Scarcity is a concept that transcends Bitcoin and the crypto space as a whole. Considering that our world is one of limited resources, we have, then, to make choices about how these resources are allocated. This is an economic concept rooted in one of the most basic facts of life. For instance, when a country is deciding how to allocate its limited funds, it must decide which sectors—such as health, education, or defense—to prioritize and invest in.
This concept is based on the understanding that resources are limited and finite, and that there is not an infinite amount to go around. Therefore, people must make decisions about how to allocate these resources, based on the idea that they cannot have everything they want. As a result, prices are determined by how much people are willing to pay for a given product or service.
In a similar way, scarcity in Bitcoin is created by the fact that it has a finite amount that it can ever be mined. This means that its supply is limited, and, as demand increases, the value of the asset will also increase, making it a more desirable investment.
This is because as the demand for Bitcoin grows, the amount available for purchase decreases. This makes it a scarce asset and causes its price to increase as investors look for ways to capitalize on the limited supply.
While Bitcoin has a set limit of 21 million coins to ever be created – and 91.76% of them already are in circulation – it has a mechanism to control its supply: halving. Every four years, the amount of newly created Bitcoins is cut in half. This is a deflationary measure to ensure that the purchasing power of Bitcoin remains relatively stable over time. The next Event is expected to happen on April 30th, 2024.
Bitcoin’s Supply vs Time
As with any asset – and thus for cryptocurrencies as well – the market price is a result of supply vs demand, and anything that disrupts its equilibrium forces a change in the asset value. In a scenario where the demand stays the same, the diminished supply in each of these events would ultimately push Bitcoin’s price upwards.
You can also check our previous post about halving for a more in-depth look.
Previous Bitcoin Halving Events.
Each time Bitcoin has gone through one of these events, the price usually sees a surge in the weeks leading up to it, followed by a correction shortly thereafter. The price movement is a result of the expectation of reduced supply, which would drive it up.
Based on the data collected from each day that rewards were cut in half through to the historical all-time high (ATH), the following increases have been seen:
- 2013-2014: 9594 %
- 2016-2017: 3012 %
- 2020-2021: 652%
As a result, there is a lot of anticipation that Bitcoin will reach new highs in the weeks and months following the next halving, since Bitcoin had a remarkable performance in the days and weeks following the previous one.
However, it is also worth noting that this event is not the only factor that determines the price of Bitcoin, and that other factors such as global economic conditions could also have an impact on its price following it.
Ethereum
There have been a few changes to Ethereum’s supply in the last update, which has completely changed how it works. There are still mechanisms in place to manage the supply of Ethereum, even though it doesn’t have a fixed supply like Bitcoin does.
On August 5th, 2021, a token burn mechanism was implemented through EIP-1559 (Ethereum Improvement Proposal). While the focus of this update was reducing gas fees – which effectively did happen, from around 100 Gwei per transaction to around 15-20 Gwei – the ETH burning on each transaction helped it become deflationary in a few months – with almost $9 billion worth of ETH being burned by the end of 2022.
Rather than taking the entire transaction fees and paying them to the miners, the fee-burning mechanism began taking a portion of the fee and burning it, effectively reducing Ethereum’s supply as a result.
As soon as Ethereum made the switch from PoW to PoS, in September 2022, the fee-burning mechanism began to have a much more significant impact on the total supply of Ethereum coins than it had before. As a proof-of-work coin, Ethereum used to need to pay out rewards to miners for their work; however, now that the coin is a proof-of-stake coin, this is no longer necessary.
One potential downside to this switch is that it may centralize the coin. Before, with mining rewards, anyone could become a miner and thus own a part of the Ethereum network. However, now that Ethereum is a proof-of-stake coin, the only people who can own a part of the network are those who already own a large amount of the coin. This could lead to increased centralization of the Ethereum network, making it more difficult for new people to join and gain a stake in the Ethereum network.
What does this mean going forward?
There is no guarantee that scarcity will bring Ethereum and Bitcoin prices to new heights, as there is also the possibility that demand for cryptocurrencies will not continue to rise at the same rate, or even fall. This would lead to a decrease in prices and could result in investors losing money.
However, there is a possibility that Ethereum and Bitcoin demand will continue to rise, driven by factors such as innovation, utility, and trustworthiness. As long as these factors continue to push demand, scarcity will positively affect price movement.
The potential is clearly there for both Ethereum and Bitcoin to continue to rise in value, but it is also possible that the demand for these cryptocurrencies could drop. This could be caused by a number of factors, such as a loss of trust in the cryptocurrencies, a decrease in utility, or a shift in the market. If demand falls, even the reduced supply caused by their mechanisms will not be enough to keep the price from falling.