Unlimited Dilution Vs. Programmatic Scarcity: A Story in Numbers
Discover the power of Bitcoin's scarcity and how it stands in stark contrast to traditional currency inflation.
In the long-dormant world of traditional finance, few concepts have captured attention quite like Bitcoin's scarcity. As the backbone of this revolutionary digital currency, scarcity stands in stark contrast to the age-old phenomenon of government debasement, the effects of which today are referred to as inflation. (Inflation is in large part the reason why the finance industry has grown from a small percentage of our GDP in 1971 (when the dollar was backed by Gold) to 7.5% of GDP in 2021. In this short article, let’s embark on a journey to unravel the power of Bitcoin's scarcity and explore how it challenges the norm of inflation in the landscape of personal finance. But first–
A QUICK RECAP ON THE $CAD
The Canadian dollar was once backed by gold. Like many other currencies, the Canadian dollar was initially linked to the gold standard, which meant that its value was directly tied to a specific amount of gold. Because gold is very scarce, this provided stability to the CAD and helped maintain its value.
The gold standard in Canada was established in the mid-19th century and remained in place until the early 20th century. During this time, the value of the Canadian dollar was fixed in terms of gold, and individuals could exchange their paper currency for a specific amount of gold at a predetermined rate. Why were so many currencies backed by gold at some point? Because gold is SCARCE: It’s very hard to mine, and its supply never seems to inflate by more than a couple of percentages a year. Canadian Dollar holders should be so lucky!
However, as the global economic landscape evolved and the challenges of maintaining a strict gold standard became evident, many countries, including Canada, moved away from this system. The Great Depression and the economic turmoil of the early 20th century further strained the gold standard's viability. In 1933, Canada, like many other countries, abandoned the gold standard as a result of economic constraints. The Bretton Woods Agreement of 1944 established a new international monetary system, with the United States dollar as the world's primary reserve currency, backed by gold held by the U.S. government.
Eventually, even the Bretton Woods system collapsed in the early 1970s, leading to a complete departure from the gold-backed currency system in favour of fiat currencies, including the Canadian dollar, that are not directly tied to any physical commodity (gold, or other). Since then, the Canadian dollar, like most modern currencies, operates as a fiat currency, deriving its value from the trust and confidence of its users and the stability of the Canadian economy.
Bitcoin's Scarcity: A Precious Digital Asset
1. Limited Supply:
At the heart of Bitcoin's scarcity lies its capped supply of 21 million coins. This predefined limit is in sharp contrast to traditional fiat currencies, which can be printed endlessly by central banks. The scarcity of Bitcoin mirrors precious metals like gold, imbuing it with inherent value and fostering a sense of digital rarity.
2. Halving Events:
Bitcoin's scarcity is further accentuated by its halving events, occurring approximately every four years. (The last Halving occurred in the spring of 2020 and the next is expected to occur sometime in May of 2024.) During these events, the reward for miners who validate transactions and maintain the network is halved. This intentional reduction in new Bitcoin issuance contributes to a controlled pace of creation, akin to the way precious resources are mined.
Inflation: The Silent Eroder of Value
1. Understanding Inflation:
Traditional currencies are susceptible to inflation, a process where the purchasing power of money decreases over time. Governments and central banks often resort to increasing the money supply to stimulate economic growth (or sometimes, to bail out failing industries like Banks, Airlines or Automakers), which can lead to a decrease in the value of each unit of currency.
2. Impact on Savings and Investments:
Inflation erodes the value of savings and investments, making it difficult for individuals to maintain their purchasing power over time… Hence the growth of industries which are intended explicitly to preserve their clients’ purchasing power over time: The Finance industry.) People must invest their money to outpace inflation, putting their financial security at risk.
Bitcoin vs. Inflation: A Paradigm Shift
1. Preservation of Value:
Bitcoin's scarcity offers a hedge against inflation. With a limited supply, it inherently resists the devaluation that plagues traditional currencies. As a result, Bitcoin is often touted as a store of value akin to digital gold.
2. Decentralization and Autonomy:
Bitcoin's decentralized nature empowers individuals with direct control over their funds. This stands in contrast to centralized financial systems, which can manipulate monetary policy and affect inflation rates.
Show me the Numbers:
Bitcoin was invented as a direct result of government bailouts of banks during the GFC (Great Financial Crisis) of 2008, where private corporate losses were socialized, while corporate profits remained private. So let’s take a look at how your purchasing power would have fared if you’d saved your money in Canadian Dollars vs. Real Estate, vs. the S&P 500, vs. Bitcoin between 2011 and 2021.
(Fortunately, since Bitcoin is only 14 years old, comparing your purchasing power saved in CAD vs. your purchasing power saved in BTC is a relatively straightforward thing to do.)
$1000 saved in CAD$ between 2011 and 2021:
Your 2011 $1000 savings could only buy you about $667 worth of goods in 2021. (Closer to CAD $500 if you’re trying to buy Real-Estate, for example, and closer to $350 if you’re trying to buy American university tuition or healthcare services.)
$1000 saved in Real-Estate between 2011 and 2021:
The average cost of a house in Canada in 2011 was $340K; the average cost of a house in Canada today is $640K (much more if you live in a big Canadian city). So if you’d saved your $1000 in Real-Estate in 2011, your purchasing power today would be closer to CAD $2000.
$1000 saved in S&P 500 between 2011 and 2021:
Between 2011 and 2021 the S%P 500 grew 336.92%, or 12.52% per year. If you’d invested $1000 in a simple S&P 500 ETF (Exchange Traded Fund) in 2011, your investment would be worth roughly CAD $3370.
$1000 saved in Bitcoin between 2011 and 2021:
Depending on when you bought your Bitcoin in 2011 (the price fluctuated between $1 and $30, your Bitcoin stack would be worth anywhere between 33 and 900 BTC; CAD $1.26M to $35M.
Conclusion: Embracing the Future
Now you can see why Bitcoin's scarcity represents a paradigm shift in the world of finance: Its predetermined supply, controlled issuance, and decentralized nature challenge the conventional norms of inflation. As we continue to navigate an era of economic uncertainty, Bitcoin offers a glimmer of hope for preserving value and redefining the way we think about money. In this digital age, the power of scarcity has reemerged, allowing us to rethink financial freedom and autonomy like never before.