Dear reader,

We hope these words find you well. Over the coming weeks, we will be reading and blogging through The Bitcoin Handbook: Key Concepts in Economics, Technology, & Psychology by Anil Patel. During this & future book series we will take the written information, publicize it, and sometimes expand upon it while also giving the author full credit and sourcing. The intent is to bring more publicity to these great authors and teachers in our space by supporting their missions. We and many of these authors aim for open-source education for both ourselves and others. Another intention is to create both short-term and long-term value in anything that is written, for ourselves, our children, for the reading public, and for our prospects and investors.

I highly recommend Anil’s work as he is helping educators to educate better, often pro bono, so please support him wherever you can. You can find Anil’s free resources here or here. The Bitcoin Handbook (<<—hard copy Amazon link) is a great read for those who are first learning about Bitcoin as it doesn’t go head first into the technicalities, but rather teaches the topics around Bitcoin which are necessary to “connect the dots.” Any of Anil’s work is great for beginners, but it’s also great for those long-time investors who want to firm up their principles-based thinking on why Bitcoin is most likely to win the long-term war of natural selection with other currencies and commodities. His excellent visuals (which I am extremely grateful for and will use abundantly throughout this book series) and simplistic style make learning difficult topics much easier.

We’ll move through the three parts of The Bitcoin Handbook in order 1) Economics; 2) Technology & Systems; and then 3) Psychology.

Economics lesson #1: Scarcity

“The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” - Thomas Sowell (Is Reality Optional?, 1993)

Bitcoin’s Mathematical Halving and Issuance Schedule

Scarcity lies at the core of economic analysis, decision-making, and resource allocation. It refers to the condition of limited resources or goods relative to the demand for them. In our world of infinite wants but finite resources, scarcity forces us to make choices and trade-offs. In a free market, scarcity of resources incites competition. A commodity resource may become increasingly scarce if demand as an industrial input rises faster than new supply is produced. Separate but related concept, money is typically chosen by the market as the most liquid and salable thing that’s value is defended by its inherent scarcity.

Salability - extent to which something can be sold across time and space

Scarcity of a resource which is both commodity and money has significant potential to incentivize abundance elsewhere. Scarce money builds upon the deflationary force of innovation and technology, incentivizing increased competition, product quality, and resource allocation efficiency, which leads to energy and resource abundance. Said inversely, abundant money leads to scarcity and inefficient allocation of energy and other resources. Almost all technology and innovation are the same as Bitcoin in that they are naturally deflationary and orient us towards being able to accomplish more with less input - work, energy, or material.

The FIVE critical traits of Money

Scarcity - Difficult to produce, resistant to supply manipulation/value dilution
Divisibility - Units that can be combined or separated at various scales
Portability - Density of value, ease with which it can be moved across space
Durability - Does not deteriorate, ease with which it can be moved across time
Recognizability - Ease with which it can be identified and its value verified by others

Ranking Assets by their Monetary Properties

Key Insights on Scarcity:

1) Opportunity Cost: Scarcity necessitates making choices. Whenever we opt for one option, we inevitably forgo the benefits and opportunities associated with the alternatives. This concept, known as opportunity cost, reminds us of the trade-offs we face in decision-making.

Supply, Units, and Purchasing Power Across Time for US Dollars versus BTC

2) Supply and Demand: Scarcity drives supply and demand dynamics. When resources or goods are scarce, their prices tend to rise due to increased competition among individuals or entities seeking to obtain them. When a money is scarce, this interaction between scarcity and market forces helps determine prices and influences economic outcomes.

US Dollar Money Supply (current) versus Bitcoin Money Supply (future)

3) Digitally Native: Bitcoin is the world’s first known example of digital scarcity. It’s fixed terminal supply, enforced by a novel consensus mechanism, allows us to trust that it is absolutely scarce without the involvement of any humans. You can “validate the code” using simply a computer, mathematics, and electricity and there is no level of scarcity beyond absolute scarcity. Being digitally native also means you can carry your wealth across a border by memorizing a set of words in your head or move vast sums of wealth across the globe in a decentralized, permission-less manner, both of which were not possible before the powerful innovation that is Bitcoin.

From Digital Duplication to Digital Scarcity

Bitcoin's Unique Monetary Premium

“When the dominant money becomes terminally ill, we witness the short-term monetization of everything else.” - Tuur Demeester

As US Dollars have had their scarcity property violated excessively, their ability to reliably store value has been broken since the Nixon shock of 1971 when the convertibility of dollars into gold was cancelled. As stated by central bankers, 2% devaluation is their annual goal, but we know it’s often much higher than 2% annually. For reference, $1 US dollar experiencing 2% inflation annually turns into $0.55 after 30 years. This has happened with almost all fiat currencies which we we trade with as there is often most salable “money.” Until a new form of dominant money emerges, other scarce assets and resources such as real estate, art, and companies all fill in the void in the market interim, absorbing some of the monetary premium. Now, let's explore how Bitcoin exemplifies a distinct form of monetary premium, setting it apart even from traditional assets like gold and silver. While precious metals like gold and silver have industrial and other demand avenues, Bitcoin derives its value solely from its monetary premium.

Percentage of Industrial versus Monetary Demand

Bitcoin, as a decentralized digital currency, operates on a limited supply proof-of-work protocol, with a total cap of 21 million coins. This scarcity is ingrained in its code and ensures that no central authority can arbitrarily increase the supply. The combination of limited supply and growing demand has fueled Bitcoin's meteoric rise and positioned it as a sought-after store of value and investment asset, but it’s much more than just that as we’ll see in this series.

How exactly should we categorize Bitcoin?

Unlike gold and silver, which have various industrial applications and jewelry demand, Bitcoin's primary purposes come through monetary and denomination angles to serve as a potential unit of account, decentralized medium of exchange, store of value, and a real-time global payment settlement network. It represents a purely digital form of scarcity, one that transcends physical constraints and borders. Bitcoin is the world’s first representation of Triple Entry Accounting, which is the core revelation I had in 2017 and why I left public accounting to pursue the digital asset space full time with Redwood in 2018.

The unique monetary premium associated with Bitcoin has attracted a dedicated community of enthusiasts and investors who believe in its potential to disrupt traditional fiat currencies and financial systems. While its volatility is notable compared to traditional currencies, Bitcoin's scarcity and growing acceptance have established it as a significant player in the financial landscape. In the long-term, it’s expected that Bitcoin has the potential to re-denominate existing business models and products, drain monetary premiums from financial products and other investments, and also replace fiat/cash weighting in portfolio constructions.

Bitcoin could drain monetary premiums, re-denominate business models and products, as well as replace fiat weighting in portfolio construction.

Conclusion

In this introductory post on The Bitcoin Handbook, we have explored the concept of Scarcity and its importance in economic analysis. We have also highlighted Bitcoin's unique Monetary Premium, which distinguishes it from traditional assets like gold and silver. By operating as a decentralized and permission-less store of value and medium of exchange, Bitcoin represents a form of digital scarcity that has captured the attention of investors worldwide. So much so that Bitcoin could represent the world updating its consensus on how it measures ‘Value.’

Bitcoin as the new System of Measurement for Value?

In the next post we’ll move to Gresham’s Law and Theirs’ Law. Stay tuned for an exciting journey that unravels the intersection of economics, technology, and psychology.

Till Next Time,

Jared

Disclaimer: This blog post is for informational purposes only and should not be considered as financial or investment advice. The volatility of Bitcoin and other cryptocurrencies should be carefully evaluated before making any investment decisions.

DISCLAIMER

Redwood Rings: Scarcity & Monetary Premium