Have you ever wondered why some investments soar while others sink into oblivion? What separates the winning strategies from the losing ones? In the case of Bitcoin, the answer lies in its scarcity. Much like precious metals, Bitcoin has an unchanging supply that can be easily tracked and verified, making it a reliable store of value. As demand for Bitcoin rises, due to its growing adoption and utility, its scarcity will ensure that the price of Bitcoin appreciates over time. This article will discuss Bitcoin scarcity in greater detail, including its significance, how it works, and what it means for the future of Bitcoin as an investment. Readers will also learn how to effectively leverage Bitcoin's scarcity to develop a smart investment strategy using Bitcoin indicators that can help them build wealth over time.
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What is Bitcoin Scarcity?
In economics, scarcity describes a limited supply relative to demand. Bitcoin's fixed supply of 21 million coins establishes scarcity. After all 21 million bitcoins are mined, no new bitcoins will be created, which will happen around the year 2140.
At that point, miners will no longer earn rewards for adding new blocks to the blockchain. Their income will come only from transaction fees paid by users. This could lead to higher fees, as miners must stay motivated to secure the network and process transactions. Some people worry that transaction fees might be insufficient to secure the network. While this concern is understandable, the continued growth of Bitcoin’s adoption shows that a strong fee market is possible.
What Makes Bitcoin Scarce?
Among Bitcoin’s principal tenets is the idea that its baked-in scarcity makes it valuable. Bitcoin’s algorithmically determined rate of increase certainly makes it scarce when demand rises, though not so much when it’s falling. The fact that the algorithm allows Bitcoin’s supply to stop increasing about 120 years from now means its supply is finite. Unless the code changes (which raises questions about what “Bitcoin” means), there can never be more than 21 million bitcoins.
Bitcoin’s scarcity doesn’t stem from its finite nature but from potentially infinite, though inconsistent, demand. Its legendary volatility is linked less to its scarcity or finite nature and more to its inherent inflexibility. These distinctions may sound slight, but they are important revisions to your understanding of this technology.
All Assets are Scarce
Scarcity is hardly unique to Bitcoin. All assets are scarce. Indeed, anything that has a price is scarce, by definition. If there is no scarcity, there is no price. Things that are so abundant that everyone can have all they want are free, even if they are objectively valuable to humans. Air, for example, is free, though it is so beneficial to humans that we can’t exist without it.
The Role of Price in Balancing Supply and Demand in Free Markets
Price is the mechanism by which markets equilibrate the supply of and demand for scarce objects. When there is more demand for a product than supply, the price rises until demand falls sufficiently for supply to be adequate. This means some people’s demand for the product will be wholly or partly unsatisfied. In a free market, it is normal, indeed necessary, for people to be priced out of the market. When there is a greater supply of a product than demand, its price falls until demand rises sufficiently to mop up the excess. In retail markets, price falls might be caused by discounts and special offers.
Sometimes, there is no demand for a product at any price, even a negative one. As the saying goes, you can’t pay people to take it away. There may be a limited supply of these things no one wants, but it is ridiculous to call them “scarce.” There are far too many of them. An over-supply of a product becomes worthless and costly to the holder because it incurs storage and disposal charges.
A Problem with the Definition of Scarcity
This brings me to the fundamental problem with the definition of scarcity used by Bitcoin’s advocates. They confuse scarce with finite. It’s unnecessary for something to have a fixed supply to be scarce, and things whose supply is constantly increasing are not necessarily abundant.
Bitcoin’s Unique Scarcity
Bitcoin is intrinsically volatile, not because of its scarcity or finite nature but because of its inflexibility. Bitcoin is unique because it has absolute mathematical scarcity. This means there will only ever be 21 million bitcoins, and anyone in the network can verify this limit. Bitcoin’s source code, Bitcoin core, controls this scarcity by rewarding miners with new Bitcoin when they create a block.
The Passenger Pigeon Example
The passenger pigeon illustrates the difference between:
- Abundant
- Scarce
- Finite
Let’s consider the sad story of the passenger pigeon, a bird once native to the U.S. but now extinct. In the 19th century, passenger pigeons were so abundant that observers described them as “darkening the sky” in flight. They were a serious nuisance to crops but a free source of meat and eggs. People were paid to kill them. As people killed passenger pigeons by the millions and destroyed their forest breeding grounds, their numbers crashed.
The Tragic Extinction of the Passenger Pigeon: From Abundance to Scarcity
Lawmakers did not believe that something so abundant could become scarce, so attempts to protect the bird with legislation failed. The carnage continued, and the species went into terminal decline. The last wild bird is thought to have been shot in 1901.
The birds survived in zoos for a few more years, but breeding proved impossible. The last passenger pigeon, Martha, died in the Cincinnati Zoo on Sept. 1, 1914. She was (and remains, since after her death, she was stuffed) a bird of infinite value, the last of her kind and the icon of her species.
Comparing Bitcoin and Passenger Pigeons
While passenger pigeons still existed in the wild, their supply was not finite. They nested, laid eggs, and raised chicks. Their reproduction rate could not keep up with the rate at which humans destroyed them, so they became scarce.
If humans had stopped shooting them and stealing their eggs, their supply would have increased. If bitcoins are lost, they can never be replaced. The supply is permanently reduced. Bitcoins are finite, but the passenger pigeon was not.
Why Bitcoin is Volatile and How Scarcity Affects Its Pricing
Bitcoin is intrinsically volatile, not because of its scarcity or finite nature but because of its inflexibility. As its market size increases, its price swings become less frequent but much larger, just as a young, bubbly stream becomes a meandering river that periodically overflows its banks. While bitcoin’s supply remains inelastic, its price will remain subject to change without warning.
Bitcoin Halving: Why It’s Important for BTC Scarcity
About every four years, the number of new Bitcoin miners is cut in half in the halving event. This process will continue until around 2140 when no more new Bitcoin will be created as the flow of new Bitcoin will drop from one satoshi per block to zero. Because Bitcoin handles small numbers, the actual supply of Bitcoin will be slightly less than 21 million because of rounding down when dividing rewards.
Amberdata states the block reward at block number 2,100,000 is 4,882,812.5 satoshis. The reward will be rounded down to 4,882,812 satoshis. When the halving happens, miners’ income is cut in half, which could make mining less profitable. This could lead some miners to stop mining, affecting Bitcoin’s security. Skeptics worry that lower miner revenue could reduce security and hurt Bitcoin’s value.
Bitcoin Network Security Concerns
The more mining happening on the network, measured by hash rate, the more secure the Bitcoin network is. When the rewards for miners are cut in half, their income drops, but there are several reasons miners could continue mine profitably and preserve Bitcoin security despite halving the subsidy.
Transaction Fees Become a Primary Source of Income For Bitcoin Miners
Miners earn income from the new bitcoin from the block subsidy and users' transaction fees. While the block subsidy is cut in half, transaction fees are not. As more people use Bitcoin, transaction demand rises, and fees increase, helping miners earn more. This is because only a certain number of transactions can be confirmed every ten minutes. Therefore, the users must bid to have their transactions confirmed promptly.
Technology Makes Bitcoin Mining Efficient
Bitcoin mining equipment, called ASICs, is constantly improving at an explosive rate. This allows miners to mine more efficiently and lower their costs, making it easier to stay profitable even after a halving.
Cheaper Energy Makes Bitcoin Mining Profitable
Miners often set up in regions with cheap energy, like near hydroelectric dams, to maximize profits. Bitcoin mining is geographically agnostic, as miners can locate their operations wherever the most affordable energy can be found. As renewable and efficient energy sources grow, energy costs could fall, allowing miners to stay profitable.
It is worth noting that miners do not typically pay the consumer rate for energy. As large customers, typical mining operations can negotiate more directly with providers to source the cheapest possible energy.
Difficulty Adjustments Ensure Bitcoin Mining Continues
Due to Bitcoin’s difficulty adjustment algorithm, a miner’s expected revenue depends on their relative share of the total Bitcoin hash rate. As such, if other miners are forced to shut down due to the halving, the remaining profitable miners should see increased returns because their relative share of the total hash rate has risen.
When the total hash rate declines, the difficulty of mining declines as well. For miners who continue to mine, halving the hash rate can increase profitability by weeding out competition and increasing their likelihood of finding a block and claiming the reward.
Bitcoin Price Impact on Miner Profitability
The price appreciation of Bitcoin can turn a loss in Bitcoin-denominated revenue into a gain in fiat-denominated revenue. Most miners still pay their costs in fiat currency, so they are more concerned with their fiat-denominated revenue than their Bitcoin-denominated revenue. Therefore, if the price of Bitcoin doubles over four years, a miner can sustain a 50% drop in the block subsidy without losing any revenue in fiat terms.
This last factor is especially significant, as Bitcoin halvings can fuel upward pressure on the price. Since the halving reduces the flow of new bitcoin onto the market, if demand is held constant, the simple mechanics of supply and demand dictate that the price should rise.
The Impact of Bitcoin Halvings on Price, Miner Incentives, and Network Security
This theory has played out over the first 13 years of Bitcoin’s existence. Between all three previous halvings, the Bitcoin price denominated in U.S. Dollars has increased at least 900%, more than enough to compensate miners for the 50% drop in Bitcoin-denominated revenue.
These factors blend to maintain miner participation and network security after a halving. Past halvings have not significantly or visibly affected the hash rate. On the contrary, the Bitcoin hash rate has continued to break all-time highs.
The Future of Bitcoin Scarcity
While fees for transacting on the blockchain are expected to rise, all Bitcoin transactions don’t need to be settled on-chain. Additional layers, such as the Lightning Network, provide cheaper, faster ways of transferring Bitcoin.
Bitcoin Deflationary Concerns and Economic Impact
As Bitcoin’s inflation rate is cut in half every four years, it will slowly become the hardest currency in the world. During the 2016 halving, when the block subsidy dropped from 12.5 BTC to 6.25 BTC, Bitcoin’s inflation rate fell from 3.7% to 1.8%, making it less inflationary than the stated U.S. Dollar inflation target of 2%. The halving of 2024 made Bitcoin less inflationary than gold, an asset long valued for its low stock-to-flow ratio.
Addressing Deflation Concerns: Bitcoin's Divisibility and Economic Viability
Some economists worry that Bitcoin’s deflationary nature will make it difficult to support an economy, as there will not be enough Bitcoin to go around. To address this, Bitcoin is divisible into 100 million units called satoshis, meaning even as Bitcoin’s value rises, smaller amounts will hold more purchasing power.
As Bitcoin’s price increases, goods and services priced in Bitcoin will become cheaper. What matters is the value, not the total number of Bitcoins. While some fear deflation will kill demand for goods, many Bitcoin supporters believe these concerns are overblown. Bitcoin encourages saving and long-term thinking instead of short-term spending. People won’t stop spending entirely. They’ll just shift their focus toward future goods rather than immediate purchases.
Deflation's Impact on Different Industries: How Bitcoin Could Benefit Long-Term Investments
Bitcoin's deflationary trend may negatively affect industries that rely on frequent, short-term purchases, but sectors like tech, which thrive on long-term investment, would benefit. For example, over the last 30 years, the prices of phones, computers, and TVs have fallen while their quality has improved. Despite this deflation, people are still buying these products in huge numbers.
Bitcoin Scarcity and Store-of-Value Attribute
A store of value is an asset that maintains its value over time without depreciating. Effective stores of value resist inflationary pressures, allowing individuals to preserve wealth for future use.
Gold is the classic example of a store of value, but there are many others, including real estate, art, and collectibles. In contrast, items like cash and commodities lose value over time, as inflation erodes purchasing power. Bitcoin's unique scarcity characteristics make it an excellent store of value that may even surpass gold.
Scarcity and Bitcoin’s Value Proposition
Bitcoin's scarcity strengthens its value proposition as an inflation-resistant store of value. With only 21 million BTC, this finite supply is hardcoded into the Bitcoin protocol, meaning external forces cannot change or manipulate it.
As of October 2023, over 19 million BTC had already been mined, leaving fewer than 2 million to be issued over the next 120 years. Bitcoin’s predictable supply schedule, coupled with steady increases in demand, is why many analysts believe the asset will appreciate substantially over time.
Bitcoin vs. Inflationary Assets
Inflationary pressures diminish the value of assets over time. As new cash enters the economy, existing cash loses purchasing power, creating a less reliable medium for future transactions.
In contrast, Bitcoin’s deflationary characteristics and predictable supply schedule ensure that the asset will retain value over time, even as demand for the asset grows. Historically, as demand has increased, the price of Bitcoin has appreciated significantly, allowing holders to preserve wealth for future use in the face of rising inflation.
How Bitcoin Halvings Impact Scarcity
Bitcoin is often compared to gold due to its similar scarcity characteristics. Bitcoin’s supply is further complicated by periodic “halvings” that occur approximately every four years.
Halvings reduce Bitcoin's annual issuance rate by 50%, bringing the network closer to reaching its terminal supply of 21 million. While the predictable nature of halvings is both anticipated and well-known, historical market behavior suggests that the impact of halvings tends not to be fully reflected in Bitcoin's price until about a year after the event occurs.
Bitcoin’s Miners and Market Cycles
Bitcoin miners help secure the network and are rewarded with newly issued Bitcoin for their efforts. As such, miner revenues are directly tied to the issuance of new Bitcoin, making them a vital part of the Bitcoin market.
Leading up to halvings, miners tend to increase the amount of Bitcoin transferred to exchange platforms, preparing to sell the asset for cash as their revenues are set to decline. This behavior establishes a price ceiling for Bitcoin, which is only broken during the period following a halving when miners revert to typical market behavior.
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Why Scarcity is an Important Feature of Bitcoin
Supply of Bitcoin Continues to Decrease
Bitcoin scarcity is hard-coded into the protocol. When Bitcoin was created, its code capped it at a fixed amount. Only 21 million bitcoins could ever be produced. Over 19 million have already been mined, meaning that the supply of Bitcoin is getting smaller. While the number of new bitcoins entering circulation keeps shrinking, demand should stay the same.
Scarcity Helps Bitcoin Resist Inflation
Central banks, like the Federal Reserve, have tools to control the amount of currency in circulation. When an economy is sluggish or stagnant, the Fed or other central banks can increase circulation by purchasing securities from banks.
For the last couple of years, the Fed has sold securities from its account to remove dollars from the economy. Bitcoin operates differently. No central authority can increase the supply of bitcoin to manage economic conditions. When Bitcoin was created, its code capped the total supply at 21 million to ensure scarcity and protect against inflation. This fixed supply helps Bitcoin resist inflation and maintain demand over time.
Price Volatility After Past Halvings
Previous halvings have resulted in sharp price increases and extreme volatility for Bitcoin. In 2012, around the first Bitcoin halving, the price increased by 80 times. The 2016 halving preceded a 300% rise in its value, and in the 16 months following the 2020 halving, the price of Bitcoin rose more than 600%.
Halving Plays a Role in Bitcoin’s Scarcity
Halving plays an integral role in maintaining Bitcoin's most important characteristic, its scarcity. Despite miners receiving fewer rewards at each halving, this scarcity could continue to make Bitcoin intriguing for investors into the future. The global economic climate is changing quickly, Bitcoin is a potential safeguard against traditional markets' economic instability.
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If You Still Think Bitcoin is Scarce, You’re Suffering from Fiat Brain
Want to know what’s holding back Bitcoin adoption? The mental shackles of the fiat system. We’ve progressed much since Satoshi Nakamoto published the Bitcoin whitepaper in 2008. But it’s clear that many people still think like fiat zombies, especially when assessing Bitcoin’s supply and scarcity. Let’s call this phenomenon “fiat brain.”
You can almost hear the gears grinding when a Bitcoin halving approaches. Rather than considering what this event means for the future of the network and its users, the average person’s fiat brain fixates on the largest unit of measurement (BTC) and how the upcoming halving will decrease the rate of new Bitcoin creation. It’s an overly simplistic view that completely misses the point.
Bitcoin’s Scarcity is a Bit of a Misnomer
Satoshi Nakamoto coded Bitcoin with a supply limit of 21 million BTC. Bitcoin supply is finite. But that doesn’t make BTC, the currency, at all rare. We’re largely accustomed to this by now, but one of Bitcoin’s most appealing features is that each coin is extremely divisible, up to eight decimal places, making 100 million satoshis (sats) per Bitcoin. Dollars are divided into 100 physical cents, two decimal places, or at most, 1,000 mills to three decimal places. Extrapolate all those sats to the current circulating supply of Bitcoin.
100 million sats in 19.68 million Bitcoin makes 1.968 quadrillion sats. And sometime in 2140, when you and everyone you know will be floating about the great Bitcoin citadel in the sky, there will be 2.1 quadrillion sats. The base money supply of the US dollar is currently less than $5.9 trillion, and the much broader M3 is under $20.8 trillion. A quadrillion has 15 zeros, and a trillion has 12. If Bitcoin is scarce, then so is the US dollar.
The Address Numbers Are Staggering
Indeed, only 21 million people can ever own one Bitcoin each. Around 1 million addresses have at least 1 BTC, which is slowly growing. However, it’s not knowable how many of those are owned by the same person, nor how many exchange accounts have million-dollar Bitcoin balances. There are also 53 million Bitcoin addresses that have one satoshi or more. If the current supply were suddenly sent to those addresses, each would net more than 37 million sats ($25,500).
With this in mind, Bitcoin is not scarce. That’s the fiat brain talking, it automatically goes to the largest unit when considering Bitcoin as a currency. Your fiat brain does the same with dollars, euros, leprechaun gold, and tacos. The reality is that sats are incredibly cheap, $0.00069 each, so few consider them. If everyone sat were worth the current price of a whole BTC, then an even distribution would give every human alive $16.7 billion Bitcoin. Do the same with all addresses containing at least one sat, and each would net $2.5 trillion. A few years back, there was a push to find a symbol representing the satoshi, but nobody could agree.
Why Satoshi’s Scarcity Doesn’t Matter
Will Bitcoin’s supply ever be an issue? No. Even if Bitcoin’s supply did reach a point where it hindered its performance as a currency, the network could adapt and overcome such obstacles. This is because Bitcoin is an open-source protocol governed by a decentralized network of users.
Why Bitcoin Scarcity Is Driving Its Rise into Mainstream Finance
Bitcoin’s limited supply is one of its most appealing characteristics. Only 21 million Bitcoins will ever exist, and this supply cap creates scarcity that is attractive to many investors. As inflation rates rise globally, many investors seek alternatives to traditional finance.
Scarcity gives Bitcoin its appeal as an inflation hedge, driving demand in the financial world. This demand has caught the eye of institutional investors, hedge funds, and even governments.
Bitcoin Scarcity Attracts Institutional Investors
Bitcoin scarcity didn’t just attract the interest of individual investors; it also caught the attention of institutional investors. Major financial firms such as BlackRock and Fidelity have started to embrace Bitcoin, and it’s no coincidence that they did so after the asset’s halving event in May 2020.
“Bitcoin’s halving events have historically marked major turning points in the price action, signaling a shift in supply that impacts the asset’s inflation rate,” said Long. “After the last halving, we saw a big bull run that peaked about a year later.” In the case of the 2020 halving, this cycle peaked in 2021 when Bitcoin reached its then-all-time high of $69,000. The transition of Bitcoin from a fringe investment to a more mainstream financial asset has been marked by its scarcity and the attention it has received from institutions.
Bitcoin Scarcity Helps Investors Avoid Risky Leveraged Trades
Bitcoin’s disinflationary nature should encourage investors to rethink the need for leverage when investing in the asset. Leverage refers to borrowing money to amplify returns on investments. Long warns that a fool and his leveraged Bitcoin are soon parted, noting that traditional finance practices should be cautiously approached in the digital currency sector.
While many in the audience may be familiar with leveraging in traditional finance, Bitcoin’s unique characteristics make leveraging it particularly risky. In contrast to traditional assets, Bitcoin’s supply is fixed, meaning that it will become less volatile as its inflation rate approaches zero. Investors looking to hedge against inflation with Bitcoin should simply hold the asset.
Can Bitcoin's Hard Cap of 21 Million Be Changed?
Bitcoin’s hard cap, also known as the supply limit, can theoretically be changed; however, such a change would be unlikely. The Bitcoin protocol has incentive and governance models that protect the hard cap of 21 million coins. The Bitcoin hard cap is the maximum number of bitcoins that can be created, set at 21 million BTC. This hard limit on the total supply of Bitcoin is a key feature of Bitcoin’s monetary policy, designed to create scarcity and prevent inflation.
Satoshi Nakamoto encoded this limit into Bitcoin’s source code, which network nodes enforce. The hard cap is reached through halving, where the reward for mining new blocks is cut in half approximately every four years, gradually reducing the rate at which new bitcoins are created until the hard cap or limit is reached. It’s estimated that the last bitcoin will be mined around 2140, bringing the supply to 21 million.
Why is the Hard Cap Important?
Bitcoin’s hard cap is central to its value proposition as a money and an investment. Like gold and real estate, Bitcoin is a successful store of value because it’s difficult to increase its supply. Thanks to the halving process, bitcoin becomes more difficult to produce about every four years, and eventually, it will become impossible to create new bitcoin. This scarcity is one of the reasons why many investors value Bitcoin highly.
Why Did Satoshi Choose 21 Million?
While initially, Satoshi did not disclose the specific reasons, an email exchange with Martti Malmi, an early Bitcoin contributor, sheds light on the rationale behind this decision. Satoshi explained that the decision to cap Bitcoin’s supply at 21 million was an educated guess since it needed to be decided without knowing how Bitcoin's future would unfold.
Satoshi aimed at a number that would eventually make prices denominated in Bitcoin comparable to existing currencies. It was further explained that Bitcoin offers a high degree of divisibility, allowing for pricing flexibility. A bitcoin is divisible into 100 million units called satoshis.
Why Bitcoin’s Hard Cap Will Not Change?
There will never be more than 21 million Bitcoins because its incentive and governance model protects Bitcoin’s hard cap. A few critics claim that since Bitcoin is nothing more than open-source software, the rules of the Bitcoin network can be changed easily.
Thanks to Bitcoin’s architecture, the entities maintaining Bitcoin’s rule set have strong incentives to resist a change to the hard cap, while those who may desire to change it cannot control the network. Miners are the actors who may have the strongest motivation to change Bitcoin’s hard cap as it may temporarily increase their revenue. However, for several reasons outlined below, this change will not occur.
Bitcoin’s Incentive Model Protects the Hard Cap
There is no incentive to increase the Bitcoin supply because it would result in inflation and destroy Bitcoin's core investment thesis, its scarcity. For many investors, the allure of Bitcoin is its predictable, fixed supply. Wealth managers such as Paul Tudor Jones and institutions such as BlackRock have credited Bitcoin’s scarcity as a significant driver for its growing value.
Removing the fundamental driver behind Bitcoin’s value proposition is not in the miners’ best interest. Although the change would increase miner revenue in Bitcoin terms, losing faith in the Bitcoin network would result in a catastrophic and irreversible price collapse, leading to a net loss of miner revenue in fiat terms.
Since almost all miners pay their costs, such as equipment costs, salaries, and energy bills, in fiat currency, they are more concerned with their fiat-denominated revenue than their bitcoin-denominated revenue. Miners will face large financial setbacks if Bitcoin's price crashes.
Bitcoin’s Governance Model Protects the Hard Cap
Bitcoin’s governance model is decentralized, meaning that changes to the protocol require widespread consensus. Any change to the hard cap would require the majority of nodes to adopt the new rule, which is unlikely. Speculation that Bitcoin’s hard cap could change is rooted in two deeper misunderstandings about Bitcoin as a distributed, consensus-based network.
There is not one, but dozens or hundreds of versions of the Bitcoin source code. Every node in the Bitcoin network runs independent software that will reject invalid blocks, such as blocks that reward a higher amount of BTC. While many nodes run the latest version of Bitcoin Core, many continue running older versions and different implementations. While Bitcoin Core’s source code can be changed trivially, it is far more difficult to convince tens of thousands of nodes to adopt these changes.
The Role of Nodes in Enforcing Bitcoin's Rules: Lessons from the 2017 Blocksize War
Miners do not control the network or its rules. To be rewarded with Bitcoin, miners must follow the rules enforced by the full nodes. When miners submit a new block to the network, tens of thousands of nodes independently verify it, ensuring it produces an appropriate amount of new bitcoin, includes a valid Proof-of-Work and all transactions within the block are valid.
Nodes will reject all blocks that violate these rules, meaning miners have no control over Bitcoin’s ruleset. This theory was validated by reality during the Blocksize War in 2017 when 95% of miners agreed to raise the block size limit to allow Bitcoin to scale. Nodes and users refused this change and successfully forced miners to adopt an alternative scaling solution.
How Can Bitcoin’s Hard Cap Be Changed?
Despite the countervailing incentives and governance models, changing Bitcoin’s hard cap is possible, but several groups would have to collaborate from the developers, community members, and nodes.
Developers must propose and then write the code to implement this change. There would be a community discussion, which would likely be controversial. If developers agree to these changes, they will be integrated into Bitcoin Core.
Why Changing Bitcoin's Supply Cap Would Require a Hard Fork and Network Consensus
The community must agree to an activation path to ensure the network collectively transitioned to the new ruleset. Changing the supply cap would necessitate a hard fork, which means that all nodes on the network would have to adopt the changes or be forced off the network.
As part of the activation path, miners and nodes would signal their support for the change, and once a dominant portion of the network signaled support, the change would be activated. Nodes and miners who refused the change would now operate a minority fork, preserving the original Bitcoin network. The two networks would compete for market share and hash rate. Thus, the 21 million supply of the original Bitcoin can always remain the same.
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How Bitcoin Scarcity Influences Investor Behavior and Market Sentiment
Bitcoin Scarcity: The Impact of Supply on Demand
Supply and demand drive the market for any asset, including Bitcoin. When demand surges, and supply remains stable, prices spike. A closer look at the relationship between Bitcoin’s supply and demand reveals why the price can be so volatile.
Bitcoin’s Fixed Supply: No More Cupcakes After 21 Million
Unlike traditional currencies, which governments can print more of, Bitcoin has a cap. Only 21 million Bitcoins will ever exist. Think of it like having a limited edition of those cupcakes. As more people want a piece of the Bitcoin pie, but there aren’t enough slices to go around, the price naturally starts to climb.
The Demand Side of the Equation
Demand is driven by how much people want Bitcoin. This could be due to its potential for profit, decentralized nature, or hype. Prices tend to rise as demand goes up and supply stays the same (or even shrinks due to lost or hoarded Bitcoins). It’s pretty straightforward.
Real-World Examples: What Happens When Demand Surges?
Let’s look at 2017. When everyone and their grandmother wanted to buy Bitcoin, its price skyrocketed. The world wanted cupcakes, but the bakery could only make so many. As more people jumped on the bandwagon, the demand far outpaced the supply, pushing prices to new heights.
How Scarcity Influences Investor Behavior and Market Sentiment
Scarcity taps into a fundamental human trait: the desire for what we can’t easily have. Whether it’s a rare collectible or a limited edition sneaker, it suddenly seems more valuable if something is scarce. Bitcoin is no different. Because there’s a limited supply, it’s seen as precious—like digital gold.
Investor Behavior: Why People Go Crazy for Bitcoin
What does this mean for investors? When something is scarce, people tend to want it even more. Bitcoin’s capped supply makes it a hot commodity. Investors often buy and hold (or HODL, as the Bitcoin community says), hoping the value will keep rising as more people chase after fewer coins. It’s like a game of musical chairs, where everyone’s scrambling for a seat, but only a few are left.
Market Sentiment: The Emotional Rollercoaster
Scarcity also plays with emotions. If you knew only a handful of something left, wouldn’t you feel pressured to grab it quickly? That’s the kind of sentiment that can drive Bitcoin prices.
When people think Bitcoins are running out, they buy in a frenzy, pushing prices up. If people feel Bitcoin might lose its value (due to regulations or market crashes), the fear can lead to sell-offs.
A Real-World Connection: The Tulip Mania
Let’s take a trip back to the 1600s in the Netherlands during the Tulip Mania. Tulips were the Bitcoin of that era: rare, highly desired, and incredibly expensive. People paid huge amounts for tulips, believing they would only become more valuable. But when the bubble burst, prices plummeted. This historical event shows how scarcity and sentiment can lead to massive market swings.
What Should You Watch Out For?
Understanding this behavior is crucial for investors. Bitcoin’s scarcity can drive its value, but it can also lead to bubbles that might burst. It’s like riding a roller coaster: thrilling, but you need to hang on tight and know when to get off. Always consider your emotions and the market’s mood when making investment decisions.
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