This week’s Beaver Bulletin is written by Aubrey Jesseau, founder and CEO of Beaver Bitcoin.
When learning about Bitcoin you’ll hear the word “scarcity” thrown around a lot.
Absolute scarcity. Digital scarcity. Reliable scarcity.
It can sound like jargon, but each of these concepts are key framings to understand what makes Bitcoin valuable.
Scarcity is the foundation of everything that has ever served as good money. And absolute scarcity is the key property that makes Bitcoin unlike anything we’ve ever seen.
Why Scarcity Matters
Beads and seashells failed as money, but gold endured for thousands of years. Why? Because gold is more scarce. There’s only so much of it in the ground, and it takes time and energy to dig up.
Scarcity gives money meaning because our money needs to store value over time. If something isn’t scarce, it cannot reliably store value.
Beads and shells may have appeared scarce to people living on islands, but everywhere else they were abundant. When outsiders observed this, the outcome for local islanders was devastating and they were plundered through trade.
By the time the islanders realised what was happening it was way too late.
Gold was good money for thousands of years. It was (and still is) a scarce precious metal with strong monetary properties. Everyone recognized its value and accepted it as payment. It is divisible and portable. So what happened?
Gold failed as money because it wasn’t portable or divisible enough. These inconveniences made most people choose to store their gold in banks in exchange for redeemable gold certificates. The certificate itself was “as good as gold”.
But then people stopped redeeming their certificates.
The certificates were more portable and more divisible, and (perceivably) a better form of money than gold.
And the banks could be trusted…
Or could they?
With redemptions down, the banks began issuing more gold certificates than gold they had in reserve.
This fractional reserve style banking led to widespread bank runs in 1930 and the collapse of thousands of banks. Many depositors demanded gold instead of paper as their trust in the money had been broken.
Still, money continued to evolve.
Next there was paper money, partially backed by gold. Then came money backed by nothing at all, with its supply controlled by a central bank.
This unbacked money is what we use today, referred to as fiat, which means “let it be done” or “by decree” in Latin. It has value because governments and banks say it does, and we believe them.
In this way, gold’s scarcity was undermined slowly over time by clever bankers and politicians. But make no mistake, this would have happened the same way to anything in gold’s position, regardless of how scarce, portable or divisible.
The ultimate cause of gold’s failure as money? Existing in the physical world.
The Rise of Digital Money
As a real physical commodity, gold was doomed to fail as money eventually. This is because anything physical is not portable enough to serve as money in the modern age.
As the speed of commerce increased with advances in telecommunications, money needed to be portable to a degree not possible for solid-state matter.
Enter digital fiat currency. Not only more portable, portable at lightspeed.
Digital fiat is better money than gold in almost every way. It’s more portable and more divisible. It’s durable and accepted globally. Transactions can be completed instantly.
Where fiat fails—digital or not—is in its complete lack of scarcity.
Fiat is effectively infinite in supply, and the amount in circulation is constantly increasing. The more fiat is created, the less it’s worth and the worse inflation gets.
US and Canadian dollars have lost 41% and 36% of their value in the last 20 years.
Sure, fiat solved the portability problem, but at what cost?
Because it’s digital, those who control fiat can create more dollars instantly, for free. Even shells and beads are more scarce.
And while it’s true that our money had to become digital to adapt to the modern age, it didn’t need to become unbacked from gold with it’s supply controlled by a few individuals.
But regardless of how or why, infinite inflatable fiat is the money of our time.
And whether we like it or not, in this story, we’re the islanders.
The Discovery of Absolute Scarcity
But maybe our story is just beginning.
You’ve heard it before. Bitcoin is the best form of money the world has ever seen, on every metric, aside from having an established history.
As digital money, Bitcoin is portable, divisible and durable. It also operates every day of the year, in every country in the world. Here, it easily meets the portability requirement to serve as money for the modern age.
But unlike fiat, Bitcoin’s supply is fixed and known. Bitcoin’s supply is absolutely scarce.
This means that for the first time in history, we have a form of money that we cannot create more of.
How this is possible for something that exists digitally is what makes Bitcoin special.
After all, everything digital that we know of can be duplicated for free. Songs, images, documents. It’s all just data that can be copied.
But this is the brilliance of Bitcoin. As it turns out, absolute scarcity can only be achieved digitally.
It begins with code. Bitcoin’s fixed supply of 21 million coins is written in its code and no one can change it.
Well, not exactly.
Bitcoin software is free and open source. Anyone can download it and run it. Following that, they can change the code however they like, including changes to the supply. Maybe they want 42 million coins, instead of 21 million.
The issue they’ll have is that Bitcoin is a network. There are tens of thousands of people running the Bitcoin software around the world, and they are all in consensus. The rules are the rules and everyone agrees. Meaning, if you make changes to your own Bitcoin code, you simply fall out of consensus and you are no longer running Bitcoin.
It’s like doubling the amount of squares on a chessboard. The game exists for you, but it’s not chess and you’re going to have a hard time finding anyone to play with.
You have to play by the rules.
There’s more.
Since Bitcoin was the first cryptocurrency to establish the concept of absolute scarcity, it has gained an enormous lead. No other cryptocurrency can reliably make the claim of having a fixed supply because Bitcoin already has the largest network of nodes, miners, users and liquidity.
This isn’t speculation. Hundreds if not thousands of “competing” cryptocurrencies have made this claim. Yet none have come close to competing with Bitcoin. And while some may pump here and there, the prices of these coins are all trending to zero when measured against the value of Bitcoin over time.
The response from the market is loud and clear when it comes to alternative crypto assets claiming to compete with Bitcoin: “we don’t believe you.”
Absolute scarcity was a one-time discovery with Bitcoin—and in all likelihood—it will never happen again.
Bitcoin is Perfect Money
While we’re on the topic, there’s another property of money we haven’t covered.
Seizure resistance.
When you control your own Bitcoin keys, it is extremely difficult for someone to steal your bitcoin from you, if you are not willing to give it to them.
Unlike gold, which can be (and was) physically seized by authorities, Bitcoin can be secured in a way that creates plausible deniability in the event of government overreach.
You can “forget” where you stored your seed. You can “forget” the pin to your wallet. You can “forget” your passphrase.
Bitcoin combines the best monetary properties of gold with the best monetary properties of digital fiat. It’s more scarce, more portable, more divisible, more durable. It doesn’t close on holidays and weekends. No government can control it.
And it’s near impossible to seize.
The only area Bitcoin lacks when it comes to the established properties of money, is well, being established.
Not a lot of merchants accept Bitcoin yet. There’s still a lot of confused economists in the mainstream. And that’s ok.
It’s actually expected.
Historically, as something becomes money it goes through three stages.
- Store of value
- Medium of exchange
- Unit of account
These stages should be intuitive. Before Bitcoin becomes a medium of exchange used for day to day purchases, it needs to be adopted as a store of value. Everyone needs to own it first and recognize it as valuable, before we start using it daily.
The last stage—Unit of Account—is just a culmination of the first two. Once bitcoin is the only money people want and use, everything will be priced in bitcoin, including things like gold and oil. Then, it will have become the world’s first truly global and borderless unit of account.
Today, we are still early in the first stage. Bitcoin is just becoming recognized as a superior store of value by the broader public.
We’re Still Early
We’ve really never seen something like Bitcoin before. It’s the best form of money to ever exist by a longshot—absolutely scarce and digital in nature. It’s global, borderless and cannot easily be seized.
It’s also a technology being adopted faster than the internet.
And we are still very early. Compared to the internet it’s the year 2000. We’re using Internet Explorer on dial up. MSN Messenger is just getting popular. You’re downloading With Arms Wide Open by Creed on Napster. It takes half an hour. Nickelback isn’t even famous yet.
But unlike the internet, Bitcoin is adversarial in nature. Because of Bitcoin’s potential to become money for the world, the risk isn’t just missing out on Hotmail, it’s getting completely left behind economically as the world transitions to a superior form of money.
At the nation state level, we can think of it like the adoption of gunpowder: if your neighbours or enemies have it, you don’t have a choice, you have to get gunpowder or you’re going to get wiped off the map.
Avoiding Bitcoin is like choosing not to adopt gundpower. With Bitcoin’s potential to become global money, holding out could have brutal consequences, no different than the islanders who got caught using beads for money.
This is Bitcoin game theory, and because the only rational decision is to adopt, it’s reasonable to expect the speed of Bitcoin adoption to increase rapidly sooner than later.
Until then..
Stay humble,
Aubrey
We’re on a mission to fix the money.
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