The Myth of Scarcity in Cryptocurrencies

Many investors are attracted to cryptocurrencies like Bitcoin and Ethereum because of their supposed scarcity. The idea is that since there is a finite supply of these cryptocurrencies, as demand grows over time their value will continue to increase. However, the purported scarcity of cryptocurrencies is an illusion. Here's why:

Bitcoin's Scarcity is Artificial

Bitcoin is capped at 21 million coins, but this scarcity is artificial. The Bitcoin protocol could be changed to allow more coins to be created if there was consensus among users and miners. Additionally, Bitcoin can be divided into smaller and smaller units, so the cap on coins is unlikely to significantly constrain supply in the future.

New Cryptocurrencies Can Be Created

Even if Bitcoin remains capped at 21 million coins, there is nothing stopping new cryptocurrencies from being created. There are already thousands of cryptocurrencies in existence, and more continue to be created. The ability to easily create new cryptocurrencies means the total supply is unlimited. Just because one currency is scarce does not make cryptocurrencies as an asset class scarce.

Forks Can Increase Supply

Some crytpocurrencies have experienced "forks" where the currency splits into two separate ones. For example, in 2017 Bitcoin experienced a fork that led to the creation of Bitcoin Cash. This effectively doubled the supply of coins, as owners of Bitcoin received an equivalent amount of Bitcoin Cash. Forks can continue to happen, so the supply of any given cryptocurrency is not necessarily fixed.

Scarcity Alone Doesn't Create Value

Ultimately, scarcity by itself does not determine value. There has to be real underlying demand. For cryptocurrencies to have value, they need to have utility and serve some real purpose. They rely entirely on speculative demand to set their price. Once investors realize the false promise of scarcity in cryptocurrencies, the fundamentals become more important in valuation. Scarcity is not equivalent to value.

Examples of Cryptocurrencies With No Scarcity

Let's look at some specific examples of cryptocurrencies that illustrate the myth of scarcity in action:

• Dogecoin: Dogecoin is a cryptocurrency that was created in 2013 based on the "Doge" internet meme. Originally it was not designed to have a cap on supply. Over 10,000 new Dogecoins are created every minute through mining. While Dogecoin now has a cap on total supply, because it can be divided infinitely the cap is unlikely to meaningfully constrain overall supply. The value of Dogecoin hit a peak of over $0.60 in 2021, despite extreme inflation in supply. This shows demand matters more than scarcity.
• Ethereum: Ethereum has seen rapid appreciation in value despite no hard cap on its supply. In 2020 the total value locked in Ethereum smart contracts even exceeded Bitcoin's total market capitalization. Ethereum's lack of capped supply has clearly not prevented it from accruing value. Ethereum derives value from its utility and applications, not scarcity.
• Litecoin: Litecoin is often referred to as the silver to Bitcoin's gold. But Litecoin's capped supply of 84 million coins is over 4 times higher than Bitcoin's 21 million cap. Despite much higher inflation, Litecoin still reached a market capitalization of over $17 billion at its peak. The higher supply did not prevent Litecoin from accruing value, illustrating that caps on supply are arbitrary.

These examples clearly illustrate that capped supply and digital scarcity do not necessarily determine the value of a cryptocurrency. Focusing too much on purported scarcity can lead investors to make poor decisions based on a myth not grounded in fundamentals.

Utility, adoption, and demand drive value - not arbitrary caps on supply!

The bottom line is the concept of scarcity in cryptocurrencies is an illusion. New cryptocurrencies can be created, existing ones may fork, and their artificial scarcity alone does not determine value. While scarcity can play a role in valuations, focusing too much on it while ignoring utility and demand fundamentals can lead investors to make poor decisions. The myth of cryptocurrency scarcity should be understood to avoid overpaying for digital assets with no inherent value.