A mental model to help you conceptualize the most important discovery of the 21st century.
Scarcity
Scarcity is the reason we can’t have everything we want. When something is scarce, that means there’s not enough of it to go around. We have to make decisions about what we do with our scarce resources, like time and money.
Economics is the study of how humans use their scarce resources. A helpful way to frame the idea of scarcity is to think about its opposite: abundance. If something is readily available whenever you want, it typically doesn’t have much value. In economics, value is created when demand for something outpaces its supply.
Mental Model
In this post, we will create a mental model to help us think about how scarcity impacts human nature, money, and Bitcoin. A mental model is not complicated. We can create one simply by looking at an idea from multiple angles. Mental models are helpful because they crystalize an idea in our minds. With a strong foundation, we can stack mental models on top of one another as we build toward our goal of understanding something (in this case, Bitcoin). When building a mental model, I like to start wide and then narrow the focus.
Scarcity and Human Nature
Humans intuitively understand scarcity.
This is because our lives are anchored to time, and time is the only truly scarce resource in the universe. Time flows equally for all of us. Once it’s gone, it’s gone. It’s impossible to create more time. When we truly contemplate our limited time on Earth, it causes a visceral reaction. For instance, I feel the scarcity of time in my bones when I look at this:
Time is our most valuable asset.
You don’t have to take my word for it, just look around. Humanity is obsessed with saving time. The greatest inventions and discoveries in human history have one thing in common: they save us ridiculous amounts of time. If a discovery, invention, product, or service saves us time on a grand scale, it will be universally adopted by humans around the world. In many ways, the progress of humanity is measured in time savings.
When we make a significant time-related breakthrough, we move forward on the continuum of evolution.
Scarcity and Money
Time anchors our lives, yet it remains elusive.
The same is true with money.
- Money drives our behavior.
- Money is a measuring stick that we use to compare ourselves to other people, and not just to our neighbors, to every person with an Instagram account.
- Money has a huge influence on our emotional state.
- We trade our scarce time for money almost every day.
Money is so intertwined in our daily lives that we never stop to question it.
Wait a second, what the hell is money?
If we’re going to examine money, there’s no better place to start than with the most successful money of all time: gold.
Gold was selected as money by the human network — no government or central bank forced us to use gold as money. We chose it ourselves, and we’ve been using it for over 5,000 years. Before gold, we used things like seashells, salt, and cattle. Why did humans settle on gold as money?
Gold is scarce. Finding new gold in nature is extremely rare. Even if one finds gold, it costs a pretty penny to extract it. The scarcity of gold has allowed it to earn the trust of humans over time, because we can rely on the fact that nobody is going to show up with a bunch of new gold. The natural scarcity of gold is its defining feature. That’s how gold holds its value over time, and it’s why humans are comfortable trading their scarce time for it.
We can use the idea of abundance to drive this point home. Imagine if gold was so easy to get, that you could go in your backyard and dig it up whenever you please. In that scenario, how much value do you think gold would have?
What do we know so far?
- Humans understand the connection between scarcity and value, since our lives are tethered to the most scarce resource in the universe, time.
- Gold is the most successful form of money because its scarcity has made it the best physical representation of our time.
Scarcity and Bitcoin
Bitcoin is the invention of digital scarcity.
Before bitcoin, any object in a digital network, like an email or a photo, could be copied an infinite number of times. When I text you a photo, I keep my photo and you get a copy. I can duplicate this process a million times. There was no getting around this problem, which is why there was no successful digital money before Bitcoin.
Bitcoin is the first example of a digital good whose transfer stops it from being owned by the sender, just like cash. If I give you a $50 bill, I no longer have that $50 bill in my possession. It belongs to you now. Satoshi Nakamoto invented humanity’s first digital cash money.
On top of this technology, Nakamoto put a supply cap on the number of Bitcoin that can exist. There will only ever be 21 million bitcoin. Ever. This is the first time in history that a commodity, digital or physical, has an absolute supply cap that cannot conceivably be changed. Before the invention of Bitcoin, scarcity was always relative. Bitcoin is absolute.
Bitcoin is one of the most significant inventions in the history of mankind. It’s an open, borderless, neutral, censorship-resistant, and immutable monetary network. We know that the greatest discoveries and inventions save us huge amounts of time. Bitcoin is the ultimate time saving invention because its absolute scarcity is a direct reflection of our time. It’s gold for the Digital Era. It’s the new people’s money.
Bitcoin is 12 years old, and it’s already the best performing asset of all time. Now we can use our mental model for scarcity as a tool to help us understand why Bitcoin is so valuable.
