Scarcity, Value and Stock-to-flow

Bitcoin, like gold, cannot simply be created arbitrarily, it is limited and finite supply to a max of 21 million Bitcoins, ever. Gold's supply has historically increased at around 2% per year. Bitcoin's supply will increase less than 2% starting at the 2020 halving, and will eventually go to less than 1% a year after the 2024 halving. Bitcoin's supply will end when the last Bitcoin is mined approx in the year 2140. Gold might continue to be found through asteroid mining in the future.

"As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: boring grey in color, not a good conductor of electricity, not particularly strong [..], not useful for any practical or ornamental purpose .. and one special, magical property: can be transported over a communications channel" — Nakamoto

Bitcoin the scarce digital object.

Scarce like silver & gold, but can be sent over the internet, radio or satellite; allows fractional ownership and rapid settlements; possesses strong liquidity; runs on a secure ledger architecture.

"What do antiques, time, and gold have in common? They are costly, due either to their original cost or the improbability of their history, and it is difficult to spoof this costliness. Precious metals and collectibles have an unforgeable scarcity due to the costliness of their creation. This once provided money the value of which was largely independent of any trusted third party. " — Szabo

Cost of Bitcoin

Bitcoin's costliness, caused by its costs of electricity to produce new Bitcoins. Gold and Bitcoin are different from consumable commodities like copper, zinc, nickel, brass because they have high tock-to-flow (SF) ratio.

"For any consumable commodity [..] doubling of output will dwarf any existing stockpiles, bringing the price crashing down and hurting the holders. For gold, a price spike that causes a doubling of annual production will be insignificant, increasing stockpiles by 3% rather than 1.5%. — Ammous

Low Rate of Supply

A consistently low rate of supply of Bitcoin, like gold, is the fundamental reason it will maintain its monetary role also in the future.

"The high stock-to-flow ratio of gold makes it the commodity with the lowest price elasticity of supply. The existing stockpiles of Bitcoin in 2017 were around 25 times larger than the new coins produced in 2017. This is still less than half of the ratio for gold, but around the year 2022, Bitcoin's stock-to-flow ratio will overtake that of gold" — Ammous

Gold has the highest SF 62 (market value $8.5trn), it takes 62 years of production to get current gold stock. Silver is second with SF 22 (market value $308bn). This high SF makes them monetary goods.

Stock is the size of the existing stockpiles or reserves - total Bitcoin 21 million

Flow is the yearly production - approx 657,000 (until next reward halving in 2020)

>> Bitcoin has (2017/2018) a stock of 17.5 million coins and supply of 0.7m/yr = SF 25 (market value $230bn)

Bitcoin monetary inflation

Scarcity, as measured by SF, directly drives value.

why bitcoin has value - scarcity

The Bitcoin halving will have a big impact on SF, indicated with the dark blue dot, the next halving in 2020 will double to the SF to 50, very close to gold (SF 62). The predicted market value for Bitcoin after 2020 halving is $1trn, which translates in a price of $55,000.

Some perspective:

>> Maximum 21 million Bitcoins in the world

>> Approx 34 million Millionaires in the world

World’s money and markets:

world's money and markets

Sources: PlanB, Satoshi Nakamoto, Investopia, howmuch, Moonwhale


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About The Author:

Danny Christ is the CEO & Co-Founder of Moonwhale Blockchain Ventures Inc.

Based in Kuala Lumpur, Danny has over 20 years of IT, Operations and Supply Chain experience across Germany (home), US, Singapore, Indonesia, Thailand, Malaysia, Vietnam, and the Philippines. He managed IT projects (ERP, CRM, POS, BI) and regional expansion (franchise, M&A) for various SMEs in the Consumer Industry. His career rose to Vice President of a 3500 employees organization.

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