Periodically, we find ourselves again in the middle of crypto winter. As in previous crypto winters, critics and naysayers claim this Bitcoin (CRYPTO: BTC) it’s dead, can’t get back up, a Ponzi scheme going to zero and will never recover.
All these bumps in Bitcoin have been happening since it was created in 2009, but all it has done since then is go on a historic run and become the best performing asset in history. Bitcoin forces us to think about what money actually is and how it works. Should money be inflated at the behest of any government or central authority? Is money just an idea or should it be backed by tangible assets? What makes one form of currency superior to another?
Bitcoin is presented by some as a near-perfect form of currency. Even with volatility seen as a characteristic of new assets that eventually declines, there is reason to believe that Bitcoin will rise from the ashes again and reward patient and long-term investors.
One of the main characteristics of Bitcoin as a sound money is its inherent scarcity. Its code has a hard limit: there will only be a maximum of 21 million bitcoins in circulation. The only way this would change is if 51% of the nodes running the Bitcoin network agreed, and I don’t think that will ever happen. This is one of the important aspects that make Bitcoin, Bitcoin.
This limited supply argument has helped propel the price of Bitcoin for the past 14 years. Demand for Bitcoin has only grown since 2009, and it will likely continue to do so as it remains resilient, proves to be a reliable store of value, and as people around the world seek healthier forms of currency.
To better illustrate the dynamics behind Bitcoin’s supply and demand, consider the two charts below.
Graph #1: Growing demand
There are several metrics that can be used to show the growth in Bitcoin demand. You can see graphs that show the number of active addresses (wallets that send or receive Bitcoin over a period of time), transaction volume, or other statistics that try to give a glimpse of activity on the Bitcoin blockchain.
However, while I believe that Bitcoin may eventually become a viable form of currency for everyday transactions, most of the investors who prefer it today are attracted to it as a store of value. So, to capture its growing demand as a store of value, below is a chart of all Bitcoin addresses currently holding at least 0.01 bitcoins, and it’s currently sitting at an all-time high.
You will notice that the chart is displayed on a logarithmic scale. If it were plotted on a linear scale, the line would show a continuous rise from left to right. Unlike the linear graphs you’re more used to seeing, logarithmic charts are better suited when you want to show a wide range of values or describe the growth rate of something.
As you can see, the number of addresses with at least 0.01 bitcoin increased the earliest in the token’s history, but has continued to increase since then, even in the middle of the current crypto winter. This indicator, which is more than 11 million today, has increased by 70% in the last five years, and by 3000% since 2013. Talk about demand.
Chart #2: Prominent supply
Now let’s look at the supply. The graph below shows the declining supply growth of Bitcoin. With only 21 million bitcoins set to be created, there can only be so many bitcoins to satisfy the appetite for the growing demand — especially considering that roughly 91% of all bitcoins have already been mined.
Again, this graph is drawn on a logarithmic scale because it is more sensitive to showing the rate of change. Notice the difference in slope compared to the other graph? This is because the rate at which new bitcoins enter circulation is slowing and will only continue to slow. Rather than inflation, bitcoin is considered a deflationary asset — an excellent quality for a store of value. Deflating assets increase rather than decrease an individual’s purchasing power over time. This is the exact opposite of almost every state-issued currency.
There are about 19.25 million bitcoins in circulation today, and only 1.75 million more left to cover the supply until 2140, when the last bitcoin will be mined. Given near-zero coin inflation, Bitcoin may benefit from increased demand and limited supply in the future. Thanks to increased demand, the price of bitcoin has risen rapidly over the past decade, and I believe it will rise again as it becomes scarcer. That’s why I’m currently a Bitcoin buyer.
10 Stocks We Like More Than Bitcoin
When it comes to shareholder advice from our award-winning team of analysts, it pays to listen. After all, the newsletter they’ve been publishing for over a decade, Motley Fool Stock Advisortripled the market.*
They have now revealed what they believe are the ten best stocks for investors to buy right now… and Bitcoin was not one of them! That’s right – they think these 10 stocks are better buys.
See 10 stocks
*Stock Advisor returns to December 1, 2022
RJ Fulton has positions in Bitcoin. The Motley Fool has positions in Bitcoin and recommends it. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.