Can Bitcoin Flourish with a Capped Supply?

The answer may be counter-intuitive: Not only can Bitcoin be widely adopted under a supply cap, its trust and integrity are a direct result of a provably limited supply. As a result, it will flourish because it is capped.

Everyone Can Own and Trade a Limited Commodity, IF…

…if it is both measurable and divisible. Bitcoin has a capped supply just as gold has a capped supply. Although both assets will be mined for some time into the future, there is only so much that will ever be uncovered. Thereafter, the total pie cannot grow.

But the transaction units will continue to grow as needed, because the pie is divisible into very, very tiny units:

There will eventually be 21 million BTC and each coin is divisible into 108 units. This yields (21 million * 100 million), or 21 trillion exchangeable units. And, it can be divided further by consensus.

As Bitcoin is adopted—whether as a simple payment instrument, an investment asset or even as national currencies around the world—each unit of the limited supply simply rises in value. If thought of as a currency, with a value established by supply & demand, it leads to a deflationary economy.

But, Isn’t Deflation Bad for the Economy?

It’s common to associate deflation with economic ills. One need only glance back at the the last century to conclude that deflation coincides with wars, joblessness, recession and a crippling concentration of wealth. Perhaps, just as bad, the tools used to pull a nation out of deflation often force governments to cherry pick beneficiaries of stimulus spending.

But it is important to note that deflation plays no role in causing these things. On the contrary, it is an effect rather than a cause… In fact, when a supply cap is introduced as a designed control input for monetary policy, all sorts of good things follow. I address these in various answers at Quora. Dig in:

Ellery Davies co-chairs Cryptocurrency Standards Association. He was host and producer of The Bitcoin Event in New York.

Why is Bitcoin Capped at 21M units?

I was asked this at Quora.com. But the query deserves a companion question, and so I approached the reply by answering two questions.


You might have asked “Why was Bitcoin designed to have a cap?” But, instead, you asked “Why is the cap set at 21 million bitcoins”. Let’s explore both questions starting with the choice of a circulation cap…

Why set the cap at 21 million BTC?

The choice of a cap number is arbitrary and in fact, it could be 1 or one hundred trillion. It makes no difference at all and it has no effect on the economy—even if Bitcoin wereStacks of Bitcoin to be adopted as a currency all over the world. If it were set to 1 BTC, we would simply discuss nano-BTC instead of 1 BTC for amounts of about $650.

In fact, we already do this today. For many purposes, people are concerned with very small payments. And to best discuss these payments, we have the Satoshi. There are 100,000 Satoshi to each bitcoin (BTC).

What is important, is that the total number of bitcoin (regardless of how many units there are) can be divided into very tiny fractions. That way, the total worldwide supply can be divided into smaller and smaller slivers as market adoption gains traction. Everyone needs to earn, save, spend or pay with a piece of the pie. All users need to know is what fraction of the pie do I control? and not how many ounces, pounds, Kg, or tons is the pie. That is just a number.

Incidentally, the same could be said of gold (it can be shaved very thin), but gold is not quite like computer bits. It has industrial and cosmetic value, and this intrinsic demand for gold (beyond it’s role as a pure monetary instrument) has an effect on supply and demand along with the influence of investment, circulation, savings and reserve.

Why is there a cap at all?

At the beginning of this answer, I suggested another question: Why is Bitcoin capped at all? After all, the monetary supply in every country grows. Even gold production is likely to continue for centuries to come. Why not Bitcoin?

Satoshi designed Bitcoin to eventually become a deflationary currency. I believe that he/she recognized inflation is an insipid tax that constitutes an involuntary redistribution of earned wealth. With a firm cap on the total number of units that exist, governments can still tax, spend and even enforce tax collection. They can go about business building bridges, waging war and providing assistance to the needy. But without a printing press in the hands of transient politicians, they can only spend money with the consent of their constituents and residents.

Of course, governments could borrow money by issuing bonds. But with a capped currency, they must convince creditors that the country has the will and the ability of to actually repay its debts from real dollars and not inflated dollars.

In effect, monetary policy is restricted to the business of the governed, but the money itself is not coined by a domestic treasury. It is the province of something that is far more certain than a human institution. It arises from pure math. It is open and transparent. Everyone is an auditor, because the bookkeeping is crowd sourced.

For prescient legislators and national treasurers, Bitcoin presents far more of an opportunity than a threat. It is good for government, business and consumers, because it forces an honest money supply. Ultimately, it builds trust in government, because no one can cook the books, water down wealth, or print their way out of debt.

What about recession. Isn’t it a result of deflation?

Deflation doesn’t lead to recession. Rather, it sometimes accompanies a recession. Recession is caused by an uncertain job market, war, a massive supply chain interruption or political upheaval. In one way or another, it boils down to a lack of confidence sparked by one of the economy’s core foundations: consumers, investors, business or creditors.

Bitcoin as currency removes a major impediment to confidence. By creating a system that cannot be rigged, it fosters trust in government along with an open and transparent treasury.

Ellery Davies co-chairs CRYPSA and was MC at The Bitcoin Event in New York. He writes for Quora, LinkedINWild Duck and Lifeboat Foundation, where he sits on the New Money Systems Board.

Can Governments Ban Bitcoin?

Recently, I became Most Viewed Writer on Bitcoin and cryptocurrency at Quora.com. I don’t typically mirror these posts at A Wild Duck. After all, the sites are linked and my articles at both sites Quora_Most_Viewed_splashrank highly in an organic search. But a question posed today is highly relevant to this Blog. Here, then, is my reply to the question
“How can governments ban Bitcoin?”


Governments can enact legislation that applies to any behavior or activity. That’s what governments do—at least the legislative arm of a government. Such edicts distinguish activities that are legal from those that are banned or regulated.

You asked: “How can governments ban Bitcoin?” But you didn’t really mean to ask in this way. After all, legislators ban whatever they wish by meeting in a congress or committee and promoting a bill into law. In the case of a monarchy or dictatorship, the leader simply issues an edict.

So perhaps, the real question is “Can a government ban on Bitcoin be effective?”

Some people will follow the law, no matter how nonsensical, irrelevant, or contrary to the human condition. These are good people who have respect for authority and a drive toward obedience. Others will follow laws, because they fear the cost of breaking the rules and getting caught. I suppose that these are good people too. But, overall, for a law to be effective, it must address a genuine public need (something that cries out for regulation), it must not contradict human nature, and it must address an activity that is reasonably open to observation, audit or measurement.

Banning Bitcoin fails all three test of a rational and enforceable law.

Most governments, including China and Italy, realize that a government ban on the possession of bits and bytes can be no more effective than banning feral cats from mating in the wild or legislating that basements shall remain dry by banning ground  water from seeking its level.

So, the answer to the implied question is: A ban on Bitcoin could never be effective.

For this reason, astute governments avoid the folly of enacting legislation to ban Bitcoin. Instead, if they perceive a threat to domestic policy, tax compliance, monetary supply controls or special interests, they discourage trading by discrediting Bitcoin or raising concerns over safety, security, and criminal activity. In effect, a little education, misinformation or FUD (fear, uncertainty and doubt) can sometimes achieve what legislation cannot.

Reasons to Ban Bitcoin … a perceived threat to either:

  • domestic policy
  • tax compliance
  • monetary supply controls
  • special interests

Methods to Discourage Trading (rather than a ban)

  • Discredit Bitcoin (It’s not real money)
  • Raise concerns over safety & security
  • Tie its use to criminal activity

Avoiding both a ban—and even official discouragement

There is good news on the horizon. In a few countries—including the USA—central bankers, monetary czars and individual legislators are beginning to view Bitcoin as an opportunity rather than a threat. Prescient legislators are coming to the conclusion that a distributed, decentralized trading platform, like Bitcoin, does not threaten domestic policy and tax compliance—even if citizens begin to treat it as cash rather than a payment instrument. While a cash-like transition might ultimately undermine the federal reserve monetary regime and some special interests, this is not necessarily a bad thing—not even for the affected “interests”.

If Bitcoin graduates from a debit/transmission vehicle (backed by cash) to the cash itself, citizens will develop more trust and respect for their governments. Why? Because their governments will no longer be able to water down citizen wealth by running the printing press, nor borrow against unborn generations. Instead, they will need to collect every dollar that they spend or convince bond holders that they can repay their debts. They will need to balance their checkbooks, spend more transparently and wear their books on their sleeves. All good things.

Naturally, this type of change frightens entrenched lawmakers. The idea of separating a government from its monetary policy seems—well—radical! But this only because we have not previously encountered a technology that placed government accountability and transparency on par with the private sector requirement to keep records and balance the books.                                       [continue below image]…

What backs your currency? Is it immune from hyperinflation?

What backs your currency? Is it immune from hyperinflation?

Seven sovereign countries use the US Dollar as their main currency. Why? Because the government of these countries were addicted to spending which leads to out-of-control inflation. They could not convince citizens that they could wean themselves of the urge to print bank notes with ever increasing zeros. And so, by switching to the world’s reserve currency, they demonstrate a willingness to settle debts with an instrument that cannot be inflated by edict, graft or sloppy bookkeeping.

But here’s the problem: Although the US dollar is more stable than the Zimbabwe dollar, this is a contest in relative trust and beating the clock. The US has a staggering debt that is sustained only by our creditors’ willingness to bear the float. Like Zimbabwe, Argentina, Greece and Germany between the wars, our lawmakers raise the debt ceiling with a lot of bluster, but nary a thought.

Is there a way to instill confidence in a way that is both trustworthy and durable? Yes! —And it is increasingly likely that Bitcoin is the way to the trust and confidence that is so sorely needed.

Ellery Davies is a frequent contributor to Quora. He is also co-chair of Cryptocurrency Standards Association and editor at A Wild Duck.