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Digital Gold Scarcity and Bitcoin Halvings

digital gold scarcity

March 18, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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Gold is valuable, and most people think it is because it is rare. Well, that may not be entirely true. If gold were very rare, then most people would not be able to use it as a store of value. Bitcoin is more scarce and being considered digital gold. Most people, however, don't understand what digital gold scarcity means.

For a currency to hold much value, it needs to be just the right amount of rare. It is just enough for people to store value using it, and not too much of it in circulation leads to inflation and a drop in value. 

For a long time, gold has been a unique financial asset, and it still is. That is due to its liquidity. The supply of the tangible asset is so predictable that it holds much value. The fiat currency has had a history of falling in value against gold, which has led to investors preferring it as a diversifier and financial asset.

Bitcoin's launch has, however, challenged the position that gold holds in the economy. At the end of the read, you will understand what bitcoin scarcity means and how it is achieved.

Digital gold scarcity: Why is bitcoin knocking the shine out of gold?

The answer is simple: the cryptocurrency ticks all the boxes of what good money is. While gold ticks, too, bitcoin would have a higher score. 

1. Scarcity 

The most impressive thing about crypto, which also makes it so valuable, is its scarcity. Remember that its supply was set such that it should not surpass 21 million. Already there are 18 million coins in circulation. 

This means that the coin will become even scarcer in the future. Mining may stop at the 21 million mark, and this predicament makes it even more precious in the investors' eyes. 
The highly controlled supply of digital currency also protects it against depreciation. Another interesting fact about bitcoin and its scarcity is that if you lose them, they are gone forever, and 4 million coins have been lost.

Remember that it is an intangible asset, and the only way persons can prove their ownership is by having keys to their digital wallets. Unlike fiat currency, whereby you can reset your password and still access your account, it is impossible with cryptocurrency.
For security purposes, which also contributes to the currency being rare, a private key cannot be restored. If you lose it, you lose your crypto. 

Digital gold scarcity is the reason the price keeps going up.
How is gold's scarcity? Gold is also scarce, but its definition of scarce differs from the digital gold scarcity. There is no limitation on the supply of gold in the economy. The only factor that can truly impact its supply is the rate of production. The high value of this currency arises from its high production costs. Note that it is usually found in low concentrations, and it takes a lot of mining to come with a good amount of it.

Gold mining stretches way back in history, and its supply in the economy is plentiful, unlike bitcoin. More gold is yet to be discovered, and, likely, it will never run out. 

2. Portability and divisibility

Cryptocurrency can be transferred to any place in the world in a matter of seconds. Gold is heavy and cumbersome, requiring intermediaries to intervene to trade it. Most investors will go for digital money due to this reason, making it unique. 

The same applies to divisibility. The coin can be divided up to 8 decimal points allowing its distribution to millions of people worldwide and its use in transactions more widespread. Gold, on the other hand, cannot be as easily divided. 

What you need to know about digital gold scarcity and halving

Understanding how blockchain works are critical to understanding how halving also works. Miners in the network have access to other miners' transaction history so that they can approve and reject transactions after confirming they are valid and there are no similar transactions. This ensures that the supply does not exceed the set 21 million. 

The halving of digital currency has several results. For one, it halves the rewards that come with mining efforts. More so, every time halving is done, the currency's inflation is also cut by half. Halving also motivates its price hike. 

The last halving event took place in May 2020. This action's logic is to reduce the rate at which the coin is introduced into circulation, and it happens every four years. When its mining began in 2009, the rewards were 50 coins. The next block, which was the first halving event, attracted 25 coins, then later 12.5. The most recent halving that took place in 2020 resulted in 6.25 coins per block. 

Remember that the most significant contributor to the currency's value is its scarcity, and if halving is done every four years, then it means its price will continue to go high in coming years. In summary, when the mining reward is cut by half, inflation is also halved. This leads to a decrease in the supply of the coin, which attracts a high demand. The price therefore increases, and the miners can retain the incentive. 

The halving explains how digital gold scarcity has been maintained over the years and why its price steadily rises. 

What do halving and digital gold scarcity mean for the future?

While halving has proved to be a great thing in blockchain, reducing supply, preventing inflation, and leading to an increase in the asset's price, there are still concerns and questions on what will happen when mining has been done until nothing is left in a block. 

The last bitcoin mining is expected to occur in 2140, as this is when the 21 million limit will be met. It will get to a point where no more cryptocurrency will be found, but miners will still have a job to do thanks to digital gold scarcity.

They will still be validating and approving new transactions, as they also earn the transaction fees, which are expected to rise. At this point, the currency's value will be high, and the number of transactions more resulting from mass acceptance.

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