We in the crypto community stand by Bitcoin as the only truly scarce asset because it is fixed in supply to 21 million.
We argue that Gold isn't totally scarce since there is more Gold in outer space that could be mined from asteroids or by collecting space dust. There is no more Bitcoin in outer space. There is only 21 million Bitcoin in the universe.
Why Bitcoin Is NOT Scarce
I've watched a lot of great crypto documentaries. Many of them do a great job of presenting a balanced opportunity for the existing finance professionals and crypto enthusiasts to share their point of view.
The banking types pose an argument that goes like this.
- Bitcoin is not scarce
- Bitcoin is open source software
- Anyone can take the source code and make an infinite number of cryptocurrencies
- Therefore the supply is infinite
- Therefore it has no value
Why That Is Absolute Bollocks
How does Facebook maintain it's dominance?
Especially when:
- It's just software
- Anyone can create an infinite number of social networks
- Therefore the supply of social networks is infinite
- Therefore it has no value
Network Effects and Metcalfe's Law
The value of a network = the number of users x number of users.
Amazon and eBay.
Businesses sell on those platforms, because that is where all the buyers are.
Buyers buy on those platforms, because that is where all the sellers are.
Why not setup a rival for eBay? It's just software, so an infinite number of eBay's can be created.
It's been tried, by many. It didn't work because eBay is the benefactor of Metcalfe's law.
No startup can rival the value bestowed on eBay by Metcalfe's law. These platforms work best when they have the monopoly.
Monopolies are generally seen as a bad thing because there is a centralised company benefiting from being the monopoly. Bitcoin benefits from being a monopoly without this problem.
Bitcoin and Metcalfe's Law
Copying the functions and features of eBay or Facebook does nothing since Metcalfe's law does not mention features and functions. It's based on the number of users.
Copying the functions and features of Bitcoin does a similar amount of nothing. It creates a new network, (like creating a rival ebay) but you've still got the huge problem of being the startup with no users and having to compete with the established platform.
The users of the established platform have an incentive to stick with the established platform because that is where all the other users are. It's the gathering of the users that creates the value.
Some Play Numbers
So you can go off and establish your new Bitcoin network with 6 users but your network value according to Metcalfe's law is 7 x 7 = 49.
Meanwhile the BTC network has users in the millions. Let's be ridiculous and say just 5 million. Network value = 5,000,000 x 5,000,000 = 25,000,000,000,000.
That's 25 trillion.
49 vs 25,000,000,000,000.
Given the choice of these two networks, which one will be chosen?
The choice makes itself.
Conclusion
What is ultimately scarce is the Bitcoin network with it's monopoly position, cemented and protected by it's network effect.
New users flock to Bitcoin because it's the network that presents the most value. It has the most value because new users flock to it.
Metcalfe's law does allow for the King to be dethroned. But the larger the network effect of the incumbent, the longer it will take.