What makes Bitcoin scarce? Why Does Bitcoin Have Value?

Bitcoin is getting older

While Bitcoin was the first, according to Forbes, at least 22,932 cryptocurrencies now populate the ecosystem, supported by newer protocols and technology. This makes Bitcoin a relative dinosaur in the crypto landscape. Bitcoin transactions take longer and it is extremely difficult to scale the coin’s network in the same way as Ethereum’s.

Despite this, Bitcoin’s market dominance has never been changed by any other cryptocurrency and its share has rarely fallen below 40%, which is an astonishing achievement considering how densely populated the industry has become.

So, what keeps Bitcoin as dominant as ever in the crypto ecosystem? The answer lies in an intelligently programmed fixed scarcity mechanism.

One of the most notable aspects of Bitcoin is that the coin’s circulating supply is limited to just 21 million BTC, while 19.4 million BTC has already been mined. These numbers are much lower than most other large-cap crypto assets populating the top 100 by market capitalization.

At the time of writing, there are only seven other cryptocurrencies with a circulating supply lower than Bitcoin, making the world’s largest coin a unique presence in the industry.

Moreover, Bitcoin’s market cap also tops the industry with a total cap of $500 billion at the time of writing. Impressively, during the coin’s most recent bull run, which culminated in a new all-time high of $69,044 in November 2021, Bitcoin’s peak market cap reached $1.26 trillion before the emergence of a “crypto winter” harsh corrections throughout the industry.

It is this combination of high market cap and low circulating supply that makes Bitcoin so valuable. The price of BTC has not fallen below $10,000 since July 2020, and since about 92% of Bitcoin’s total circulating supply is already active, it would take a major investor sell-off to see the asset drop below $10,000 again values.

This solid scarcity is a major contributor to Bitcoin’s popularity. But what makes BTC so scarce? Let’s take a closer look at Bitcoin scarcity.

What makes Bitcoin “scarce”?

There is nothing accidental about Bitcoin’s scarcity. The circulating supply was a very deliberate effort by the enigmatic and anonymous creator of Bitcoin, Satoshi Nakamoto.

When designing Bitcoin, Nakamoto set up the proof-of-work mechanism. BTC is “mined” by users performing difficult “tasks” such as complex math equations. The process uses massive amounts of computing power and the miners are rewarded with BTC for their contribution to the network.

The mining process ensured that Bitcoin would not be considered worthless at launch, holding back supply to increase interest. The steady release of BTC as mining rewards means that the asset has an inflation-proof framework that is not as prevalent in the world of fiat currency due to central banks’ ability to produce more of a currency as and when they want.

Because of this capped supply, it may be beneficial for investors to view Bitcoin as more akin to gold than to traditional currencies. Due to the finite supply and complexity of the mining process, many market analysts have likened BTC to “digital gold” with more functionality.

Moreover, Bitcoin’s scarcity has been inadvertently increased by the loss of BTC over the years. According to a report by blockchain analytics firm Chainalysis, between 2.78 and 3.79 million BTC have been lost forever, representing some 23% of the total number of Bitcoins currently in circulation.

We should also consider Satoshi Nakamoto’s BTC wallets, in which estimates suggest that up to 1.1 million BTC have been dormant for over a decade. While this has led to questions about the fate of the Bitcoin founder, these fortunes may never be recovered.

Cane Island Digital Research estimates that only a maximum of 14 million BTC will ever be in circulation due to the fact that coins are often lost in inaccessible wallets or burned.

What is Bitcoin Halving? How Does Bitcoin Halving Affect Price?

At the heart of Bitcoin’s carefully calculated scarcity are the coin’s pre-programmed “halving” events.

Bitcoin’s halving or “halving” is an event that occurs approximately every four years once 210,000 blocks have been mined on its blockchain network.

While a halving event may sound complicated, it’s a relatively simple mechanism. Simply put, once every 210,000 blocks are mined, the volume of BTC awarded to miners will drop by half. When Bitcoin launched in 2009, miners were paid 50 BTC for every block they created, and this was halved to 25 BTC by 2012. After three more halving events, Bitcoin’s block reward stands at 6.25 BTC, and this figure will drop to 3,125 BTC in the highly anticipated 2024 halving event.

Bitcoin’s halving events actively make the coin scarcer by continually halving its supply. While there was a steady stream of BTC entering miners’ wallets in 2009, only 6.75% of miner block rewards will enter circulation in 2024. This actively creates less BTC available to meet market demand and thus less accessible BTC for new investors to buy into.

There is also tangible evidence that these halving events are driving up the price of Bitcoin. While there are few identifiable trends in the crypto world due to high market volatility, Bitcoin’s stock-to-flow model shows a relatively consistent pattern of asset rally in the months following a halving.

As we can see from Bitcoin’s stock-to-flow model below, the asset’s value has grown to new all-time highs within about 12 to 18 months of halving.

With Bitcoin’s next halving event set to take place around April 2024, investors are already speculating about the impact this fixed scarcity mechanism may have on paving the way to a new all-time high value for BTC.

Assured scarcity and volatility

To recap, Bitcoin halving events are a reliable trend in a cryptocurrency landscape prone to significant volatility. This means that investors should always remember that no recurring trend is guaranteed to increase the value of an asset, even if it has been shown to do so in the past.

However, this approach to keeping BTC in short supply is an invaluable benchmark for investors to follow and can help inform decisions well into the future. By tracking Bitcoin’s halving events and other factors such as market sentiment, it’s possible that cryptocurrency’s “digital gold” will become a seamless store of wealth.