Does Bitcoin Scarcity Limit Its Use Case as a Medium of Exchange?

Writing for the Motley Fool Monday, investment planner Sean Williams avers that Bitcoin’s economic architecture inherently limits its possibilities with a Catch-22. He says “Bitcoin’s Catch-22 Will Keep It From Spurring a Monetary Revolution.”

He argues that the very bitcoin scarcity (which is hard-coded into the bitcoin protocol) that has made the digital asset precious, and thus driven the astounding bitcoin price increases over the last decade, will also make it impossible for bitcoin to scale to a mass global payments and banking system:

“…the supply of bitcoin is limited to 21 million tokens, with annual inflation of the existing token base, which currently stands at roughly 17.8 million tokens, of less than 4%.”

Of Satoshi Nakamoto’s design, Williams concludes:

The reason bitcoin won’t be able to lead a monetary revolution is that it’s held hostage by a Catch-22: Its ‘scarce’ token coin and its utility as a medium of payment work in opposition to one another.”

The Motley Fool commentator reasons:

The reality is that bitcoin can have either perceived scarcity or utility, but not both. With its current token count, it could never seriously challenge fiat currencies, but this relative undersupply has helped keep the price of tokens high. Meanwhile, substantially upping the token count would allow for increased utility, but the resulting inflation would kill the perception of scarcity and likely ravage bitcoin’s token price.”

Bitcoin As ‘Digital Gold’

The problem with Sean Williams’ argument against bitcoin mass adoption is he doesn’t really substantiate it. He never explains why a scarce, deflationary commodity could not be used on a global scale as a mass payments and banking system. And he makes no attempt to refute the obvious rebuttal that gold, another precious commodity of limited supply, once served as a global payment and banking utility.

This is an obvious counter-argument because bitcoin has so often been compared to gold, even by its critics and competitors, and referred to as “digital gold,” because it was deliberately designed to digitally simulate the salient properties of gold that made gold and national currencies backed by it the most trusted medium exchange for many years in modern history. Gold’s scarcity was among the most critical of those properties.

The Golden Age

As James Chen chronicles at Investopedia:

The classical gold standard began in England in 1819 and spread to France, Germany, Switzerland, Belgium and the United States. Each government pegged its national currency to a fixed weight in gold. For example, by 1879, U.S. dollars were convertible to gold at a rate of $20.67 per ounce. These parity rates were used to price international transactions. Other countries later joined to gain access to Western trade markets.”

This gold standard era persisted, with some interruptions and gradual monetary policy defacements, but more or less intact until 1971, when Richard Nixon suspended convertibility of U.S. dollars to gold. Far from limiting economic growth because of gold scarcity, the era of the gold standard saw an explosion in economic productivity, and widespread increases in standards of living unprecedented in human history.

During the last third of the 19th Century, per capita income doubled in the United States, even as its population doubled, with millions of immigrants moving to North America to work in the gold standard economy. Unlike a fiat economy based on credit, the scarcity of the gold-backed monetary system limited the mis-allocation of resources to unproductive uses through over-consumption and mal-investment with easy money. Another hard money era inaugurated by the likes of bitcoin is not only possible, it could unleash another “golden era” of explosive economic growth.

No need to worry how to spend your bitcoin if this scenario obtains, and even the smallest division of a bitcoin (one one hundred millionth of a bitcoin– a satoshi) becomes more valuable than a cup of coffee. Second layer technologies like Lightning Network will make sub-satoshi denominations possible.

Disclaimer: The author owns a small amount of his savings in Bitcoin and Binance Coin. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.