Bitcoin offers a unique way to think about money. To newcomers, it violates pre-existing expectations about what money is. And yet it works, and adoption increases year after year. 

Bitcoin continues to feel obscure to many media commentators and traditional investors, even though bitcoin was invented over a decade ago. This is partially because its properties contradict conventional views about money – especially bitcoin’s fixed total supply. 

Satoshi Nakamoto, the pseudonymous creator of the bitcoin codebase, specified that bitcoin would have a fixed supply of approximately 21 million bitcoins. This is very unusual for money. The fixed number of bitcoin ensures absolute scarcity, unlike any other monetary system, including gold. However, bitcoin’s fixed supply is a purposeful and important feature. Because it is not just scarce but absolutely scarce, its value can never be diluted by supply increases.

Why are there 21 million bitcoin?

Ultimately, the exact number of bitcoins does not matter. What matters is that bitcoin has a fixed supply. Satoshi recognized the value of scarce money in a forum post describing his vision (emphasis added):

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: boring grey in colour, not a good conductor of electricity, not particularly strong, but not ductile or easily malleable either, not useful for any practical or ornamental purpose, and one special, magical property: it can be transported over a communications channel.

If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some bitcoin, transmit it, and the recipient could sell it.

With bitcoin, Satoshi sought to create digital money with gold-like qualities. Bitcoin, however, improves upon gold not only in its transportability but also in its absolute scarcity. As Saifedean Ammous writes in The Bitcoin Standard,

For the first time, humanity has recourse to a commodity whose supply is strictly limited. No matter how many people use the network, how much its value rises, and how advanced the equipment used to produce it, there can only ever be 21 million Bitcoins in existence. There is no technical possibility for increasing the supply to match the increased demand.

Bitcoin compared to other forms of money

When demand for bitcoin increases, supply does not change. The only way bitcoin responds to an increase in demand is with an increase to its price. Is this true of other well-known forms of money?

Gold

Throughout most of recorded history, gold has played an essential role in the global economy. Its unique characteristics make it good at being money, being desirable for ornamentation, impossible to destroy, hard to mine, and extremely rare.

But how rare is gold, really? When demand for gold increases, gold miners respond by increasing production until the price responds. While simple supply and demand explain why gold prices have been relatively stable for thousands of years, spacefaring technology has made the possibility of discovering a massive gold deposit more likely than ever. Even gold’s scarcity is not absolute.

Fiat

Unlike gold, the supply of a fiat currency, such as the dollar, is not limited by any external physical reality. Instead, the issuing body (the government or central bank) determines the supply of fiat money. 

The U.S. government printed 40% of dollars in the M2 money supply in the United States between 2020 and the time of this writing in 2022. When more dollars flood into the market, prices inflate in response. 

Because government officials can increase the supply of dollars at any time, the dollar cannot be said to be scarce. Its future purchasing power is neither certain nor stable because its supply is subject to the decisions of human beings who wield the power to print money.

Altcoins

Most alternative cryptocurrencies, such as Ether, do not have a fixed supply. In the case of Ether, along with most of its Web3 progeny, its monetary policy is subject to the decisions of a small group of insiders, giving users zero confidence that their Ether’s value will be sustained.

In contrast to gold, fiat, and altcoins, bitcoin’s finite supply introduces a new level of certainty. It gives users confidence that the bitcoin they own represents a percentage of an immutable amount of total bitcoin. They can precisely calculate the amount of their bitcoin at any time against the current amount of circulating and future bitcoin.

What happens when bitcoin is lost?

Because bitcoin is so secure, it is possible for it to be lost forever. There are a few ways this can happen.

If a person loses their private keys to one of their wallets, they can never again access the bitcoin in that wallet, and neither can anyone else. Or, a person can lose the physical device on which their wallet was stored, such as a phone. Someone may simply die without sharing their private keys with anyone. 

While rare, when a miner successfully mines a block of bitcoin transactions, the miner can elect not to receive the block reward, or may not receive the reward for technical reasons. 

In all these cases, bitcoin can be said to be “lost” – not because it has disappeared, but because its owner has lost access to it, rendering it un-spendable.

Although lost bitcoin does decrease the total amount of bitcoin, it does not affect bitcoin’s monetary policy. Users can still easily see the total amount of bitcoin on the network. There’s no danger of “running out” of bitcoin, because it is digital, so it can always be divided into smaller pieces in order for everyone to be able to use it.

Most importantly, lost bitcoin actually enhances its scarcity. Lost bitcoin decreases the total in circulation and makes the existing bitcoin more scarce.

Absolute scarcity makes saving easier

People save money and other assets because they are uncertain about the future. If the future were known, including income streams, life events, wants, and needs, people would not need put aside extra money to prepare for the unexpected. Unfortunately, the future is not certain. 

Bitcoin is a form of money whose supply anyone can audit with precision. The number 21 million is irrelevant; what matters is the limit itself.

Bitcoin has many qualities that make it good at being money. Absolute scarcity is one of them, and that sets it apart from all forms of money that came before.