Everyone intuitively understands that anything with economic value must also be scarce, meaning that it’s hard to come by. It’s the reason air is free and a steak isn’t. 

Scarcity is defined as demand for a resource being greater than the supply. The greater the difference, the greater the scarcity. 

One of the reasons that bitcoin has value is because it is absolutely scarce. The number of bitcoins that can ever be in circulation is capped at about 21 million. This limit will never change thanks to bitcoin’s network effects, unparalleled decentralization, incentive structure, and governance model. The 21 million unit limit is written into bitcoin’s source code and enforced by all participants running the bitcoin software.

Why is scarcity in money a good thing?

Scarcity is usually something that we would want to avoid, if possible. When food is scarce, people go hungry. When something is scarce it means that people wish they could have more, but they are denied what they want. So why is it good when money is scarce?

In contrast to other life necessities like food and water, a scarcity of money ensures that it cannot be counterfeited or created arbitrarily. The unique thing about money is that it represents value.  Therefore, those who control it are incentivised to make more of it for themselves. Preventing this was one of the reasons bitcoin was invented.

We use our time, energy, and labor to create value, with the hope that it will improve our lives in the future. Debasement of money is different from thievery, but the result is the same. Everyone has the moral right to store the fruits of their labor without their wealth being stolen. 

Money that is easy to find or create is called “soft” money. In contrast, a “hard” money is scarce, and that makes it better able to maintain its value over time. This is why, throughout history, harder forms of money have always and everywhere replaced softer ones.

Escape the arbitrary inflation risk of centrally managed currencies!  Bitcoin's total circulation is limited to 21 million coins. – Satoshi Nakamoto, Bitcoin v0.3 announcement, 6 July 2010.

Bitcoin’s absolute scarcity is a guarantee that your money can’t be diluted by central banks, special interests, counterfeiters, or anyone else. It’s nothing less than a technological revolution in property rights. 

Are there other assets that are as scarce as bitcoin?

People use many different assets to store their wealth. Given that scarcity is a key element of an asset’s ability to store value, are there other assets that have similar qualities?

Bitcoin is often compared to gold. One thing bitcoin and gold have in common is that both are scarce. However, although this may sound counterintuitive, bitcoin’s hard supply cap means that it is more scarce than gold. When demand for gold increases, more effort and energy can be expended to find new gold deposits and build new refineries. In contrast, when demand for bitcoin increases, its supply remains fixed.

In some ways, bitcoin is more similar to a plot of land in Manhattan. When the price of Manhattan real estate increases, nobody can make more of it. When demand increases, since supply cannot change, the only thing that can change is price. When you own bitcoin, you own a piece of something with a supply that is hard-limited.

However, unlike Manhattan real estate, bitcoin can be easily and quickly traded with no trusted third party, no banks, and no costly legal processes. With a few clicks, bitcoin can be sent over the internet to anyone on the planet.

Bitcoin is digital. How can it possibly be scarce?

The reason bitcoin is so special is that it’s the only digital good that possesses this quality of absolute scarcity. Most of us who grew up in the era of file sharing learned that digital goods are able to be copied ad infinitum. This is so ingrained that it’s hard for people to accept how revolutionary bitcoin really is. 

Bitcoin’s main technological breakthrough was to create uncopyable units of currency in cyberspace. Bitcoin’s rules are set in stone, and its rules, as embodied in the bitcoin protocol, are followed by millions of people. 

The certainty of bitcoin’s supply schedule is unique to bitcoin and can’t be recreated. No other digital asset that is widely recognized and utilized on a daily basis possesses an unchangeable monetary policy. 

Many believe that bitcoin’s scarcity allows it to serve as a store of wealth

This fixed supply is also the reason bitcoin is utilized by millions of people to store their wealth. Leading economists believe bitcoin is the best savings technology ever invented. 

Economic actors are incentivized to choose the money that best holds its value across time, is most widely accepted, and most clearly conveys market pricing information. All three of these qualities are rooted in scarcity: resistance to inflation ensures that money retains its value and ability to accurately price capital across time, which leads to its use as an exchange medium - Robert Breedlove

There are numerous examples of legacy financial institutions investing in bitcoin. Since 2020, bitcoin has seen massive institutional adoption, as its scarcity has been recognized by the legacy financial industry. 

As Chris Kuiper and Jack Neuruter of Fidelity Digital Assets describe in their report, Bitcoin First, 

One of the primary reasons investors attribute value to bitcoin is its scarcity. Its fixed supply is the reason it has the ability to be a store of value.

Bitcoin’s predictable and fixed supply has been cited by wealth managers like Paul Tudor Jones and financial institutions such as Fidelity and BlackRock. 

As of the time of this writing, Fidelity recently announced that its 401k products will support bitcoin. It is also adding bitcoin trading to its brokerage platform. BlackRock is providing its clients with direct bitcoin exposure as well as a spot bitcoin private trust. 

Bitcoin’s rules may make it scarce today, but what if that changes in the future?

Technically, bitcoin’s rules can be changed. However, because bitcoin is decentralized, changing the rules would require hundreds of thousands of people around the world (one day soon, it will be millions or even billions) to all agree on rule changes and upgrade their bitcoin software to the new rules. Every node in the Bitcoin network runs the bitcoin protocol software independently, and will reject any blocks that don’t conform to the rules. In order to change the consensus rules you would have to convince everyone to adopt these changes. Like chess, if you change the rules for yourself you do not change it for all other players around the world.

Bitcoin’s scarcity is just one of the rules embedded in bitcoin’s source code. If everyone who uses bitcoin decided to inflate its supply, they could do so by adopting new rules. However, this is akin to saying that everyone who owns houses could all decide to burn them down at the same time. That is, because the people who use bitcoin have adopted it partially because it is a safe store of wealth, it is impossible to imagine that thousands of people would coordinate their actions to destroy the very thing they value.

Can bitcoin miners make as much bitcoin as they want?

Miners on the other hand, might arguably be said to have an incentive to expand the supply of bitcoin. After all, that’s part of their job – when a miner successfully finds a block, they are rewarded with freshly minted bitcoin. 

However, miners do not control the rules of bitcoin. Instead, they are competing to mine blocks that are compatible with the rules of bitcoin, so that their blocks will not be rejected by users. In this way, they serve the preferences of the users.

If the bitcoin blockchain ever split into two sets of rules, where some nodes continued using the old rules that ensured bitcoin’s scarcity, and other nodes started using new rules that allowed for debasement, miners would choose the chain where they would most profit. It’s the logic of the old saying, “if you can’t beat them, join them,” playing out on a massive scale. 

In fact, this game theoretic outcome has been tested. In 2017, miners tried to change bitcoin’s rules on their own when 95% of miners colluded to attempt to change the size of bitcoin’s blocks on the blockchain. Users, however, simply refused to update their nodes to these new rules, so blocks mined under these new rules were rejected. This occurrence in bitcoin’s history is now known as the Blocksize War. The day of the chain split is now known as “Bitcoin Independence Day.” It was the day that users proved that they had the independent power to enforce the rules of bitcoin.

Even if bitcoin’s users wouldn’t choose to inflate the supply, could they be forced by authorities to do so?

Because bitcoin’s rules are distributed, there’s no way for authorities to change the rules through lawmaking, or even coercive force. Copies of the rules sit on thousands of computers in almost every geographical location and political jurisdiction in the world. There is no board of directors, no leadership to pressure, no head of Medusa to cut off. 

Because there is no center, there’s nothing to control, nothing to take over, and nothing to shut down. This makes bitcoin extremely resistant to censorship and control – and impossible for political forces to change its rules.

In fact, the behavior of bitcoin’s network is so predictable, we can be near-certain that the last bitcoin to ever be minted will enter circulation sometime around the year 2140.

If bitcoin is scarce, will we run out of it one day?

Now that you understand that there can only ever be 21 million bitcoins, another question arises: If the whole world uses it, then that 21 million will need to be divided up among every person on the planet. Will there be enough bitcoin for everyone? What if it runs out?

Fortunately, bitcoin being both scarce and digital means that running out will never happen. There is no limit to how small a fraction can be – you can just keep dividing it into smaller and smaller parts. Because bitcoin is digital, it can be divided into ever smaller fractions. Even if all but one bitcoin were somehow lost, that single bitcoin could be divided up among everyone and used as money.

Bitcoin’s scarcity is a key part of its value

When people trade, they naturally gravitate towards using something as money, instead of bartering, because it makes trade so much more efficient and convenient. Some objects can serve as money better than others. One of the key attributes of a good money is its scarcity. 

Until bitcoin was invented, there was no such thing as a perfectly scarce commodity to use as money, so people used whatever form of money they could. Scarcity was a key element of good money. Whenever a form of money stopped being scarce, it stopped being used as money, and everyone who held it as a store of wealth lost that wealth.

Bitcoin is a revolutionary technology. Not only is it the first commodity to be perfectly, provably scarce, it is also digital, allowing anyone who can access the internet to trade with one another with the hardest money ever invented.