Bitcoin also offers people new means for financial freedom and sovereignty.
All this is fairly interesting in a world where the money supply is not particularly transparent, unpredictable and subject to extensive surveillance and control. It leads me to think that demand for bitcoin will continue to increase over time. Given the rigid supply function, I would, therefore, not be surprised to see bitcoin’s scarcity continue to increase. Many people will probably only be able to own a small amount of bitcoin in the future.
This trend, of course, is not an inevitability. Perhaps something could still break Bitcoin’s production algorithm and produce rampant monetary inflation. Or perhaps demand will start decreasing consistently after this current bull run and never recover. While I do not deem such scenarios likely, they are surely not impossible.
Divisibility And Scarcity
We have already established that bitcoin’s divisibility does not make it non-scarce. However, we need to explore the issue a bit further, as divisibility does impact the degree of scarcity.
Imagine, for instance, that there was only one bitcoin in existence and that it was completely indivisible. That would not make for very good money, so I would expect there to be little to no demand for bitcoin in that case. Hence, bitcoin would not be as scarce as it is now.
Alternatively, suppose that there were 21 million bitcoin, but that you could not divide them any further. Suppose further that demand conditions were relatively similar to those currently dominating the market. Assuming decreasing marginal utility from bitcoin ownership, it might be the case that bitcoin is actually scarcer in this situation as compared to the current situation.
Teasing out the relationship between divisibility and scarcity for bitcoin — or really any other resource — can be a bit complicated. In any case, while we can acknowledge that the current level of Bitcoin’s divisibility impacts the degree of scarcity compared to alternatives, it is surely inaccurate to claim that the current level of divisibility negates its scarcity entirely.
Bitcoin is scarce. That fact is not changed by its divisibility.
Of course, I am making those claims against the standard economic understanding of the term “scarcity.” But I think that any other reasonable sense of the term would have to draw the same conclusions. It would certainly require a rather strange understanding of the term “scarcity” to claim that bitcoin is not, in fact, scarce. One that is likely to be meaningless and unproductive for scientific analysis.
Bitcoin scarcity also has been increasing over time, despite that the system has been subject to monetary inflation. This is because demand for bitcoin has increased over time (though admittedly with some severe volatility).
I would expect this trend of increasing scarcity to continue, as its transparency, predictability, consensual nature, and censorship resistance make bitcoin a unique monetary asset. Though all of that is certainly not a given.
This is a guest post by Jan-Willem Burgers. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Meet The Kraken Bank Executive Team: CEO David Kinitsky
First revealed last September, Kraken is quietly hard at work gearing up to launch Kraken Bank. This exciting new venture is helping to shape the landscape for both Bitcoin and other cryptocurrency services – and the banking industry – well into the future.
While we can’t reveal all the details yet, we sat down with Kraken Bank CEO David Kinitsky to get a glimpse into how he’s leading the charge to ensure the next generation of financial firms are built with the next generation of assets in mind.
David brings more than 15 years of experience in cryptocurrency and financial services. He helped launch a streak of innovations with Grayscale, Fidelity, Circle, SecondMarket, and the private investment funds he’s managed.
He’s full of industry knowledge and always adds a colorful perspective to the conversation. Enjoy!
Hi David! You worked at some of the biggest names in the industry. How did you get into crypto, what were those experiences like?
I first came across Bitcoin when I was working at a company called SecondMarket, which would become Digital Currency Group, one of the largest players in this industry. SecondMarket built marketplaces for illiquid, esoteric, and emerging assets. Eventually we got into Bitcoin and sold the legacy business to NASDAQ.
I took the lead in setting up Grayscale, structuring it’s first and flagship product – the Bitcoin Investment Trust – and served as GM of the business, which I ran for the next couple years. Today, Grayscale is the largest digital asset manager in the world with some $25-30 billion assets under management. (Big shout out to the team over there that took the baton, executed with remarkable consistency, and grew it into the juggernaut it is today.)
I left Grayscale to join Fidelity as their first digital asset hire, helping them to develop their strategy in the crypto space. I also ran a proprietary crypto fund there as a co-portfolio manager alongside the team that now runs Castle Island Ventures, an early stage VC firm focused on crypto.
My next stop was at Circle where I helped to restructure their business, refocus it around their USDC stablecoin, and relaunch with their payments/treasury platform.
Finally, when I saw Kraken pursuing the SPDI bank, I jumped at the opportunity and went all in, moving along with my family to Wyoming where the bank is based. It’s important infrastructure for Bitcoin and crypto, and is also reshaping traditional banking and financial services.
There is a lot of discussion about regulating cryptocurrencies. What do you find fascinating about bitcoin in this respect and how do you look at regulation of the space?
There’s not just a lot of discussion about regulating, there’s real regulating going on already. I sometimes hear this misunderstanding that crypto is not regulated. It’s regulated in the same way we regulate most financial services and other industries – by regulating the services providers and the actions taken by users. Just look at crypto companies and the licensure/registrations they maintain.
We should want to be especially smart about how we regulate these crypto companies as compared to their more traditional counterparts. There’s a key distinction to consider. In traditional financial services – say banking or brokerage or whatever – end users have no other alternative to access these services. They can’t opt out. If you want to send money across space and time, you need a bank or other financial service provider. Crypto is different. Users can receive, hold, and send their own assets themselves. It may be clunky for some, but they can do it. So there is some level of burden above which users will just not use the key nexus through which regulation is enforced. And the first ones to leave are the “bad guys” you want to be able to oversee.
I’ll also say that crypto provides new tools and abilities. For example, financial institutions can incorporate verifiable proof of reserves or to build other auditable assurances into their operations to ensure they’re solvent and doing what they say they are.
I’m optimistic that we’ll be able to thread the needle on the right regulation in the long term, and just hope we don’t shoot ourselves in the foot nearer term.
What about political and public opinion? How is Bitcoin and crypto currently being viewed and how might that affect its status and regulation?
It’s a good question. Absolutely foundational. After all, law and regulation arise out of policy objectives that take into account certain cost-benefit tradeoffs. Historically, we haven’t been able to have these serious conversations about Bitcoin or crypto here in the US because of some absolutist or ill-informed opinions.
The most common is that there’s no use case other than speculation or illicit activity, and no reason to make any accommodations within the existing system. I do think that more recently – especially in this macro environment – there’s an increasing appreciation for the benefits that Bitcoin provides as a store of value and in terms of censorship resistance, as well as an openness to the other opportunities crypto could create in the future. There’s also starting to be some recognition that Bitcoin and crypto will continue to operate regardless, and will simply do so outside of the existing financial system if we don’t pave a path for them within it.
Another is that they’re necessarily adversarial to America somehow, or simply incompatible with our laws, regulation, and institutions. But, Bitcoin is as American as apple pie. Its values are exactly the same as American values – free speech, free association, free enterprise, individual liberty, property rights, and so on – all the principles this country was founded on and the engines for growth throughout our history. And either way, the fact is that Bitcoin exists and other countries are getting involved. It’ll be critical that the U.S. maintain a position in this emerging industry to ensure its global competitiveness and national economic security.
What is it about Kraken Bank that makes this a venture worth building?
I do actually think that this initiative has some symbiotic elements to it, but – and maybe it’s gauche to say these days – we’re building Kraken Bank because it achieves some very clear organizational objectives of ours.
It provides the business with better legal/regulatory positioning, improved infrastructure and resultant customer experience, and more product/market opportunities. More broadly, it supports Kraken’s mission of promoting crypto adoption to enable more financial freedom, by seamlessly connecting crypto all the way down to the bottom of the financial services stack, which is entirely buttressed by banking. It puts us in a position to help shape the future of banking and it incorporates crypto.
Finally, I’m excited to help develop the ecosystem right here in Wyoming. Banks have always played important roles and re-invested within their communities. Kraken will be no different. We’re not carpetbaggers. We want to be connected to communities where, and with which, we conduct business – and to build something special together.
Want to help? Kraken and Kraken Bank are actively hiring, with new jobs posted periodically on the company’s careers page. If you don’t see a role at the bank that’s right for you today, stay tuned for more listings soon!
Thank you David.
-The Kraken Team
Institutional Clients: Get Free Real-Time USD Transfers Through Signature Bank
Institutional clients at Kraken now have a new way to transfer USD that is free, near-instant and available 24/7. The new funding option is available through our integration with the Signet™ payment platform offered by Signature Bank.
- Deposits: $0
- Withdrawals: $0
- Kraken Pro business account
- Account with Signature Bank
- Both accounts must be under the same name
How to get started
Note that you must have an account with Signature Bank, so the process is different depending on whether you already have an account or not. Follow the link below for complete instructions and requirements.
Learn more about Signature’s relationship with Kraken and the Signet platform in the Q&A below with Signature CEO Joseph DePaolo.
Can you talk about your relationship with Kraken?
We are thrilled to have been working with Kraken for almost three years. Kraken continues to showcase thought leadership and technological innovation in the digital space, which are the critical qualities we look for in a partner. Kraken not only has top security protocols in place for their clients, but also the platform has seen extreme growth recently. I am excited to see what the future holds as the exchange connects to our Bank’s Signet platform and API.
Can you give a quick overview of the Signet Platform and how it leverages blockchain tech?
Signet is the first proprietary, blockchain-based, digital payments platform that can be integrated directly into client’s businesses and technology systems. Signature Bank launched Signet on January 1, 2019, to enable its commercial clients to make instant and free payments in U.S. dollars.
Through Signet’s design and features, Signature Bank clients have used Signet’s API to merge their proprietary systems with the Signet platform for full transactional capabilities. These API enhancements allow clients to continue to leverage Signet’s real-time, 24/7/365 benefits and transactions safety and securely.
Signet’s blockchain technology is largely influenced by Ethereum’s code and allows for the minting of signets, which are tokenized representations of USDs, to instantly send and settle payments between clients. However, rather than operating a public ledger where anyone has access to the transaction history, Signet is a private, closed loop blockchain for use by Signature Bank clients only.
Why did you start a niche for small businesses? What is missing among the “big banks”?
Signature Bank was founded 20 years ago with a mission to provide excellent client service and care to small- and mid-sized businesses, values that we share closely with Kraken. Our private client banking teams serve as a single point of contact to meet all clients’ banking needs – unique when compared to mega-banks where clients are typically parsed out to different departments. This single-point-of-contact approach has become the hallmark of the Signature Bank franchise.
As the Bank grew and diversified, it appointed a Digital Assets private client banking team in January 2018 to serve the rapidly evolving digital asset community.
Kraken is proud to offer our institutional clients this fast and convenient new funding option. For more information and instructions on how you can enable Signet for your account, visit our support page here.
Bill Gates explains why he associates Bitcoin with tax avoidance and illegal activity
Billionaire Microsoft co-founder Bill Gates said he doesn’t hold Bitcoin, nor is he short against it. Instead, Gates claims he holds a neutral position as far as the leading cryptocurrency is concerned.
However, his follow-on comments contradict his opening statement. While he’s all for the digitization of money, he believes Bitcoin encourages tax avoidance and illegal activity. Instead, Gates prefers the central bank digital currency approach to digital money, with reversible transactions and direct identity association.
“I don’t own Bitcoin. I’m not short Bitcoin. So I’ve taken a neutral view. I do think moving money into a more digital form and getting transaction costs down, that something the Gates Foundation does in developing countries.
But there we do it so you can reverse the transaction, you have total visibility of who’s doing what, so it’s not about tax avoidance or illegal activity.”
Gates pivots towards charity work
Since leaving his position as Microsoft’s chief software architect in 2000, Gates has increasingly focused on charity work via the Gates Foundation.
In 2020, he decided to dedicate more time to this cause and cut ties with Microsoft by resigning from its board. However, he mentioned that he’s always available in a consultation capacity.
“dedicate more time to philanthropic priorities including global health and development, education, and my increasing engagement in tackling climate change.”
Bitcoin community chimes in on Gates’ comments
Throughout this transition, Gates has become less known as a tech innovator and more as a philanthropist. Bitcoin-bull Anthony Pompliano implied this had dulled his understanding of disruptive technology.
“It is wild to hear one of the smartest men in the world sound so uninformed and uneducated on one of the most disruptive pieces of technology.“
Equally, Binance CEO Changpeng Zhao tried to pass off Gates’ ill-informed comments by saying he’s earned the right not to be “bleeding edge” any longer.
“He’s at a different stage in life though. He is not on the bleeding edge, leading, push, etc. He doesn’t have to.”
Growth lead at Kraken exchange Dan Held said there’s some merit to Gates’ comments on high fees and excessive energy consumption. But overall, Held believes that Gates hasn’t taken the time to understand Bitcoin.
As a former board member of Berkshire Hathaway and close friend of Warren Buffett, Gates’ position on Bitcoin should surprise no-one.
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