Michael Saylor, founder of Microstrategy and an MIT alumni, has been aggressively promoting Lyn Alden's BTC bullish thesis which can be summarized as follows:
- Bitcoin has a supply cap of 21M coins
- Bitcoin has an advantage over other cryptocurrencies because of its network effect
These 2 properties, according to Lyn, will help BTC perform like digital gold the quantitatively eased covid world. The first statement, however, is inaccurate in the sense that Bitcoin does not have a supply cap and is not scarce in the same way as silver and gold are. Bitcoin's scarcity/supply cap is defined via a consensus similar to the one that regulates the supply of fiat currencies, that is a consensus that can be changed or can be manipulated. Whether by sheer ignorance, or tacit collusion, the promoters of this thesis should/may one day be held accountable in court for spreading a lie in order to lure in buyers at progressively higher prices.
Why BTC does NOT have a supply cap
Supply in Bitcoin is regulated by an algorithm that limits the amount of new coins issued and defines the rules by which these newly minted coins are distributed. To mine a coin in BTC a miner has to solve a puzzle after which the blockchain is updated to increase the balance of his address by 1 unit. This would be a mined coin, since it did not come from another address through an incoming transaction.
According to today's algorithm there cannot be more than 21 million coins, and the amount of coins minted for every puzzle solved (which corresponds to block found in bitcoin lingo), is 12.5. This is known as the block reward. According to the same algorithm the block reward is supposed to halve every 4 years.
It is important to emphasize here that we are speaking of an algorithm, not a natural law. Such algorithm (which is part of bitcoin's protocol) is used by today's BTC miners. This algorithm seems to be sufficient for Michael Saylor (and Lyn Alden) to promote Bitcoin as a currency with limited supply and capable of fulfilling its role as digital gold. However, it is not.
Michael Saylor is a billionaire engineer, who seems to have a deep knowledge of the bitcoin community. At the same time, he seems to not be able to tell the difference between a natural supply cap and a supply cap set by social (or decentralized) consensus. It is exactly by glossing over such distinction that newcomers are lured to believe that BTC's supply is set in stone, and invest/buy as if BTC's supply is set in stone, when in fact that's not the case.
A natural supply cap is independent of political or social consensus. Even if the most powerful/influential leaders, policymakers, scholars, economists, engineers and so on of the world came together and agreed that there needed to be more silver on Earth, there is nothing they could do to change the total amount of silver. They could not because silver's supply is fixed.
A supply cap set via consensus, on the other hand, can be lifted or modified if the underlying consensus changes or is manipulated. This is the case of fiat currencies, where we have seen the consensus shift towards accommodative monetary policies that were unthinkable 4-5 decades ago. And this is also the case with Bitcoin, the only difference between Bitcoin and fiat currencies is that today's consensus in Bitcoin veers towards sticking to the original 21M supply. While it is true that bitcoin's supply is defined by an algorithm, this algorithm can be changed. Therefore Bitcoin is not scarce, at least not in the same way as precious metals like gold and silver whose supply is independent of any form of consensus.
Consensus shifts in Bitcoin's 10 year history
In Bitcoin's history there have already been instances of changes in consensus that have impacted its properties. For example in its early years Bitcoin was defined as digital peer to peer cash because it could be used as peer to peer cash, thanks to subcent fees, even for micro payments. But as adoption picked up, transaction fees increased and BTC's performance as cash deteriorated. The general consensus then started to favor digital gold over peer to peer cash. As this transition occurred, the community split in two camps that would clash with each other for years to come trying to reaffirm their own view as the consensus view. In this fight for consensus each side resorted, among others, to censorship, ad hominem attacks and industrial scale DDOS attacks in a proper cyberwar fashion. In the end small blockers (proponents of Bitcoin as digital gold) prevailed, while big blockers forked into BCH. This series of events matters because it proves that the same thing can/will happen one day with bitcoin's supply. Today the camp let's increase supply already counts some prominent BTC figures, like ex Bitcoin Core developer Peter Todd.
Conclusion
There is no difference between BTC and fiat currencies like the US dollar technically speaking. The only difference is who is in charge, in BTC it is the Bitcoin Core developers while in the case of a fiat currency it is a central bank. Right now consensus in BTC is that the cap should stay at 21M. But if this consensus changes, then just like with fiat currencies, a lot of retail buyers who used BTC as digital gold would have to passively accept the change. This risk is what distinguishes a fixed supply currency from an inflationary currency. Not the consensus in a particular point in time.
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