reason #7
bitcoin is super scarce
What do you think would happen if it was announced that only 5,300 more tonnes of gold could be mined, and when that number was reached, all gold mines around the world would be closed down forever? Given that on average between 2500 and 3000 tonnes of gold are mined each year, we are proposing that in two years every gold mine will be mothballed. The demand for gold will skyrocket as people scrambled to get their hands on the last supply of gold. This is a simple case of supply and demand. If supply exceeds demand, prices go down. If demand exceeds supply, prices go up. If supply goes to zero, as long as there is still some demand, prices need to go up. Notice how I said, "if there is still some demand". If there is no demand and no supply, the price theoretically is zero.
Let's say you are walking through the desert and you have a camel that is carrying a bag full of dollars to the value of $1 million. You get lost in this desert and after three days you have drunk your last drop of water. After six days you are an inch away from death and there is still no water in sight. You then come across a water truck that has also lost its way. You hail the truck down and the driver informs you he has one bottle of water left but needs it for himself. How much is that bottle worth to you? I would say close to $1 million. Your price elasticity is inelastic. Your demand for that bottle of water is the same regardless of whether it costs $1 or $1 million.
This is an extreme example but goes to the heart of everyday life and that is scarcity. Everything on this planet is limited. We have limited fresh water, a limited number of years in our lives, hell, even multi-billionaires have limited money. Their money limit is high, but after your 100th Ferrari, 5th wife, and 20th beachside mansion, life starts to become a little mundane. Back to the notion of supply, most things have limited supply.
So how do our brains react to limited supply? Marketers know that our response is sometimes irrational. How often have you come across this phrase when you are buying an airline ticket - only 5 seats available? I call for this every time. What happens if the flight is sold out and I miss that important presentation? You buy that ticket because airline companies know that scarcity is a wonderful sale converter.
Our brains are even more irrational when it comes to money and scarcity. It is this fear of scarcity that causes a run on a bank - a concept you need to understand if ever you want to become proficient in investments. Banks make money in the following way - they take money from people with lots of money (depositors) and pay them for that money. The amount of money paid for those deposits is expressed as an interest rate. Let's say you invested $10,000 at a 2 per cent interest rate. If you hold your money there for a year, your interest will be $200. The bank will not sit on your money for 12 months. If it does, it will lose $200. It needs to put that money to work. Let's say that someone needs a $10,000 business loan for 12 months to expand their factory. Let's say the bank charges 10 per cent for that loan. After 12 months, the small business repays the loan plus $1,000 (10 per cent of $10,000). From that $1,000, the bank will pay you $200 and the $800 left over is the profit of the bank.
Now the regulators step in. You can think of them as being the police of the banking system. Their job is to ensure that banks are run soundly and they focus primarily on the depositors and the quality of the loans. They want to make sure that when the bank takes your $10,000 he lands that money out wisely and does not go to Vegas and spend all the money on booze, poker and strippers. One of the many tools regulators employ to keep these bankers honest is by forcing them to keep a fraction of their deposits in reserve. This is known as fractional reserve banking. In most banks around the world, the reserve ratio is 10 per cent. That means that of the $10,000 you deposit, the bank is forced to put $1,000 into a special account that cannot be touched for the length of the deposit. This means that the bank can only lend out $9,000. The banker will make $900 on the loan and pay you $200 which means his profit is $700. But before you shed a tear for the banker, you can be assured he will invest that $1,000 in a low-risk government instrument and earn something off it.
Assume the bank has taken $10 million in deposits, lent out $9 million, and is holding $1 million in a low-risk treasury bond. A rumour emerges that the bank has been reckless with the lending and has lent all $9 million to an unlicensed casino that is about to get closed down by the police. All the depositors hear this rumour and jump to the conclusion the rumour is true. They are overcome with fear that their money is in danger so they all descend on the bank and demand their money back. The bank manager tries to assure them the rumour is false without success. The bank sells the $1 million in the treasury bill to satisfy the first customers but has to turn the rest away and the bank collapses and goes into liquidation. This is known as a run on the bank. Whether the rumour is true or not is irrelevant in the short term. It forces the bank to try and get as much money back from its lenders but almost always it will come up short. This threat of scarcity causes people to do irrational things.
What does this have to do with Bitcoin? A total of 19.3 million Bitcoins have been mined over the past 12 years. When Satoshi designed Bitcoin he wanted to mimic the physical scarcity of gold and therefore capped the supply of Bitcoin to 21 million. This means that 90 percent of Bitcoins have been mined.
What many people do at this point is take 19.3 million and divide that by 12 years arriving erroneously at the conclusion that approximately 1.7 million Bitcoins are mined every year. The calculation is not linear because the number of Bitcoins per block halves approximately every 4 years. Satoshi paid plenty of attention to scarcity. This means that after every 210,000 blocks have been mined, the number of Bitcoins per block halves. The genesis block contained 50 bitcoins. The first halving took place in 2014 and the block size went down to 25. In 2018 it went down to 12.5 and in 2022 it went down to 6.25 in August 2022.
Why does this halving occur?
The Bitcoin mining algorithm is programmed to look for new blocks every ten minutes. The time it takes to find blocks will decrease as more miners join the network and add more hashing power. To restore a 10-minute objective, the mining difficulty is reset once every two weeks or so. The average time to locate a block has constantly remained below 10 minutes (roughly 9.5 minutes) as the Bitcoin network has grown dramatically over the last decade. Bitcoin's supply is limited to 21 million units. The generation of new BTC will stop once the total number reaches 21 million. Bitcoin halving assures that the quantity of Bitcoin that can be mined each block drops over time, making BTC more rare and valuable.
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Logically, the incentive to mine Bitcoin would decrease when each halving was completed. Bitcoin halvings, on the other hand, are linked to massive increases in the price of BTC, giving miners an incentive to mine more even though their payouts have been halved. Bitcoin miners are encouraged to continue mining as prices rise. On the other hand, miners may lose the incentive to create more Bitcoin if the price of the digital currency does not rise and block rewards are reduced. This is because mining Bitcoin is a time-consuming and expensive operation that necessitates a lot of computer power and electricity.
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Why does Bitcoin halving matter?
Bitcoin halving is usually accompanied by a lot of turmoil for the cryptocurrency. As a result of the halving cycle, the supply of available Bitcoin decreases, raising the value of Bitcoins yet to be mined. And with such changes comes the opportunity to profit. On Nov. 28, 2012, when the price of BTC was around $12, the first halving took place; one year later, Bitcoin had risen to nearly $1,000. The second halving occurred on July 9, 2016, and Bitcoin's price plummeted to $670 at the time but rose to $2,550 by July 2017. Bitcoin reached an all-time high of about $19,700 in December of that year. Bitcoin's price was $8,787 at the time of the most recent halving, in May 2020, and it exploded in the months following. If you believe in the value of history, past Bitcoin halvings have been long-term bullish drivers for the cryptocurrency's price. The third halving in Bitcoin's existence, on the other hand, is almost certain to have an impact on the BTC ecosystem in various ways. Primarily, as the economic benefit of mining becomes less enticing and, for less effective miners, unprofitable, the number of Bitcoin miners is widely projected to decline.
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The Bitcoin halving symbolizes Bitcoin's deflationary tendency regularly. This has been the core of the bull case for Bitcoin since its inception; that is, Bitcoin, being the decentralized cryptocurrency, can't be printed into oblivion by governments or central banks, and the total supply is completely known.
