Bitcoin’s bulls should fear scarcity problem

In the eyes of many Bitcoin advocates, scarcity is a key advantage over more conventional assets. Unlike fiat money, which can be created from nothing on a bank’s balance sheet, or gold, which can be mined from the ground in quantities still far from being exhausted, the supply of Bitcoins was set from the start at 21 million. That means, in the words of its pseudonymous founder Satoshi Nakamoto, it should ultimately be “completely inflation free” — making it a far better store of wealth than assets whose real value declines over time.
That’s the theory, at least. With the price of Bitcoin climbing as high as $34,792 on January 3 and putting the value of all coins in circulation at around $647 billion, though, there’s a different scarcity problem looming larger.
It’s easiest to think about this in terms of asset allocation. When the value of all Bitcoin outstanding was measured in the tens or hundreds of millions, a minuscule shift of money away from the $217 trillion world equity and bond markets into digital currency would be sufficient to make its price go wild.
If investors in aggregate decide to put just 0.1% of their stock and bond portfolios into Bitcoin right now, that represents an additional $200 billion or so chasing the same pile of 18.6 million coins that have been mined to date — enough to push the price well over $40,000.
In that sense, the roller-coaster ride that Bitcoin has ridden in recent years looks almost sedate. At current prices, all the digital coins in circulation are equivalent to about 0.6% of the $103 trillion market capitalisation of the world’s equity markets. That’s higher than the 0.4% allocation when the crypto price last peaked on December 18, 2017 and much higher than levels shy of 0.1% that have prevailed at times since then — but it looks a whole lot less dramatic than the 79% run-up in coin prices from their last peak.
The problem for digital bulls is that the success of cryptocurrencies tends to eat itself. As the value of the asset class rises, the shifts away from more conventional investments needed to provoke price spikes get larger and larger.
Right now, Bitcoin on its own is worth about six times the 56 million ounces of metal represented by all the contracts outstanding on the Comex 100-ounce gold contract. The world’s biggest gold ETF, SPDR Gold Shares, holds about $72 billion of the yellow metal.
Add in other forms of private investment gold and you’ve got about $2.87 trillion worth of metal — but much of that is in the form of bars and coins that aren’t easily liquidated when investors want to tweak their portfolios.
—Bloomberg