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On Friday, the 18 millionth bitcoin will be mined. There will only be another three million left to dig up. It’s an arbitrary number to celebrate, but Bitcoin diehards are celebrating nonetheless—like Anthony Pompliano, who’s trying to get #3MillionLeft trending on Twitter.
There are a host of reasons why increasing scarcity gives Bitcoin believers happy tingles. Central to this is the thesis of Bitcoin itself—the notion of “artificial scarcity.”
Unlike state-backed, “fiat” currencies, Bitcoin was hardwired by its inventor, Satoshi Nakamoto, to be immune to inflation. Free printing to make up for falling interest rates is impossible. The limit is hard-capped at 21 million. Barring an update to the algorithm, which would have to be agreed upon by people with powerful interests against doing so, that will never happen.
The halvening approaches
The first million bitcoins, by some estimations, were mostly mined by Satoshi, who would now be worth around $7.2 billion. Bitcoins were worth pennies at the time, and mining generated a full 50 bitcoins each “block,” the batches of transactions validated in bulk by miners. Now fewer are generated each time, because of the routine halving of new Bitcoin supply, due to happen again in May 2020—dubbed “the halvening” by true believers. The first 18 million coins took roughly ten years: the next three million are expected to be fully mined by 2140.
Satoshi’s coins are locked away, and careless hodlers have further diminished Bitcoin’s circulation. Cryptocurrency analytics firm Chainalysis reckons that some four million bitcoins are inaccessible, thanks to forgetfulness, theft, hardware malfunction, and death. That leaves only 14 million usable coins.
The most immediate tangible effect of the Bitcoin supply dropping is that, once supply hits zero, miners will go out of business. That’s unless they can live off transaction fees, which generate a pittance because very few use the network for transactions.
Nevertheless, the 21 million cap fuels two powerful narratives: the first is that Bitcoin is “hard money,” a deflationary alternative to fecklessly printed national currencies. Coupled with the halving feature, this produces a high “stock to flow” ratio, the currency in circulation (stock) divided by number of new coins generated (flow). A high ratio, believers say, marks a “hard” currency whose price will tend up, not down.
The second narrative is more simplistic: the scarcer Bitcoin is, the more people will want to buy it. Think old National Lampoon issues, Beanie Babies, dot com domains, Rembrandts. Scarcer assets command higher prices. When only a few million bitcoins remain on the shelves, believers say, it will trigger a frenzied, shop-till-you-drop buying spree on Wall St.
Indeed, a reading of early comments by Satoshi suggests that Bitcoin’s “scarcity” was a way to counter the cryptocurrency’s lack of “intrinsic value,” and compel people to take it up as a peer-to-peer cash.
From base metal to digital gold?
In a 2011 thought experiment, Satoshi posited a “base metal as scarce as gold” but “boring grey in colour,” “not a good conductor of electricity,” “not particularly strong,” “not ductile or easily malleable either,” and “not useful for any practical or ornamental purpose.” The metal would have “one special, magical property,” however—it can be “transported over a communications channel.”
“If it somehow acquired any value at all for whatever reason,” he said, people would use it as cash. But that wouldn’t be possible without any market value, which he believed—in lieu of the “automatic bootstrap of intrinsic value—could be forced through scarcity. “If there were nothing in the world with intrinsic value that could be used as money,” he said, “only scarce but no intrinsic value, I think people would still take up something.”
But, critics wonder, why should scarcity have any effect? Old glass electrical insulators are extraordinarily hard to come by, but nobody cares. The clay bowl you baked as a pre-schooler? Worthless. Unless you become President. As one CNBC pundit said to Pompliano, “there are a lot of things that are scarce that nobody cares about.”
Neither is it necessarily true that a bump to the stock-flow ratio in the wake of the “halvening” will do anything. Litecoin experienced a similar halvening and flatlined: it may be that these changes, known by the markets in advance, are already factored into Bitcoin’s price, or “priced in.”
Whatever the truth is, we’ll find out for sure in 2140.