Crypto 101: Scarcity Matters

The less there is of something, the more valuable it is

This week, I got a great reminder of the power of scarcity.

One of my favorite cryptocurrencies reached an important milestone. Algorand now has twenty million wallets. When measured against Algorand’s fixed supply of ten billion $ALGO tokens, this development is significant. If all the tokens were distributed evenly, then each person holding Algorand would only be able to have 500 $ALGO.

Just 500.

That’s not a lot. At all.

Of course, most Algorand wallets have more than 500 tokens. Several have hundreds of thousands. There are people who got in when Algorand traded at around a penny, and they are still holding.

But from here onward, $ALGOs are going to become scarcer than they were already. Twenty million wallets hold at least a fraction of one. Assuming each wallet represents a person, that’s twenty million people who are keyed into the token as an investment. The demand is there, the supply is fixed—the implicit value is about to go up regardless of the dynamics of the boarder market.

Just how valuable will Algorand be? We don’t know. The market will decide.

But when it comes to a crypto investment, a fixed supply of a given token is something to look out for. It’s something to check on before chucking $500 at this token, or $1000 at that one.

I say this a lot, but it bears repeating: not all cryptocurrency projects are the same. Some do not have fixed supply. Others do. Some have no use cases. Others have huge ecosystems.

Lots to pick through.

But scarcity does matter. It can be a great metric for measuring the potential appreciation of an asset in the future. For example, Bitcoin has a fixed supply of 21 million. That’s it. There will never be more. Ever.

Twenty-one million isn’t a lot.

Florida, for example, has just over 21 million people. You can infer what I’m driving at here—if someone decided to give everyone one Bitcoin, then only the population of Florida would be able to receive one before the supply would disappear. Bitcoin’s rarity is part of what creates its value.

Scarcity isn’t the only thing you should use to as a metric for investment, but it’s certainly one of the big things.

So, the next time you’re ready to drop some cash on a flashy new crypto, take a moment to look up the supply. Fixed? Fluid? Large number? Low number? Answering those questions will help you know if its an investment you really want to make.

The Crypto Connection is for entertainment purposes only and is not meant to be financial advice. Please do your own research before investing in any asset class. Sara Celi is not a financial advisor, and holds several cryptocurrencies. To purchase her books on Amazon, please click here.