Bitcoin’s Limited Supply Increases Its Value. Should You Invest in Cryptocurrency? | Foodman CPAs & Advisors

Macroeconomic concepts tell us that when supply of a valuable commodity is limited, demand for it will rise, and so will its price. Fiat currencies are backed by governments and central banks and more can be printed at will.

Bitcoin, on the other hand, doesn’t have traditional backing and has a fixed supply. This may increase its long term value. Or not.

Bitcoin’s supply cap was set at 21 million by Satoshi Nakamoto, who is believed to be the inventor of Bitcoin. That meant only 21 million Bitcoin tokens would ever be produced. This hard cap is perceived by investors to be positive since creating scarcity could ultimately lead to an increase in value.

In his 2008 white paper and an email exchange with former Bitcoin software developer Mike Hearn, Satoshi said that setting the cap of 21 million was an educated guess.

Current estimates for mining of the final Bitcoin put that date somewhere in February 2140, according to Investopedia. Interestingly, anyone who owns 21 Bitcoins or one-millionth of the entire supply is currently a millionaire today. 

As more crypto investors become informed and view Bitcoin as a sound investment, its scarcity can contribute to its rise in value.

90% of available Bitcoin is already mined

According to Coin Base, the current circulating supply of Bitcoin (11/29/21) is 18.9 million – 90% of the 21 million hard cap.  Since there is only 10% of Bitcoin left to go around, demand continues to rise.

The industry is in its very early days, and currently only one in ten Americans invest in cryptocurrency, while 55 percent invest in stocks.

Do your homework

Largely because the crypto industry communicates poorly, and because it is fairly complex, individual investors need to be sure they understand the risks and benefits before investing. While the space is tempting, determine your risk appetite and your risk tolerance before jumping in. That means that if you’re looking for guaranteed returns, crypto is not the market for you.

You should:

• Do your crypto research with reliable sources
• Learn your tax responsibilities from a crypto tax expert
• Invest only in what you understand
• Beware offers that sound too good to be true.
• Consider a Buy/Hold strategy, known as HODL by crypto investors
• Never Invest more than you can afford to lose

Bitcoin is perceived as a hedge against inflation

Central Banks and governments have the power to print fiat currency at their will resulting in their currency’s ability to depreciate. On the other hand, Bitcoin’s space is fixed and limited, making it less susceptible to inflation.

The rise in cryptocurrency adoption shows that individuals as well as institutional investors are joining the space at a rapid pace. Their perception is that crypto is a desirable hedge against inflation. They blame current inflationary trends largely on the way many governments are printing money to cushion Pandemic related economic issues. 

Could Crypto regulation make it safer?

The short answer is probably.

Currently, the cryptocurrency industry is worth over $2 trillion. Senior administration figures, including from Treasury Secretary Janet Yellen and SEC Chair Gary Gensler, have said more oversight is necessary. In fact, Gensler described crypto as “the Wild West” in need of more oversight.

Two sides to the regulation debate

The Biden Administration is focused on crypto in part because it realizes that taxing crypto transactions is a government revenue enhancer. 

Comprehensive regulation for cryptocurrency is currently in the works. This might be a step toward mainstream crypto investing.

At the same time, long-standing crypto investors and enthusiasts fear that over regulation could suffocate this rapidly expanding industry. That said, nobody is defining over regulation.

It could, therefore, be crucial that lawmakers create a regulatory environment no less flexible than our current securities environment, that minimizes the risks of adopting new technologies, without disabling their benefits.