Artificially Constrained Supply: Fashion and Crypto

A tooth is much more to be prized than a diamond.

-Don Quixote

Cartier, Piaget, and Baume & Mercier destroyed $563M of watches in 2 years. Burberry destroys tens of millions of dollars worth of goods. H&M burns so many clothes that a power plant is switching from coal to burning H&M. This is common in the fashion industry. When you sell fashion, you must artificially constrain supply.

Suppliers are known to destroy goods when it’s cheaper than recycling/repackaging them. This makes sense. What irks me is when the goods themselves are significantly more valuable, and the supplier is purposely limiting supply to create scarcity. Diamonds are a famous example with De Beers hoarding billions of dollars worth of diamonds in their vaults. They release diamonds periodically, keeping the diamond price at a level they prefer. 

Artificially constrained supply tends to coincide with conspicuous consumption. When there is artificially constrained supply, it’s fashion. More things are fashion than we care to admit.

Digital goods are fashion. Whether it be a limited supply hat or weapon in a video game.

Crypto is artificially constrained. There’s nothing stopping someone from creating a currency that is exactly like BTC that is called BTC Pro or something else. There is no constrained supply of what makes up BTC. Everything that makes up BTC is open sourced. The code can be copied and pasted. There is only an artificially constrained supply of BTC named BTC. It’s valuable purely because of the brand. Because other people believe it’s valuable. This is fashion.

The same way Doge Coin is valuable. It’s valuable the same way Kim Kardashian is popular. At first it’s a joke and doesn’t make sense. Then perhaps it becomes the norm.

Since leaving the gold standard, the US dollar is artificially constrained. There’s very little stopping the fed from additional quantitative easing. Stimulus or “infrastructure” bills also increase the supply of USD. The best argument for governments adopting a cryptocurrency is that it forces them to work within a constrained supply. 

SaaS software is constrained. It costs almost nothing to run, but it takes maintaining the codebase, customer support, and development costs of new features. It costs money to continue to innovate and operate. The cost of SaaS is slightly artificial but there is additional labor that is constantly going into it vs a cryptocurrency or handbag. 

This is not to say that selling handbags is an easy business. The value is in the raw materials, meticulous labor, supply chain logistics, branding/marketing, and end product. The value of cryptocurrencies is purely the marketing/branding. Even with innovation in crypto, someone else can copy the innovation and create a better brand. It would be like if every handbag maker had to open source every part of their process except their name. You could create a Gucci handbag tomorrow except you just couldn’t call it Gucci. Beyond that, it could be exactly the same in every single way. This is a zero barrier to entry business.

This makes crypto even more superficial than fashion.