Re-inventing Scarcity: A Look At Gold, Bitcoin, Booms And Busts


Re-inventing Scarcity – Gold, Bitcoin, Booms And Busts

While there are plenty of people with affluence of academic / ideological thinking and too little an understanding of human nature who would rail against the accumulation of wealth and assets like gold. But the truth is that it is intrinsic to the human condition to have and securely own something of a credible value that others can't.

And why wouldn't they? It's these kinds of resources with a limited supply and an intrinsic value that makes them even more valuable. What further drives the value of these scarce assets is the fact that there is an individual and collective desire to own some share of it.

If we need any kind of examples of this – we need only look at rare, limited edition cars, artisan watches, artwork and even precious assets like gold. perceived exclusivity means scarcity, scarcity drives desire and desire creates and subsequently drives up value.

About Scarce Assets

The underlying concept of utility is one that is relatively well understood, and there is a pretty impressive and substantial amount of economic theory surrounding it.

There has been plenty written about it in the joint world of political and economic theory. Utility itself refers to the underlying value that an object (or person or entity) provides in the way of utility is provided to society.

The underlying value of scarcity, by contrast, remains an otherwise elusive concept compared to calculating utility. As a result, scarcity remains on the periphery of economic thinking.

Where there is still theory to be written about the notion of scarcity, the best thing for us to do is to look at three assets that have, for some time, presented a good degree of scarcity as one of its essential, or core building block. Here are some of the reasons that these same assets stand out:

Each of these assets hold a relatively unique position as either a ‘standard' or more exclusive ‘pioneer' within their class. The underlying scarcity, or limited utility that these assets may have may be somewhat under debate, but their overall supply is understandably scarce in nature.

In many instances,  these kinds of assets exhibit a good number of, if not all of, the kind of characteristics we would see of money, as philosophers like Aristotle highlights in his discussion regarding ‘Sound Money' – Durability, Portability, Divisibility, uniformity, limited supply and wide acceptability.

The underlying objective of this piece is not to operate as some kind of validating authority for one of these assets over the other – as each have their own unique merits which allow them to corner their own proverbial market. The aim overall is to compare them and thus explore in greater detail, the concept of scarcity as a whole.

The best kind of accomplishment that this article hopes to realize, is to instill a greater curiosity over the nature of scarcity, and thus inspire further research into the field.

The Best Known Scarce Asset – Gold

If there is any kind of asset that first comes to mind when we use the term ‘scarce' it's gold, as it has been the most popular form of ‘commodity' / money throughout history for a long time.

On the surface of the planet, there is a limited amount that's been extracted over the centuries – with more than 190,000 tonnes of it having been extracted since it was first mined. Every year from then, there is a further 3,000 tonnes being mined and added to the existing circulation.

The vast majority of demand for Gold, along with other kinds of precious metals is within the worlds of investment and jewelry, with the usage of gold being almost purely valuable from the stand point of ornamental and investing purposes.

While the lions share of demand comes from these two industries, there . is still a wider industrial demand for Gold in fields as far flung as electronics (trace amounts of gold are used for microchips and circuitry), dental work (custom gold fillings for example) and the medical field.

Even though these uses make up the remaining 10 percent of demand, there is still a limited utility in using it in these kinds of ways and, instead, it continues to charm investors and wearers for its aesthetic value, even after all these years.

Governments of the past had affixed the value of their currencies against the value of gold at the time. A system more commonly known as ‘the gold standard,' but for countries of the 20th century, it has been one that we've steadily moved away from in favor of a more ‘free-floating', credit-based economy. With the Nixon administration abandoning the gold standard in 1971. It was because of this decision that the conventional price of Gold skyrocketed from nearly $40 at that time to reach a peak of $1,700 during 2012.

As of 2019, the price of gold has held relatively static but has since reached heights of $1,400.

Our Digital, Decentralized Gold? Bitcoin

Much unlike gold, which people quickly found to have a great deal of value relative to its overall scarcity, Bitcoin is the very first kind of digital asset to have an intrinsic system of fostering scarcity. According to the white paper set out by Satoshi Nakamoto in 2008: there is an intrinsic system of scarcity pre-built into the code-base.

At this moment in time – there are more than 18 million Bitcoin in virtual circulation. But this amount will be increased to a grand maximum of 21 million by the end of its cycle in 2140.

In contrast to Gold and the extensive amount of time that it's been in circulation and used by people, cities and nations, Bitcoin is a startlingly new asset. With the Genesis block for Bitcoin being mined back on January 3rd, 2009, coinciding with the following comment – which was a very clear attack on the instability of reserve banking at the same time:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
10,000 bitcoin bought one pizza in 2010, and today each coin is worth several thousand dollars — over $13,000 at the time of writing.”

The underlying objective of Bitcoin is to become and provide a truly democratized peer to peer payment solution, but has yet to be fully realized on account of chronic issues like scalability and higher market volatility, but while this is the case, the core development team has been working well to implement layer-2 solutions to better address scalability.

And even while Bitcoin still suffers from some level of volatility, Bitcoin has been working hard to present itself as an effective store of value all along the way. Having an intrinsically limited supply, with a wholly transparent supply schedule.

The Bomb – Deflationary Gold

Within the age that we live in, we have been going through what can only be described as breakneck speeds in terms of innovation. Bitcoin is just one of the pieces of technology that we can point to for an illustration of this speed – as a digital asset and source of value, it never needed to wait a few thousand years in order to complete the various phases needed to be recognized as a ‘money like' asset.

Another example that we can look at is bomb, which gained a very unusual amount of groundswell on account of being the “world's first self-destructing currency”. While not holding the same kind of goals at heart as Gold and Bitcoin as respective stores of value – the Bomb project lay out that its objective is to serve as a social experiment and subsequent case study in order to measure the practicality of a deflationary system of currency.

The “World's First Self Destructing Currency

The underlying idea behind Bomb as a deflationary currency through an in-built apoptosis means that its supply will gradually decrease over time. Bomb starts out with a beginning supply of 1 million tokens, but each time that it's transferred, 1 percent of the total transaction would be destroyed, with no new tokens ever being created or issued.

The concept behind Bomb first came into being on January 2019, starting off as an Ethereum based smart contract. The majority of its 1 million tokens were airdropped to participants for free before undergoing this 1 percent destruction mechanic. It is pretty interesting to see how this token, after being given away for free less than a year ago is now trading for more than $10 over certain exchanges.

There is no claim of utility held by its developers, other that that it can provide some kind of hedge against inflationary instruments from move conventional markets. While this project is very much in its early stages, but it is genuinely impressive as an experiment.

Prices – Appreciation And Market Volatility

With the announcement by the US government in 1971 that the economy will be moving away and eventually abandoning the gold standard. As a result of this move away from this standard, the price of Gold had skyrocketed from just around 40 dollars to more than $1,700 by 2012 before leveling out to $1,300.

Bitcoin's price, for example, rapidly soared from zero to well over $20,000 within the first few years of its life, with Bomb managing to cover an impressive distance as well, rising from zero to $10 in just a matter of months since it was created.

Considering the fact that there was a lack of utility for assets like Gold, the precious metal's price remains relatively volatile and incredibly hard to predict over a longer stretch of time. While there is a longer trend proving itself to be more encouraging, it is worth highlighting that Gold's return has been relatively negative over the past 8 years. Bitcoin's price, in comparison, fell to just under $4,000 before bouncing back from there.

That's one of the challenges that comes with an asset like gold of Bitcoin; their value, being derived from a people's desire for greater scarcity can fuel longer bear market trends.

A Matter of Hedging – Cycle Risks

While assets like Gold and Bitcoin have undergone tumultuous fluctuations and protracted bear markets. These are the same kinds of assets investors will retreat to as hedges against market cycle risks. The most commonly known of these, of course, is Gold: which is a broadly accepted hedge investment whenever there is economy uncertainty – such as with the 2016 US Election.

Bitcoin has also been increasingly regarded as an effective hedge in light of international / geopolitical risk, especially . as it gains popularity and real use cases as a hedge, as was seen this year with the China-US trade war, and during the Cyprus economic crisis.

Crypto cycles have largely been regarded as operating in an uncorrelated manner compared to broader economic cycles, and anyone who has experienced this juxtaposition first hand will be able to find greater value in using crypto as a hedge.

Bomb, by contrast, through operating as a wholly deflationary token amidst a wide and growing range of inflationary crypto assets, intends to provide an effective hedge within an iconoclastic crypto hedge.

Bomb As A Hedge Amongst Crypto Cycle Risk

With the kind of pressure that more centralized financial institutions are coming under in this day and age – especially for centralized banks, the gatekeepers and controllers of fiat currencies – we may very well see scarce assets become increasingly important and financially relevant. The encroachment of populism and radical politics, this is likely going to speed up the need and further whetted the appetite for digital gold.

One of the central financial institutions biggest faux pas comes from their continued push to print an increasing amount of fiat currency, which is only going to drive inflation up further, thereby sowing the seeds of a potential financial crisis. There is more evidence to prove that the printing of fiat currency is a behavior from banks that is showing no signs of slowing down.

In conjunction with this, global debt has managed to rise far higher, reaching over 200% of Gross Domestic Product which, with any further ‘hitches' to the economy, proving more than enough to fling countries into a far worse financial crisis. This is what economists have feared for some time – a double dip recession.

Interestingly enough, it's not the poorest countries that are responsible for this increasing rate of debt – we are seeing it from the most prosperous countries in the world. The top three of which are the People's Republic of China (5.2 trillion dollars, or 47.5 percent of its GDP), Japan (10 trillion dollars or 253 percent of its GDP) and the United States (22.22 trillion dollars or 110 percent of its GDP). These three nations alone account for more than half of all debt across the world.

Competition

While Gold is the most widely known kind of precious metal that we associate with scarcity, it's not exactly alone in that market; Silver along with Platinum and other metals vie for its position. Both Silver and Platinum offer a range of industrial uses as well which help to drive up their respective prices, while also exposing them to economic cycles.

But this is what sets Gold apart from these two – with the yellow metal being a more well known ‘safe haven' metal which people swarm to during periods of uncertainty.

Bitcoin also has a pretty unique position as a pioneering kind of asset within the broader cryptocurrency revolution that has since allowed for an unleashing of a remarkable amount of innovation. Bitcoin continues to serve as a kind of ‘standard' amongst a wider range of cypto assets.

While there have been more than a couple of articles discussing the hierarchical ranking of various cryptos over the year, Bitcoin remains recalcitrant in holding rank number one.

While Bomb stands out as an interesting case study, it is not some kind of exception with no competition – there are already some projects looking to take the deflationary concept even further than just a test – while others are just operating as plastic copies. While there is some competition out there for Bitcoin now, it still took a number of years before these same rivals could be quantified as ‘competition'. Bomb competition, meanwhile, is hot on its virtual heels.

The Bomb project itself needs to innovate at rapid speed in order to build on its pioneering idea before it is either swamped by rivals or overtaken and condemned to redundancy.

With Competition Comes More Attention For the King Of The Castle

While competition cranks up the heat for the resident champion scarce assets, there is a silver lining to these clouds. One of them, it can be argued, that competition actually reduced the level of scarcity, while also helping to boost popularity and draw more attention to the scarce asset in question.

Over the past few years, hundreds of crypto assets have launched in relatively quick succession. But while this has placed some pressure on Bitcoin, it has indirectly helped to raise attention for Bitcoin directly, allowing it to become more popular, and established as an exceptional asset class that institutions which previously dismissed it out of had, have started to eye with increasing seriousness.

The Characteristics Of Money

These various assets each exhibit a range of characteristics that make it bear resemblance to money – these being Durability, portability, divisibility, uniformity, limited supply and acceptability. With each scarce asset ticking off some or the vast majority of these qualities, with some often unique deviations.

Each of these have their own levels of durability and uniformity, while other characteristics warrant a good degree of discussion. Each of these assets has a supply that is limited to some capacity and are not controlled by the people – Gold's scarcity of supply occurs naturally, while Bitcoin's and Bomb's code derive from their code.

Bitcoin and Bomb are unique among these kinds of assets largely because they are far more portable over something like gold thanks to being digital in nature.

Bitcoin itself offers a great degree of flexibility as well, on account of that it's a highly divisible currency, broken down to the eighth decimal – which is known as the Satoshi. Put in a different way,  a single Bitcoin consists of 100 million Satoshi. Bomb by contrast, chose not to make itself a divisible kind of currency. Which has no smallest, or biggest denomination – just 1 Bomb.

The 1 percent Bomb destroyed is also one that is rounded up, with an entire Bomb token being destroyed with every transaction. As a result, one Bomb is destroyed when 100 of these are transacted, or when a single bomb is transferred. It's thanks to the fact that it's an indivisible kind of asset that its deflation will be sped up thanks to Bomb's intrinsic code.

Where Gold has been broadly accepted by individuals, communities and businesses for more than a thousand years – far longer than any other kind of fiat currency has been in circulation for – Bitcoin has been making some pretty remarkable progress towards large scale adoption and acceptance.

Bitcoin itself had an interesting genesis point – being a movement amongst technologists, crypto-anarchists, innovators and activists, which managed to start gaining momentum after its development. The number of Bitcoin blockchain wallet users stands as a testament to the kind of rapid adoption that it's obtained over its life so far. Having risen to more than 40 million wallets at a remarkable rate.

Bomb has since demonstrated some pretty impressive progress, especially considering the fact that they just started out on its journey, with the project managing to receive increasing amounts of attention from the crypto community.

The value of a scarce asset, inevitably, lies in its popularity over time. As a result of this, it will be pretty interesting to see just how the acceptance of assets like Bitcoin and Bomb mature over time.

In Summary

In a world of financial abundance, scarcity has and will always have an interesting degree of appeal. The emergence of digital scarcity has opened up an otherwise not well documented area of the market to a greater degree of innovation.

Gold is the more quintessential kind of scarce asset in the market, with Bitcoin and Bomb representing the more fascinating innovations in the realm of digital scarcity. The underlying value of a scarce asset is in very limited supply, with a unique narrative that allows it to stand out relatively well from the competition in question.

While there are limited industrial uses for assets like gold, this means that there is little exposure that it gets to economic cycles. Bitcoin represented one of the pioneering digital assets out there that could provide digital scarcity – BTC helped to bring about the idea of a decentralized, democratized, trustless digital asset, which helped to usher in a far longer crypto revolution.

Bomb in comparison is unique because of its design as a self destructing currency, as well as a potential hedge to crypto hedge risks.

While there are scarce assets which provide relatively unique positions within the particular spaces, these make for unique hedges against economic uncertainty and international risks. These same assets provide clear use cases that can demonstrate potential to hold up their value over the long term in contrast to market volatility in the mainstream.

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