scarcity for cryptos
6 min reading
Are you therefore a newbie in the crypto world, why not sit back while we widen your understanding through this article.
Why are we talking about scarcity for cryptos?
What is scarcity?
According to the Oxford dictionary, scarcity is defined as the state of being in shortage of supply whatsoever. In the first instance, one would quickly think of lack or inadequacy. But with cryptocurrency, scarcity is not equal to lack. Are you therefore a newbie in the crypto world, why not sit back while we widen your understanding through this article.
Scarcity and cryptocurrency
There is some evidence that there is a correlation between scarcity and price. Cryptocurrency is in short supply when demand exceeds available supply. The scarcity of cryptocurrency is not due to its finite nature but to its potentially endless demand. Note that scarcity is not unique to cryptocurrencies as all assets are lacking. If there is no deficit, then there is no price either. Anything that has a price is rare.
Things anyone can have are free, even if they have objective value to people. This is due to the number of digital coins in circulation. One of the main drivers of cryptocurrency supply is the interaction between supply and demand in the cryptocurrency market.
The demand for cryptocurrency is primarily driven by its value as a medium of exchange, and the supply is determined by the supply of a cryptocurrency in circulation, which is known and predetermined in the long term.
What is price and how it is formed?
Thus, price is the mechanism by which markets balance supply and demand for rare items. When demand is high, the price increases until the demand decreases enough for the supply to be sufficient. Conversely, when the supply of a product exceeds demand, its price automatically drops until demand rises to absorb the excess. It is also impossible to conclude that there is a shortage of a product if there is no demand for it, regardless of its price.
Supply and demand
Like any asset, a cryptocurrency is considered in short supply when the demand for that commodity exceeds the available supply. When demand falls, it cannot be said that a cryptocurrency is in short supply, even if there is no demand for a certain period. However, cryptocurrency supply algorithms affect the price because they prevent supply from meeting demand.
For example, Bitcoin price drops from $100 to $20. With this drastic drop in the price, we will notice that many traders will want to purchase more Bitcoins in the future. However, BTC owners will not want to sell their coins because for them it is a huge loss. They then keep their Bitcoin anticipating that eventually, the price will go up. During this period where traders want to buy and Bitcoin owners do not want to sell, we say that there is scarcity. Scarcity does not outrightly mean that there are no coins available but it’s simply because the price at which the digital currency is sold does not favor the asset owners.
Hence, cryptocurrencies are likely to evolve not because of their scarcity, but because of their inflexibility. As the market size increases, prices are also likely to fluctuate, becoming less frequent but much higher. As long as cryptocurrencies remain inelastic, their prices are subject to change without prior notice. However, you will be interested to know that cryptocurrencies have a unique quality that no other currency has, namely the almost perfect inelasticity of supply. This means that no matter how great the demand is, cryptocurrencies will always be mined at the same rate.
In conclusion, cryptocurrency cannot be said to be scarce, it is only volatile due to its inflexibility. As the size of the market increases, there is an increase in the demand for cryptocurrencies and because of this, we find that the prices begin to fluctuate. Having a static price for a cryptocoin does not solve the issue because cryptocurrency in its nature is volatile.