Bitcoin And The Rules Of Scarcity: Is The Math Telling Us The Truth?

Bitcoin And The Rules Of Scarcity: Is The Math Telling Us The Truth?

By BitcoinGordon | BitcoinGordon | 1 Apr 2021


Only 21 Million Ever To Be Mined: Is this inflation, deflation, neither, and does it even matter?

Ah, Bitcoin. Satoshi's coin is the one that maxi's love to love, and other-coin-maxi's love to hate.

It uses too much energy. It's slow. It's TX fees are too high. Everything Bitcoin can do, others coins have improved upon. No one knows who made it. PoS is better. The list goes on.

Love it. Hate it. Bitcoin is the #1 crypto and sure, anything can and probably will happen in the future to boost others near the top, perhaps even over the top. Heck, at one very brief point in time, be it end of 2020 or Jan 2021, ETHER topped Bitcoin's 24/hr volume, though obviously not the price. It's a mad world out there!

Many of us are here in crypto because we love the technology. Some of us appreciate the world-changing elements of blockchain and freedom in finance that can come from a better economic model. Many love the smart-tech possibilities not just in currency-related areas, but in management of systems, efficiency models, proof that networks can make strong decentralized process flow and a myriad of other things. But, at least when it comes to Bitcoin, let's please all be honest and admit, most of us are here for the mad gainz, yo. Let's not be apologetic at the desire to earn our way to whale cred. If you're interested in a speculative piece, why pretend you don't want to earn a fortune? If you do succeed in doing so, then it means you were successful in choosing your target source of value. Congrats!

What I would add to this, is that while in my example at least, my goal with Bitcoin and any other cryptocurrency, is to speculate in the short term on price movement to continuously and consistently raise the value of what I own until it can outperform any 'real world' job or investment opportunity, I also tend to be a person who is driven by my level of interest, and I will give my full dedication to something that grabs hold of that interest. I'm also a fairly multi-faceted person that takes an interest in numerous subjects, especially when they tie in to multiple disciplines. Therefore, cryptocurrency is just about as perfect a sector for me that could exist. It calls into focus everything from invention to economics, political ramifications to future-thinking technologies, simple trading and investing to programming skills, security and risk to social shifts in populations. It is fascinating and even the soap opera dramas of personality give you that trash TV element that all of us can keep as our secret guilty pleasure.

I believe that a well-rounded interest in crypto can help a person retain confidence in the resilience of design and maintenance of invention, and for this article I'm just choosing to focus on Bitcoin, but this applies to the best projects out there. The question placed here, is whether Bitcoin is truly designed to scale, and whether it is likely to hit some of those crazy high prices 'experts' have targeted. I've heard $100K by year's end 2021. I've heard $250K before it stabilizes and is less volatile. I've heard $1 Million before 2023. the list goes on. I've heard very, very few who believe it is headed back down for anything more than temporary corrections at this point. The truth is that it has struggled for weeks to repeat it's most recent peak around $61,500, which doesn't mean anything, but it does call into question the effect of FOMO pump noise coming from big announcements in that time. Are people getting numb to world-changing advances in crypto?

Now, let me break down a few elements of what speaks to Bitcoin's future price increase and why many should continue to risk the longer term HODL, while others should employ mid-term trading on top of a DCA.

The Design helps encourage gradual price increase

There are numerous mechanisms in place that show a great deal of forethought in planning and design for Bitcoin. They all work towards Bitcoin's long-term advantages, including price. The way Bitcoin was designed, first of all resolved the biggest technical hurdles in a monetary form that could withstand the evils of centralized finance, while utilizing a strong network system that needed to never shut down, allowing the software to drive functionality 24/7/365 etc. But, it was also designed in such a way that it was to be '2008'-proof. Bitcoin was designed to survive inflation, deflation, manipulated mining practices, pyramid scams, too big to fail lending practices, while maintaining its minimum value over time, encouraging a dramatic increase in price. The creator(s) was perfectly willing to fail, in the effort to design an inspired new financial system. If they proved the model to work, it could set a standard for others to follow and help shape the world towards a better direction. I believe it has accomplished these things.

Let's look at a few of the economic benefits built-in. First, mining Bitcoin requires having the right goods to make it work, so a cost point of entry, even in the earliest days, required someone who was serious about generating coins to invest in a little gear. Sure, the casual user could mine coins with a laptop, but if they immediately saw the benefits of mining thousands and thousands of coins daily, they still needed decent GPU's. 

Bitcoin is designed to raise the bar on the equipment needed to mine, while making it computationally more difficult. This is updated regularly more than once/month in perpetuity so that it scales accordingly, and then every few years a halving event takes place that reduces what miners earn and increases the difficulty. When something is valued, and it is required to become more scarce, it hypothetically raises its value by a similar scale to its scarcity. Scarcity eventually will come from 21 million being the total potential coins ever mined, but even more, it is created by the economic conditions surrounding the creation of coins and the network efficiency. I have no doubt that without innovations like the Lightning network and any other layer two systems, Bitcoin would be suffering bottlenecks that directly affect its price. Trading a tiny bit of security for a massive load of efficiency has proven a worthy benefit, though it begs for better solutions. Still, what this proves is that people value Bitcoin's future rise in value enough to build scaling solutions into the model, where these things were not originally resolved in its primary design. That speaks solidly to it's likelihood to continue to scale and rise in value.

Balancing the flow of an open ledger with increasing difficulty in computation, reducing pay-outs while incentivizing price growth all seem to be working for Bitcoin. But, this only seems to matter if there is enough money available to enter the space to keep pressing against the supply and demand.

 

Traditional Markets Are Starting to Recommend It

Here we are in a time where crypto has survived a drop into a bear market post-2017. Expectations were high, and people lost a sense of reality that every single pump coin could not just keep going up in value. YouTube personalities encouraged every bag to be held, assuring that every coin would eventually 100X in the future. Maybe they will still be right, but it was not the advice that encouraged growth despite a bear scare. Over the past several years Bitcoin started to grow in speculative price when there were a rising number of exchanges allowing active trading of crypto, not just buying and custody platforms. The inclusion of some traditional sector interest spurred a bull run at the same time where there was concern that some of the hype was fueled by wash trades and manipulation. All of these were probably true, but all trading is manipulation, just not necessarily vindictive or illegally motivated. The CME, futures, options, binaries, ETF's, and other finance elements come into play when the 'regular' banking world gets involved. There is a strong interest in entities like Fidelity, Morgan Stanley, Charles Schwabb, JP Morgan, PayPal, VISA and others piling in to make crypto accessible to their clients and customers.

With the investment platforms, it is about high income whales and institutions having direct exposure to Bitcoin while still being managed by brokers and financial advisors. In the case of VISA and PayPal, it is about access but even more, about encouraging a market place for people to interface with their crypto. This opens a world not only of saving, HODLing and trading, but also spending crypto, which in turn connects directly to financial tricks to leverage one's bags to interface with the world of commerce. In short, the strategy to borrow against one's Bitcoins in order to spend based on their crypto, without letting go of their crypto, is being viewed as a safe bet even for individuals, with the assumption the price will only go up in value. No sense letting a new pair of shoes reduce your future potential earning power. A person is likely to be better off paying 5% interest to pay for their shoes in cash that is backed by Bitcoin, than to lose even a tiny chunk of their investment for a pair of Nikes. A 100% return on an investment more than coves a 5% interest markup for a short-term fiat purchase backed in BTC. Banks love it because they can find new cracks in the structure to introduce predatory lending in an all new manner!

The point here, though, is that investors are hearing about Bitcoin popping at $13K, breaking the $20K barrier, hitting $30K, 40, 50, 60K and now demanding that their brokerages give them a way to buy-in. Equally, we see signs that even gold as a store of value is going down against the dollar and Bitcoin, legitimizing the banker's interest in going crypto.

It's Use Case is Starting to Kick In

We held on for announcements for what seemed like a decade, but it may have been only 2 years max, for events like using crypto at Starbucks and other items that were said to have the potential to take crypto mainstream, but in the end they were just added to the pile of things true maxi's argued defeated the point in the HODL. If we rely on the 'real' world catching up to crypto's importance, then it defies the philosophy behind its design. When PayPal quickly flew by its pilot program into full U.S. crypto access, it added an extra layer of simplicity and mainstream interest to crypto. Now, they are in lock-step to VISA, with a focus on direct access to the marketplace. This is another element of long criticism for something like Bitcoin that, while popular, makes a better tool of exchange and store-of-value than it does a direct payment system.

While it may go against the decentralized philosophy to benefit from middle-men, the truth is that the 'real' world is not ready for handling everything Bitcoin on their own, and one of those issues is real-time market value. When you have an asset that can change by 3% in a matter of minutes, but a real-time transaction can take 30 minutes to complete, truly it is very easy to overpay severely for expensive goods and services. Just think, buying that Lambo with Bitcoin could cost $30-40K OVER sticker if done directly under market conditions, but settled third party as an instant purchase backed by crypto, perhaps there will be ways for reduced fees to play a role. Let VISA and PayPal and certainly others soon to come, figure out how to make the price performance work for the customer.

Bitcoin is Being Utilized for Trade Mechanisms it Wasn't Originally Designed For

Lending, farming, leverage, futures, binary options, IRA's, crypto credit cards, ETF's, wrapped versions of coins on other platforms... these interests are all taking the crypto world into a new dimension... or I should say an old one. In many respects, young investors, computer nerds and HODLers are unaware of the long traditions of banking practices and may not see this as an invasion from the traditional sector. But, the truth is that much of the adoption taking place in crypto is coming from a distortion of crypto's reality. Crypto was designed much as an escape from the old system of bloating and greed, and even more, as a better form of money, but now we are testing the limits on how well crypto can shoulder the exact practices that make the traditional sector what it is. Is that a good thing? Hard to say, really. Leveraging positions in trading is something that exchanges were eager to employ, which should make everyone question why they are so anxious to lend you money against positions? The answer is ALWAYS that the odds are in the house favor, no matter what someone may tell you.

Without going deeply into every aspect, the question I am the most focused on in this post, is whether the intrusion of numerous financial mechanisms, buying/selling in the market, and piling on new protocols to facilitate growth, will all work towards a bottom-line in actual market buying and HODLing, or will it actually spread out interest in ways that don't actually change the price value as much as the basis for its original model?

If there was no way to get Bitcoin except directly from its blockchain, where it is mined and transactions are processed, with no layer 2, no market to buy things, no banks to borrow from, no leverage lent or borrowed, and no parallel entry points that are based on 3rd party speculation tools, then we have a digitized model that places intense future pressure on the value of an item, with a history of people's growing interest to buy and hold that asset. It seems nearly impossible for the pure-bones of Bitcoin not to continue into astronomical valuation under these conditions.

The real question I ask, then, is what effect will come as a result of what I'm going to call parallel access. When there are ETF's, and numerous countries able to offer ETF's, people will be able to essentially gamble on the value of Bitcoin with zero interaction on the Bitcoin blockchain. Without cause and effect, this means that potentially billions of dollars of new interested parties will be interacting with Bitcoin without ever having to touch it, which means none of that money will directly pay miners for those transaction fees. In many cases, it is possible that some form of averaging takes place if there is an OTC process for ETF-trades, where the same price value is settled on-chain at the end of trading cycles, perhaps daily, but if the guess-work over price regards someone else's funds dedicated to Bitcoin price action, there is no question it will be reducing that same potential traffic operating on-chain, meaning that technically something unexpected, perhaps even unexplained can occur: more people can HODL positions in Bitcoin's price without running out of the actual reserve. Whoopsidaisy, that wasn't supposed to happen! Do you get it? In the real world, if there isn't enough Bitcoin, people can go to a virtual bookie and bet on whether it will go up or down, without interacting with the actual Bitcoin circulation, eh? We simply do not have any idea what the tangible effect of the scarcity model will be in that case.

The liquidation of heavily leveraged positions can be fatal if novice users do not know how to properly balance their principal spread across numerous positions. The essential idea in options, futures, binaries, is to get within a predictive range you feel certain Bitcoin is going to move, either up (long) or down (short). 2-100X Leverage will create a window/range between the value of the position and how much is available to borrow against the real cost, and the user can close a position early or add funds to protect from that window closing in. The worst that can happen is losing the entire position, and the best is that they can earn a much larger profit than a 1X on that position. The main effect here that interests me is that of futures in those funds sitting on books for extended time when they could be going straight to the market, therefore essentially on-chain, adding value to the eco-system which in turn is the most likely to press the price upwards, where futures, though reflected at market, do not place the exact same threshold of price action against the scarcity of supply. What's even more, is when positions get liquidated, those users do not typically have an endless flow of cash to keep placing new positions, therefore it means that people who are in the field and dedicated to crypto may not have the future funds available to continue DCA or trading Bitcoin, meaning the price does hit plateaus if people get stuck in the wrong direction and lose funds.

The parallels that do not directly interact with the actual supply of Bitcoin, but do add speculation to the market,  are largely still adding upward pressure, but in this case, it is in the form of the investment platforms that actually purchase and hold the Bitcoins that allow others to gamble on their stash's value. So, aside from the aside... that is, other than the fact that you can speculate on price without directly affecting a shortage of supply, profits from people's gambles and fees will still be going towards banks, bankers and investment firms buying up Bitcoin to further their own businesses and hedge against the devaluation of fiat.

The marketplace is a particularly interesting narrative in the price-driven scarcity model, because on the one hand it goes to add value to crypto when it can be used and re-used, and whether directly or indirectly, the blockchain will get utilized and provide increasing value for the network that processes transactions. At the same time, it also adds value similar to spot trading, where volume and liquidity force the models, like Lightning and whatever even better layer 2 solutions may provide, to speed up the network and thus drive value and interest towards liquidity. The faster and easier it is to get in and out of Bitcoin, the more people are able to do so. More transactions means more miner incentive, which also means speculation can move as fast as technology will allow. Imagine people being able to profit from micro-transactions in the millions of moves per day, all while essentially HODLing a portion of profits. This undoubtedly will add to the rise in price over time not because of the HODL alone, but because of the new money it generates. Everyone who bets on Bitcoin and wins, has the opportunity to add more value to its economy by purchasing more Bitcoin. I will probably write on and on and on about how complex economic models actually are, because it never stops being fascinating.

It will be incredibly interesting to see if there are other future-savvy economists who seek new models beyond micro macro, Austrian etc., and entering into a new realm where tangible economic principles bump up against imaginary situations that have literally never occurred in humanity before. Contracts, spots and HODL's are all going to be working towards a similar aim at hoping Bitcoin will moon, and each will have it's place in providing radically varied points of access for users. Will interest in crypto continue to rise? Absolutely. Will it continues to increase the perceived value in crypto? Absolutely (again, unless the govts. blow it up).

I hope you find this speculative asset... er... blog post interesting and thought-provoking. If you disagree with my ponderings, it's cool. I'm not utterly convinced of every aspect and its effect either, but I certainly see the value in the considerations. In the end, I believe we are going to see Bitcoin and also may other digital assets continue to scale and offer huge value to those who have stuck it out for the long haul. The question is what the new mass adoption vehicles will bring to the actual brilliant model it was formed upon. We will all have to stay tuned and see!

And for now, Crypto Gordon Freeman, always speculating on the speculative aspects of speculation... out.

 

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BitcoinGordon
BitcoinGordon

Hi! I'm Gordon Freeman (I hear they made a likeness of me in some video game... totally unrelated... or...).


BitcoinGordon
BitcoinGordon

Welcome! This is my blog for all things crypto, from my day trading and tutorials to general crypto news.

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