Scarcity Does Not Necessarily Increase Value

2/16/20

I read the article Why street art in Miami is being tokenized on Bitcoin and while I am for supporting art and artists, the article had something so fallacious in it that I had to write this article. Here is the section

The token economics include a burn feature that's designed to encourage people to buy more tokens. If you buy ten PRECOLUMBIAN tokens and burn them, you'll get one PRECOLUMBIAN.rare token - burn 10,000, and you'll get the PRECOLUMBIAN.ultrarare. "By burning tokens, they are reducing the total number in circulation, thus increasing scarcity, which should increase the value of the base token for all the people who have it," he said.

First, "price" is not the same as "value". Second, that scarcity, or a decrease in supply, implies an increase in price or value is a fallacy that I hear over and over again. There is simply little relation between the two.

If I draw a picture on this piece of paper on my desk, it is extremely rare. In fact, it is the only one of this type in the world! But why does that not suddenly confer a high price or value on my art? Oxygen and water are not rare, but why are they so valuable?

Not to mention, the idea of burning something that supposedly has value to begin with to make the remainder have even more value is quite silly. If you had 10 $100 bills would you burn 9 of them to make the 10^th one worth more? If you had 10 gold coins, would you lose the other 9 to make the 10^th worth more?

In the end, it comes down to supply and demand. Is there any demand for whatever digital coin they are offering? If there is high demand and there is value, then the price will probably increase if there is also scarcity.

Many people in cryptocurrencies, gold and silver, and stock markets, whether scammers or just naive, use the 'it is rare' schtick to imply that the price will increase, to imply that you should buy. Beware of this fallacy. Many rare things simply have no demand or value. Also, making something scarce does not necessarily increase demand if there is no demand or value to begin with.

Thanks for reading.