Yesterday, I had a discussion with my colleagues about the set supply of bitcoin.
Bitcoin is limited to a finite number of coins. 21,000,000 exactly.
But my colleagues posed a question. One that is brought up regularly.
‘If bitcoin can break down into smaller fractals, is it really finite?’
This is a common misunderstanding within crypto economics.
Bitcoin cannot infinitely fracture.
Each bitcoin can be separated into 100,000,000 units at most.
Or 0.00000001 bitcoin.
This is known as a ‘satoshi’, which is the smallest unit of bitcoin.
What this actually means is that bitcoin has 2.1 quadrillion raw units.
In the future, one bitcoin might equal the value of a house; while one satoshi might equal the value of a cup of coffee, for example.
If the supply is set, which it is, the commodity is finite.
The Future of Money
But let me explain why this is such an important principle for the future of money.
Bitcoin was always designed to be ‘digital gold’.
It’s a finite, tradeable commodity that becomes progressively harder to mine until the supply is exhausted.
Very few tradeable commodities are finite. You could argue that gold is not truly finite.
As Apple co-founder Steve Wozniak said recently:
‘There is a certain finite amount of bitcoin that can ever exist. Gold gets mined and mined and mined. Maybe there’s a finite amount of gold in the world, but Bitcoin is even more mathematical and regulated and nobody can change mathematics.’
He goes as far as saying that bitcoin is actually better than gold because of this very principle.
Finiteness does not mean you will run out of a commodity to trade. If it was too limited, the currency could only spread so far.
If a commodity were to ‘run out’, that economy would stop.
No one wants something that ‘runs out’ to be a trading tool. Otherwise you would have a permanently depressed economy.
That’s why a metal like palladium has never been a widely-used currency. It is too rare, despite having most of the properties that a currency would have.
A Store of Wealth
The reason it is so important for a commodity to be finite when being used as a store of wealth is so the amount that exists today can’t be diluted.
You know that what you buy now will not be diluted by more being produced.
What you have now will be the same in 100 years’ time.
When more bills of money are produced by central banks — generally to pay debts — the worth of the existing money goes down. That’s because it’s less scarce.
This is what leads to inflation.
In some cases, like in Zimbabwe, hyperinflation rendered the money worthless due to oversupply.
The key point is that all assets are fiduciary.
Or, in simpler terms, the value of assets is only dictated by the faith people have in them.
As New York Times bestselling financial author Jim Rickards says with regards to fiduciary assets (my emphasis added):
‘Gold is a form of money. The US dollar is a form of money. The Australian dollar is a form of money. Bitcoin can be a form of money. There can be many, many kinds of money.
‘And people say, “well, you know, they’re not backed by anything.” Bitcoin’s not backed by anything, and the Aussie dollar is not backed by anything. My answer is they’re all backed by one thing: confidence.
‘But confidence is extremely fragile. It can be lost. And once it is lost it is very hard to regain. But people have never lost confidence in gold.’
Bitcoin’s Finite Nature is an Advantage
Bitcoin’s finite nature is, without doubt, one of its strongest advantages over fiat (paper) currency.
It is a protection against inflation and provides certainty as a store of wealth.
So long as people have confidence in both currencies, they both will survive, coexisting in a more diverse financial world.
If either were to lose this confidence from society, then the other would likely become the dominant financial method.
This is moot right now because cryptocurrencies can’t currently handle the amount of transactions required to be the dominant method of commerce.
However, once the issues of scalability are solved, this will be the key global question.
Are cryptocurrencies just a subsidiary payment method to fiat, or are they a superior method that will uproot the traditional system? A money 2.0?
If nothing else, it is a fundamental philosophical difference (to fiat) that makes us think critically about the management of the global pool of money.
In my opinion this can only be a good thing.
Junior Analyst, Money Morning
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