Bitcoin Economics

Dive deeper into Bitcoin economics

Updated over a week ago


This article covers Bitcoin economics. We highly recommend reading and understanding Bitcoin mining and Bitcoin blockchain to gain a better connection to information in this article.

Bitcoin Supply

The supply of bitcoins is the total number of bitcoins that have been created and are in circulation. The total supply of bitcoins is limited and is determined by a predetermined algorithm, which means that the number of bitcoins in circulation will never exceed a certain maximum number. This is in contrast to traditional fiat currencies💡, which are often subject to inflation and can be printed by central banks at will.

💡 Fiat currencies

A fiat currency is a form of money that is issued by a government or central bank and is not backed by a physical commodity, such as gold or silver. The value of fiat money is derived from the relationship between supply and demand in the economy, as well as the stability of the issuing government. The USD was traditionally backed by gold, but this was removed in 1971, allowing the government to mint unlimited dollars without any asset backing required.

The maximum supply of bitcoins is set at 21 million, and it is estimated that over 18 million bitcoins have already been mined as of December 2021. This means that there are only a few million bitcoins left to be mined, and the total number of bitcoins in circulation will eventually reach the maximum supply.

The limited supply of bitcoins is one of the key features of the cryptocurrency and is intended to help ensure its value and scarcity. As the use of bitcoin continues to grow and evolve, the supply of the coins will continue to be a key factor in its economics and value.

Bitcoin Halving / Inflation

The bitcoin halving, also known as the "halvening," is a predetermined event that occurs every four years (on average) in the bitcoin network. It is designed to control the rate at which new bitcoins are created and released into circulation.

Every time a block of transactions is added to the bitcoin blockchain, the miner who successfully mined the block is rewarded with a certain number of newly created bitcoins. This reward started at 50 bitcoins per block, but it is halved every 210,000 blocks, or roughly every four years. The purpose of this halving is to control the supply of new bitcoins and limit the rate at which they are created.

The first halving occurred in November 2012, when the block reward was reduced from 50 to 25 bitcoins. The second halving occurred in July 2016, when the block reward was reduced from 25 to 12.5 bitcoins. The third halving occurred in May 2020, when the block reward was reduced from 12.5 to 6.25 bitcoins.

The halving is a key feature of the bitcoin network and is one of the reasons why the supply of bitcoins is limited and subject to predictable inflation. It is also a key factor in determining the mining rewards and incentives for miners, which can impact the overall security and stability of the bitcoin network.

Unlike Bitcoin, fiat currencies are managed by central banks. They are in control of the money supply. If a government needs (or wants) more money, it can print more money. However, printing more money means that the currency in circulation loses value because the laws of supply and demand kick in.

Bitcoin inflation over block timeframe

Bitcoin Divisibility

Divisibility is the property of a good that can be broken into smaller amounts without losing value. The New Zealand Dollar is divisible as you have dollars and cents, gold on the other hand is not easily divisible into smaller denominations.

Each bitcoin can be divided into 100 million smaller units called satoshis, named after the pseudonymous creator of bitcoin, Satoshi Nakamoto. This high level of divisibility makes it possible for users to transact with very small amounts of bitcoin, even down to fractions of a satoshi. This can be useful for making transactions for very small amounts of money, such as buying a cup of coffee or paying for a small online purchase.

The divisibility of bitcoin is one of the key features that makes it a useful and versatile form of money. It allows users to transact with precision and to make payments for very small amounts of value.

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