21 Million
At the centre of the bitcoin network stands an agreement between all participants – there will not be more than 21 Million bitcoin in circulation, ever. This agreement, a social contract if you will, defines Bitcoin at its core. The 21 Million are the solution to endless money printing and the silent expropriation of the ordinary people by the ruling class. We will cover several topics and connect them to understand why this limit is revolutionary.
In order to understand why it is so special to have a money that has an absolute limit we have to go back in history and understand how money has worked until now. I have already covered most of this in my post "Is Bitcoin Money" but I'll give a brief overview here as well. There is a common thread through history, every form of money (except gold) has hyperinflated. The reason was always that there was not enough constraint on the money supply side. This happened mainly due to one of two reason. Either nature did not have enough constraints on the production of that money good or the money production was corrupted by humans. Let me clarify these two points with an example. We had commodity monies which is a money based on a good. Historically these were goods like salt, glass beads, sea shells or rai stones. Those goods were naturally occurring and were scarce in the areas where they were used. With the advance of technology most of these commodity monies faced a higher level of production. It had gotten easy to produce large amounts of that good through better manufacturing processes. People were incentivised to produce large amounts because with the good they could buy many things. Basically they arbitraged low production costs to higher pricing in the market. With an increase in the money supply inflation set in and the money devalued. This is how money used to work until we arrived at silver and gold. Gold and silver are comparatively scarce commodities and even though they increased in price the supply was more or less constant. Gold is still more scarce than silver, so even silver was demonetised over the later years.
Now we have fiat money. With fiat money the total supply is controlled by a central bank. Fiat money, just like weak commodity money, has constantly inflated, though for different reasons. With fiat money the money supply only increases either through the central bank printing money or through fractional reserve banking. Fractional reserve banking is when a bank has $100 as deposits but can create credit for $500. This process of fractional reserve banking expands the money supply because money is created out of thin air. This process just like the printing of money is inflationary due to the increase in the money supply. The central bank has control over how much money is printed and also over the factor of how much money the banks can create through fractional reserve banking – the central bank is in control. A central bank is often claimed to be independent of the state but this is virtually never the case – I’m actually not aware of any country where that is the case. The government effectively controls the money supply. And this leads us to the core issue with fiat money and why it inflates. The government can easily be corrupted to increase the money supply. It can create money out of thin air, money that everybody else has to work hard for. The government needs that monopoly because Governments are, as history shows very well, bad at keeping a balanced budget. And the deficits are financed by using newly created money issued with the help of the central bank. The government can hence finance itself at a fraction of the real costs of money. The money is spent on gifts to the populus and other wasteful government programs. These government programs are inflationary due to the creation of new money.
Inflation has some serious consequences on the economy and society at large. The Keynesians have been telling us that we need a bit of inflation to keep the economy going. This is probably one of the biggest lies. People would not just stop consuming if their money would seize to devalue. People would still have to buy food or new clothes. Also there would still be investments driven by the outlook of generating more profits with better processes of production. The required rates of return would be different. If we look at economics through the lens of human action we find no basis for this claim that we need inflation for anything. The only thing that inflation perpetrates is the silent taxation of the people and governments obviously liked the theory which helped them expropriate more wealth from their citizens.
I believe I haven’t shown yet how exactly that process of expropriation – or silent taxation – works. When the money supply increases the existing stock of money is reduced in value. This is due to the fact that the amount of goods in the market does not change just because new money was created. In the end more money is chasing the existing goods. The consequence is the bidding up of the prices of those goods. It cannot be said that the price of all goods will increase by 5% if the money supply is expanded by 5%. The price increases will creep through the economy and affect good after good. When the prices increases textbook economists would now say that the wages will increase with rate of some consumer price index (CPI) and in the end nobody will notice anything but this is wrong. We can observe that CPI is not the rate of true inflation. This is due to a number of reasons. CPI is just an average basket of goods, so the individuals inflation rate will most likely look very different to that rate. Moreover the CPI does not cover the massive asset price inflation that hits. Scarce assets, like gold, real estate and stocks, are increasing just as consumer goods. The holders of these assets are profiting from the inflation of the money supply while people who have to pay more for consumer goods are suffering from these price increases. Inflation is the reason we are seeing one record after another with regard to stock prices and housing prices. Gold is also doing very well in these times of inflation. It creates a constant redistribution of wealth from the bottom to the top. Inflation is also the reason why we see more people struggling financially. With rising consumer good prices and wages not keeping up, this development should not come as a surprise. And no, this is not the fault of greedy capitalists who exploit their workers for pennies on the hour while they rake in huge profits. These inequalities we are seeing are due to inflation. Let’s dig deeper on that point because I have observed this common misconception on our societal issues. All political forces are blaming each other but in the end they all do deficit spending and increase the money supply which leads to inflation. So no matter who you vote for, you will see inflation. This inflation then leads to an increase in asset prices which benefits the asset holders which are a minority of the population. I also haven’t mentioned the Cantillion effect yet, which perfectly describes this issue. Richard Cantillion observed that the closer somebody is to the source of money production the more they profit from newly created money compared to someone who is further away. Let’s unpack this. When somebody receives newly created money they can spend it in the greater economy. The greater economy has not yet priced in the change in money supply and thus that person can spend this money at better prices. The further down we go the more parts of the economy have been bid up by the now larger amount of money. The last person in the chain does not have the cheap money and has to pay the higher prices which have been established in the economy. So after basically all prices have been bid up the person furthest from the money production did not receive any of the cheap money. That person therefore did not just not profit from that process but actively lost. This is the process how inflation is the fire that drives the inequality in our society.
Now let’s connect the dots and bring Bitcoin into all of this. With Bitcoin we have a fixed supply of 21 million coins, there won’t be more. I will outline the mechanics on that below. With a fixed supply we will not see things like the Cantillion effect and there is no monetary inflation. Everybody who saves money in Bitcoin will continue to have the equivalent share of the purchasing power of Bitcoin. Nobody controls Bitcoin and it is very difficult to control – nearly impossible short of a global government coalition. So we have a commodity which is limited in its total supply and it cannot be corrupted by governments. It opens up a free market for money because it is also nearly impossible to control who is allowed to own Bitcoin and who isn’t. The social contract that Bitcoin will only ever have 21 million is the core of the network, a monetary policy defined by math which is not corruptible by humans. We now find ourselves in a time where we have access to ultra sound money. We have never had money this hard and as of now it is difficult to imagine a money that is even harder.
The 21 million limit is the result of a predefined mathematical formula that describes the issuance of new bitcoins. The amount of Bitcoin issued with any additional block is halved roughly every 4 years starting from 50 bitcoin per block at Bitcoins inception.
Bitcoin issuance schedule is what in its core defines the 21 million hard cap. It is consensus critical. Consensus in Bitcoin is the process of how participants agree on transactions are added to the ledger. If a transaction breaks consensus it will not be added to the ledger. There are several consensus critical definitions in Bitcoin but here we want to focus on the 21 million. Because it is consensus critical no single party can change the definition of the supply limit. We have to distinguish two things. Anybody can create a new version of Bitcoin and change the rules the way they like. What no person can do is force everyone else to join that new monetary network. If A changed the rules on their Node B and C could still continue with the original rules of Bitcoin. It’s similar to chess. We can play chess together but if you decide that your king can move like a queen I will not join these rules if I don’t like them. Some people might even want to play like that but you need to agree on the rules in order to play together. The big caveat here is that with money people will gravitate to the most sound rule set. So somebody might come up with a version of Bitcoin that inflates at 5% annually but this money will be less sound than the original Bitcoin. Holding that new Bitcoin will be like holding a melting ice cube.
Now we can go back to one of our earlier points. Weak money devalues relative to hard money. Another statement I would add is that weak money will be demonetised. Real estate gold and stocks have been monetised over the last decades because the money that is being used is weak. It is basically a flight of capital from a melting ice cube to a more stable asset. My thesis is that Bitcoin will emerge as the winner in this current currency conflict. In the process of winning it will acquire the outstanding monetisation premia of other assets. This will result in lower prices of previously monetised assets and a higher price for Bitcoin. Moreover the adoption rate at the moment is still very low. Through network effects the value of the Bitcoin will increase. Additionally the more wealth is stored in the network the more value has a coin.
Concluding. Bitcoins 21 Million are the solution to a problem many people cannot even name. It enables everyone to remove their wealth from the equation of inflation. This crucial point is why I believe Bitcoin will not fail. Bitcoin is not just a hedge to inflation it’s the solution to the inflation problem. Bitcoin is the hardest money ever found by humans. If the history of money teaches us one thing it is that this will probably lead to a massive redistribution of asset valuations. A redistribution of asset valuations will most likely consequently lead to a redistribution of wealth as well. Not adopting Bitcoin is equivalent to not adopting gun powder, it’s not optional. The armies which stayed passive and did not adopt gun powder strictly lost. Only the armies advancing with technology survived. I would argue that in order to maintain ones wealth everybody will have to buy Bitcoin or will loose their wealth through years of inflation and the demonetisation of existing asset classes.
To me it is important that you understand why Bitcoin is the hardest asset and which implications this has, hence I wrote this post. With this piece I wanted to bring you one step closer to what I mentioned in my post explaining "Stay Humble and Stack Sats". Saving in Bitcoin is the most rational thing to do. It may not seem like that for somebody who newly discovered Bitcoin but it does make sense. I can only recommend following down the rabbit hole to find out what Bitcoin has in store. The absolute number of 21 Million, as a contract between the network participants, has the potential to change the way we think about and use money. In that sense keep learning, stay focused because the most important thing is to stay humble and stack sats.
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