Bitcoin as the Scarcest Money

Bitcoin’s scarcity is far better than that of the dollar (or any fiat currency). Among a number of reasons that scarcity of currency matters is the fact that the lack of monetary scarcity, due to central banks printing more of it at will, is one of the key causes of the growing debt that is engulfing the world. As discussed in Chapter 4, a fractional reserve system in which the central bank can create more money and thereby abet deficit spending out of a myopic concern with consumer price inflation and a failure to consider the consequences of asset price inflation, seems to result in ever-rising debt levels.

A gold standard is better than the dollar in terms of scarcity, but not as good as Bitcoin. The scarcity of gold makes creating money more difficult than with the dollar, but new gold supply can still be extracted from the earth at a rate of 1%–2% annually. Gold also disappoints users by being much harder to transfer than fiat currency, especially over long distances. A paper-based gold standard (in which paper notes are backed by gold held in vaults) solves the transferability problem. However, history shows that governments are unable to adhere to a gold standard because the temptation to take advantage of the stealth tax known as seigniorage (printing valuable money at low cost) is too great.

Bitcoin, in contrast to the dollar, to gold, and to any other currency in the history of the world, is the hardest money ever invented—“hard” being the word international currency analysts, economists, and traders use to describe money that is hard to produce and therefore scarce. Its predetermined cap of 21 million bitcoins operates on a supply schedule as follows. The Bitcoin network validates a block of transactions approximately every 10 minutes, and a set of new bitcoins is minted as a “block subsidy” with each such block. Every 210,000 blocks (which equates to approximately four years), the number of new bitcoins minted for each block subsidy falls by 50%. For the first four years of Bitcoin’s existence, 50 new bitcoins were awarded with each new block. For the next four years, 25 bitcoins were. Currently 12.5 bitcoins are minted with every 10-minute transaction block, and in mid-2020 it will fall to 6.25 bitcoins per block. The supply schedule and the implied inflation rate for Bitcoin’s first 20 years is shown in Figure 7: