2Sep 2019

Bitcoin’s Ever Increasing Scarcity

by Henrik Andersson

When Bitcoin’s creator Satoshi Nakamoto created Bitcoin, its inflation schedule was hard-coded in the software. It can not be issued beyond what the software specifies.

According to Satoshi Nakamoto:

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.

When Bitcoin launched in 2009, 50 bitcoins were issued every 10 minutes. That number is cut in half every 210,000 blocks —with 10 minutes between every block, that’s about every 4 years. This is the issuance of Bitcoin since 2009:



As we can see, close to 18 million bitcoins have been mined so far. If you look carefully you can also see two points in the history when the graph decreased its slope, in 2012 and in 2016. These points are called “halvening” points and marks the supply cuts. We are currently coming to the end of the third period when the supply is cut from 12.5 bitcoins every 10 minutes to 6.25 bitcoins.

It is straightforward to calculate the total number of bitcoins that will ever be mined:

Screen Shot 2019-09-02 at 6.05.26 pm.png

Around the year 2140 the last bitcoin will have been mined and we will have the full supply of 21 million.

Lately there have been attempts to model this increasing scarcity in what is called the Stock-to-Flow model. For the below modelling we thank the pseudonym Planb, who writes on Twitter under the handle @100trillionUSD.

The stock of bitcoin is currently close to 18 million while the flow is around 0.7M per year for a Stock-to-Flow ratio of 25. The hypothesis is the Stock-to-Flow ratio drives value for a store-of-value type commodity like Gold or Bitcoin.

Source: PlanB

Source: PlanB

So far in Bitcoin’s life the price of Bitcoin has followed the Stock-to-Flow ratio remarkably well as can be seen in the chart above.

If we zoom out, we can look at where on the Stock-to-Flow ratio Bitcoin falls compared to other Stores-of-Value:

Source: PlanB

Source: PlanB

In the above chart, the coloured dots are Bitcoin while the grey dot is Silver and the yellow dot is Gold. Bitcoin has so far moved up and to the right as scarcity has increased. Note that the y-axis on the above chart is logarithmic and that the ‘market value’ of Gold is close to US$10tr vs Bitcoin’s current market cap of US$175bn.

I mentioned before that we are coming close to the next halvening event. In May 2020 Bitcoin’s supply will be cut in half again. Bitcoin’s inflation can be calculated as the inverse Stock-to-Flow ratio. After May 2020, Bitcoin’s inflation will be around 0.35/18=1.9%. That’s is below the target inflation of the global central banks —and from there it will only go lower.

We expect that the market will start pricing that event in closer to the end of this year. We think it’s wise for investors to consider a position as one of the world’s most scarce asset gets even scarcer!

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Crypto and is the fund manager for the Apollo Crypto Fund. He also acts as the fund advisor for the offshore Apollo Crypto investments funds, the Apollo Crypto Frontier Fund and the Apollo Crypto Market Neutral Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.