In my previous post, I described how the Bitcoin system succeeds at creating a public ledger that requires no centralised, controlling authority. Aside from decentralisation, another aspect of BTC is that it is anti-inflationary. In this (shorter) post, I delve into that.

(this post was first published on my wordpress blog)

But if miners create new BTC, how can that be anti-inflation?

I mentioned in my first crypto post that Bitcoin hedges against inflation because it is limited in supply, unlike the fiat money that central banks print. This essentially means that demand is the only factor driving the price of BTC. Since more people get involved with crypto every month, and the total cake is limited, the value of each slice of cake will increase in the long term. The cake is a lie BTC in this metaphor.

On the other hand, when you print money, the cake gets larger and larger, meaning that when cake expansion outgrows the demand for cake, the price can even drop! This is exactly what will eventually happen with the USD when you realise that 25% of all the existing cash was printed in 2020, let that sink in.

“But señor Jeff, how is anti-inflation possible when everyone just keeps mining and confirming blocks, wouldn’t that just increase the BTC supply?” Very perceptive of you, dear reader! Yes, that limited amount I was talking about is 21 million. However, we can all keep mining without running out of BTC in the foreseeable future. Why? Because the mining rewards decrease over time: after each 4 year period, the reward is halved.

BTC mining reward halving happens every 210 000 verified blocks. One block is created every 10 minutes, so this results in 1 halving every 3.99 (~4) years (source: investopedia.com).

Halving?

For example, in 2009, the BTC rewards were 50 BTC, whereas successful miners only receive 6.25 BTC in 2020. Without the halving, those 21 million BTC would have already been in circulation by the end of 2017...

It's important to realise that this doesn’t decrease the incentive for miners though, since BTC’s price has increased over the same 4 year period, still making mining a lucrative deal for miners. For example, in 2009, the mining reward (50 BTC) was worth less than 0.5$, but the 6.25 BTC were worth 50 000$ in 2020. This is proportional though, as there are more transactions every 10 minutes now then there were in 2009, so it takes more energy to mine.

We now learned how many BTCs will be mined every 10 minutes and that this amount decreases every 4 years. This means we can project when all the BTC will be mined: by 2140 (by today’s technology). Currently, about 89% of BTC is mined, meaning that most of its inflation is in the past. To put this into perspective: 89% of the BTC is already in circulation after about 10 years, while the remaining 11% will be released in the coming 100 years.

The amount of BTC in circulation for the coming 50 years and onwards. In orange, one can see that inflation did occur in the first couple of years of BTC, but will be nearly 0 in a couple of years (source: bitcoinblockhalf.com).

Digital gold?

This is how BTC tackles the problem of inflation and how it’s similar to gold, but digital. Both assets are anti-inflationary (limited supply that can increase a tiny bit: even new gold mines get discovered), permanently in existence once created, and their limited supply is ideal to make them a store of value: once you buy some, its value in 10 years will not be lower than it is today.

So as I said: BTC can essentially be thought of as an anti-inflationary asset, of which the price is nearly only driven by demand, since supply is a near constant. This doesn't mean there are no other threats to the BTC but I'll keep that for a future post. In my next post, I will go into BTC’s mysterious creator.

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