FloraUnlike other currencies, and even most other cryptocurrencies, bitcoin has one distinguishing feature which makes it more precious than any of them: scarcity. There are only 21 million Bitcoins that will ever be in circulation; unlike fiat currencies, these can be printed anytime by the central banks. This is an artificial constraint in the protocol of Bitcoin, and plays an important part in its value, functionality, and popularity. Why would it be wrong to have an endless number of bitcoins, and why is a limited supply relevant? To get a better grasp of this, we have to examine the origin of Bitcoin, how to buy bitcoin online, and how it has affected investors and global finance.
The Reason Behind the Low Supply of Bitcoin
When Satoshi Nakamoto published the whitepaper in 2008 and launched the network in 2009, one of the most crucial assumptions was to limit the total supply to 21 million BTC. This was not an arbitrary figure but a calculated action to produce a limited digital asset- something that could not be tampered with or expanded by central authorities.
These weaknesses came into the limelight during the 2008 global financial crisis, which was characterized by huge bailout packages and stimulus programs.
The Supply Cap Working Mode
The amount of Bitcoin in supply has been fixed by the code and is enforced by a network of computers distributed across the globe. The new bitcoins are added to the circulation via the process called mining, where the participants (miners) verify transactions and are rewarded with the newly minted BTC.
Nevertheless, the reward the miners obtain is decreased as time goes on with the help of the process called halving, which happens about every 4 years.
Why Scarcity Creates Value
Supply and demand are two of the major concepts of economics. As the supply of an asset is limited and the demand goes up, it gains value. The same principle applies to what made gold such a consistently valuable item; it is rare, hard to extract, and universally accepted.
Bitcoin, which is commonly known as digital gold, has a similar rationale. The scarcity of which it is known is what gives it the quality of being a store of value. The advantage is that no central authority can print any more coins, so investors can be assured that Bitcoin can be used to hedge against inflation and loss of value of their money.
Defense Against Inflation
Some of the most significant explanations as to why Bitcoin is a good idea are that it is an inflation hedge, which neutralizes the devaluation of money over time. During an emergency like the COVID-19 pandemic or the 2008 financial collapse, the central banks tend to increase the printing of money to ensure the economy is stimulated. Although this can help to address short-term problems, it will have long-term effects of devaluation of the currency.
This is balanced against a set supply of Bitcoin. The total number of bitcoins will remain forever fixed at 21 million, and no one can increase it. This makes it free of the inflation policies of the governments. This fact has led many investors to start using Bitcoin as a means of preserving wealth across generations, as was once seen with gold.
The Psychology of the Market
The feeling that the supply of Bitcoin is limited makes it exclusive. Investors know that there is a limited supply, and the more people join the market, be it as an individual, a corporation, or an institution, the more the demand to own any part of Bitcoin rises.
This scarcity also promotes a long-term investment attitude, which is also referred to as Holding in the community. Rather than actively buying and selling, some Bitcoin investors prefer to hold their coins over long periods of time and benefit as the value of Bitcoin rises with time due to scarcity.
Influence on the Greater Financial System
The scarcity of Bitcoin implicates both personal investment and a threat to the monetary policy. The governments and the central banks are accustomed to directing the money supply and the rates of interest to regulate their economies. Bitcoin, as an entity that exists outside of this system and cannot be easily manipulated, means a new form of financial independence.
This has led to an argument among economic experts and policymakers. The limited supply of Bitcoin is viewed by some as a virtue, and one that makes Bitcoin a pure form of money.
Conclusion
One of the most significant decisions in the architecture of Bitcoin is the limit on the supply of Bitcoin to 21 million. It is the strength of the value promise of Bitcoin: the ability to create digital scarcity where nothing in the digital world is rare. With more people getting the idea of Bitcoin and the world losing confidence in the established monetary system, the scarcity of this cryptocurrency becomes even more prominent.