Executive Summary

• The critical value of scarcity
• Understanding the utility of the blockchain
• Will (can?) governments ban cryptocurrencies?
• A coming geometric explosion in the price of cryptocurrency?

If you have not yet read Part 1: Understanding The Cryptocurrency Boom available free to all readers, please click here to read it first.

In Part 1, we surveyed the exciting but confusing speculative boom phase of cryptocurrencies. In Part 2, we attempt to contextualize this mad swirl by running it through two filters: scarcity and utility.

What’s Scarce? Scarcity Creates Value

Regardless of one’s economic ideology or system, scarcity creates value and abundance destroys value.  When we say supply and demand, we’re really talking about scarcity and abundance and the rise or fall of demand for the commodity, good or service.

In classical economic theory, scarcity is met with substitution: ground beef too expensive due to relative scarcity? Buy ground turkey instead.

But this model has weaknesses.  There aren’t always substitutes, or the substitutes are more expensive or problematic than what is now scarce. Consider wild fisheries: as they are depleted (i.e. the ecology of the seas are disrupted/destroyed), the economists’ substitute is farmed fish.

But farmed fish is not a substitute to an ecologist viewing the stripmining of the seas with alarm.  Nor is it a substitute for those monitoring the heavy use of chemicals to suppress algae blooms and diseases in the fish farms. Fish farms that attempt to mimic Nature as much as possible and eschew chemicals often go out of business due to the intrinsic high costs of this ecologically sensitive business model.

Then there’s oil: substitutes exist for some uses, for example, natural gas and electricity, but when it comes to jet fuel, these are imperfect substitutes.

As a general rule, profits flow to any scarcity of goods and services with high utility value.  We value what’s scarce and useful, and place little value on what’s abundant and of limited utility.

Currency has three basic functions: a store of value (it will retain its purchasing power over time), means of exchange (we can use it to trade goods and services, pay debts, etc.) and as an accounting mechanism to track assets, debts, income, expenses and exchanges/trades.