Scarcity
2 min read
Scarcity is the property of a good which cannot be costlessly replicated. Scarcity is not dependent on the number of existing units of a good, but rather on the costliness of producing more units.
For money to function well, it must be widely available, but not easily found or created. If money can be readily found and created, it has weak scarcity, and the trust and value of such a money will degrade over time. If a good is not widely available, it cannot support economic activity, and will not be used as money.
Since fiat currencies are either paper or digital, they have extremely low natural scarcity. To impose artificial scarcity on the U.S. dollar, the U.S. federal government declares that only the Federal Reserve can create legitimate U.S. dollars. However, by creating unbacked loans, private banks also increase the money supply at low to no cost.
Bitcoin, unlike any other good in history, pairs strict scarcity with a finite supply. Bitcoin’s difficulty adjustment algorithm ensures that new coins are always produced at a cost and that this cost remains close to the real price of bitcoin. Additionally, Bitcoin’s halving algorithm guarantees that there will never be more than 21 million bitcoin, a feature which drives bitcoin’s value proposition.