Bitcoin Reward Halving Takes Care Of Scarcity, But What About Utility?
Will Bitcoin's utility catch up to its scarcity in time?
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Scarcity and utility are twin engines of the potential for mass adoption of Bitcoin. But one is outstripping the other, and potentially interfering with its growth.
As we approach bitcoin’s third block reward halving – an event that typically causes a run-up in BTC prices in anticipation of half as many Bitcoin being created every ten minutes than are currently being produced – these considerations are only going to gather momentum. The next block reward halving is scheduled for around May 2020.
On October 8th at the Economic Club of New York, Ripple Labs’ Brad Garlinghouse repeated his infamous backhanded broadside at Bitcoin that “the value of any digital asset will be related to its utility in the world.”
It is as much pro-XRP and anti-Swift as it is a thinly veiled criticism of Bitcoin’s relative sloth in terms of transaction speeds. But utility is one-half of the value equation. The other half is scarcity. Even if spent fuel rods were scarce, their negative utility would render their prices low. They are classic examples of demerit goods, in economic terms.
As it approaches another halving, then, Bitcoin proponents need to cast their eyes on two factors: utility and scarcity.
On Scarcity, Bitcoin Gets a Tick
One measure of Bitcoin’s scarcity is its mathematically possible maximum supply of 21 million. But a more nuanced take on it is how quickly more Bitcoin can be produced in a given period of time. One way to measure that is the stock-to-flow ratio.
Stock refers to the existing amount of something, and flow is the annual production of new stock. One of the reasons gold holds value so well is that it has a high stock-to-flow ratio. In other words, it is difficult and slow to dig up more of it out of the ground.
Gold contrasts significantly with other commodities such as copper, zinc, nickel, and brass.
Economist and Bitcoin advocate Dr. Saifedean Ammous explains gold’s high stock-to-flow ratio as compared to other commodities. “For any consumable commodity… doubling of output will dwarf any existing stockpiles, bringing the price crashing down and hurting the holders.” he notes. “For gold, a price spike that causes a doubling of annual production will be insignificant, increasing stockpiles by 3% rather than 1.5%.”
“It is this consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history,” he concludes.
He likens gold to Bitcoin. It is difficult and costly to produce and its rate of supply growth is a fraction of existing quantities. Bitcoin’s stock-to-flow ratio in 2017 was around 25. There were around 17.5 million coins with an annual new supply of 700,000. That SF ratio is roughly equivalent to that of silver.
Gold’s is 62. The amount of gold in stock would take 62 years to replace. Current platinum and palladium stocks can be replaced with new flows of supply in around a year, making them poor stores of value.
At the next halving, Bitcoin’s stock-to-flow ratio will be 50. By 2022, Ammous concludes, “Bitcoin’s stock-to-flow ratio will overtake that of gold.”
PlanB penned a Medium post in March mathematically estimating the future price of Bitcoin as a result of the third halving. But more interestingly than the resultant price predictions, the piece made the argument that the inflow of money required to get Bitcoin to its resultant estimated valuation – $1 trillion at $55,000 per BTC – will come from “silver, gold, countries with negative interest rate[s] (Europe, Japan, U.S. soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc.), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of [the] last 10 yrs.”
What About Utility?
While scarcity is crucial to Bitcoin’s success, failing to achieve mass adoption as a payment system would make it difficult to reach those valuations – though it is not quite staring at the same fate as spent fuel rods.
The widespread use of crypto is critical, and after ten years in development, that level of use needs to occur sooner rather than later. There have been a number of positive developments on the utility front. Global POS announced a rollout of point of sale systems that will allow retailers such as Decathlon and Foot Locker to accept Bitcoin in France. Crypto.com’s new Pay Checkout plugin can be used by WooCommerce merchants for online purchases.
But this rate of adoption is not sufficient to render Bitcoin a currency with genuine mass utility, argues Nicole Jonker of the De Nederlandsche Bank in an April 2019 research paper. According to the study, “Acceptance of crypto-payments [by online retailers] is modest. The potential of cryptos to drastically change the existing retail payment ecosystem by making financial institutions superfluous or even disrupt the monetary system seems small.
“But there is substantial interest among online retailers to adopt them [and] acceptance may rise once certain (perceived) barriers are lowered,” the study concludes.
The millennial demographic may provide a pull factor in terms of the more widespread use of crypto in commerce. They are more interested in crypto than the boomer generation, which they are soon to outnumber in the U.S. New Zealanders can now be paid in crypto, and many U.S. states – ironically – accept taxes in crypto. (So, too, do political campaigns.)
Simply put, however, the point-of-sale experience of cryptos can already easily undercut the costs of major credit cards. What it must now do is match the POS ease-of-use and speed that consumers are accustomed to.
Bitcoin utility lags its stock-to-flow ratio properties substantially. It is a distance that needs to be trimmed quickly. A cruel irony is that the more valuable Bitcoin becomes as a result of its scarcity, the less likely hodlers are to want to spend it.