10,000 Bitcoins for 2 Pizzas and Bitcoin’s 340,000-fold* increase in value
Me neither, but someone did. Well, sort of. On 22 May 2010 a programmer by the name of Laszlo Hanyecz made what is believed to be the first purchase using Bitcoin.
He paid an astonishing 10,000 Bitcoin for 2 pizzas from Papa John’s in Florida, USA, an amount that is worth approximately $85-million today. That’s about $7 million a slice if you cut 6 slices per pizza, or if you prefer to think about it in South African Rands, about ZAR93-million.**
For ZAR93-million you could probably pick up the pizzas (make that extra cheese), the shop, and the suburban shopping centre – and still have change.
Around the world 22 May is marked by enthusiasts to illustrate the meteoric rise in the value of Bitcoin, and it is also an opportunity to take a look at Bitcoin in terms of its future value in relation to scarcity and the finite nature of the coin.
In the financial world, scarcity is considered a fundamental economic problem where there are many human wants in a world of limited resources. According to economists, society is simply unable to meet all human wants and needs using the productive resources available, so we tend to be careful and diligent with what there is. Well at least some people are.
Finite on the other hand is quite simply being limited in size or extent. There basically is only so much of it.
And this is where it is interesting to compare a major currency such as the US Dollar with Bitcoin. For a start, the supply of US Dollars is controlled by the US Federal Reserve and new banknotes are constantly being printed by the interestingly named Bureau of Engraving and Printing at facilities in Washington, D.C. and Forth Worth, Texas.
Over time the supply of US Dollars (and growth in money supply) is inflationary by nature, which means that the purchasing power reduces steadily. So, whilst cash and scarcity tend to go hand in hand for many of us, the supply is far from finite. Inflation may be relatively well managed in the USA and many countries, but it is also ranges from high to ridiculous in other parts of the world. Spare a thought for the debilitating inflationary effects on people living in countries such as Venezuela and Zimbabwe?
Finite vs infinite
Whilst the US Federal Reserve can pump out money continually that serves in part to reduce the value of the cash you already hold, Bitcoin is quite simply, finite.
A little over 17-million Bitcoins have been mined to date and the last Bitcoin should be mined around 2140, making a total of 21-million. It stands to reason that the same principles apply to other finite production coins, for example DASH (19-million) and Litecoin (84-million).
According to Forbes.com, nearly between 2,8 – 3,8 million Bitcoins have been lost forever. Just as you can burn banknotes and lose gold overboard in the ocean, Bitcoin can also be permanently lost. And we’re not referring to stolen coins because someone can still use them, just those that are plain gone. Some of these resided on old hard drives that were discarded when Bitcoins were worth a few cents each. In 2013 a Welsh IT worker, James Howells, lost almost 7,500 Bitcoins when he threw out an old hard drive that contained his private key. A London based developer who mined around 50 Bitcoins in 2010, stopped mining because the noise of the fans on his mining computer started annoying him. He put the coins on a memory stick and then later overwrote it. These coins are irretrievably lost.
Just over 1-million coins belonged to Satoshi Nakamoto, the FBI apparently holds a large amount that was seized, and you get the picture: the amount of Bitcoin in actual circulation is far less than 17-million. For the purposes of comparison, let’s use 12-million.
Assume for a moment that Bitcoin will one day be the world’s de facto currency. If that happens, even in part, then the following numbers make for interesting reading:
The world population is a little over 7,6-billion and growing at about 83-million per year, and yet right now there are 12-million Bitcoins available. If we had to share the coins out equally, that would amount to 0.00158 BTC per person, or 1 BTC for every 633 people. That’s not a lot of Bitcoin to go around. In fact, if everyone in Belgium owned 1 BTC each, there wouldn’t be any left for the rest of the world.
$90.4-trillion global money supply
On the other hand, whilst the total value of the world’s global money supply is $90.4-trillion, let’s consider just the ‘narrow’ money, defined as coins, banknotes, and bank deposits. They amount to $36.8 trillion, according to Jeff Desjardins from The Money Project (October 2017).
Based on the number of Bitcoins available today, there is an equivalent in global ‘narrow’ money of $3-million for each Bitcoin. Whilst the ‘narrow’ money will likely continue to grow at a steady rate, Bitcoin will grow by less than 4-million coins in the next 100 years, and if Bitcoin and other virtual currencies start replacing traditional fiat currency, even in part, then the Bitcoin price growth trajectory will likely continue.
Bitcoin scarcity
The supply of Bitcoin was relatively high in the first few years of production and this was written into the code. By 2013 the reward for mining a block (an event which takes place on average every 10 minutes globally) was halved from 50 BTC to 25 BTC, and in 2017 it was halved to 12.5 BTC. This is evident in the reduction in the supply growth rate as well as the flattening in the actual supply of new Bitcoins.
As a result, the only real way for the market to meet the growing demand for Bitcoin is for the price to increase such that existing holders are sufficiently incentivized to sell some of their coins to the new entrants into the market. The reducing supply pressure colliding with the vastly increased demand largely explains why the price of Bitcoin has increased from $0.0025 to $8,500 in just 8 years.
Whilst the meteoric rise may or may not continue, what is a fact is that with the world population expanding at 83-million per year, there is likely to be a growing number of people competing for a shrinking number of Bitcoins. Based on economics 101 supply and demand, this would suggest, as mentioned earlier, that the cost of purchasing a Bitcoin could continue the staggering upward price pressure of the last few years.
Looking forward
For both purchasers and miners who sometimes wonder whether it makes sense buying more Bitcoin or mining it at close to breakeven levels. The fact is, if you truly believe that the price will continue to rise based on the factors discussed in this article: namely a rapidly expanding world population, enormous increases in Bitcoin adoption, and not just a finite, but actually a deflationary asset, it is worth asking yourself where you believe the Bitcoin price will be in the future.
After all, if it can increase from 0.25 cents (US) on 22 May 2010 when Laszlo bought 2 pizzas at market value, to $8,500 in 8 years (a 340,00-fold increase), what can the Bitcoins that you purchase or mine today be worth in another 8 years?