Bitcoin is the first cryptocurrency and has been around since 2009. It’s now one of the most valuable currencies in the world, with a total market cap of over $100 billion USD. But what exactly is Bitcoin? How does it work? And why do people care so much about it?
Bitcoin is a deflationary currency.
Bitcoin is a deflationary currency.
- Deflationary currency: A currency that appreciates in value over time, as opposed to inflationary currencies which lose their purchasing power over time.
- Bitcoin is a deflationary currency because it has a fixed supply and its rate of issuance was designed to decrease over time (through mining). This means that there will always be less bitcoins available for purchase than there are now, so their value will increase relative to other currencies or goods/services that can be purchased with them; this is known as the “law of supply and demand”.
There will only be 21 million bitcoin in existence.
Bitcoin is a finite currency, meaning there will only be 21 million bitcoin in existence. This is different from fiat currencies, which can be printed at any time by central banks.
Bitcoin also has a deflationary nature: as more people use it and buy into the system, its value increases. This makes sense because if everyone who owns bitcoins wants to spend their money on something or invest in another cryptocurrency, then there will be less Bitcoin available for others (and therefore higher prices).
Because of this feature of bitcoin’s design–that it can only ever have 21 million coins–some people think that this means that its price will go up forever until all those coins have been mined out (or “mined”).
The central bank of bitcoin is the Bitcoin protocol, not a person.
The central bank of bitcoin is the Bitcoin protocol, not a person. It’s the source of all bitcoin transactions and mining, and it provides security for the entire ecosystem.
The Bitcoin protocol can be thought of as a kind of “digital democracy” where everyone has an equal voice in deciding how things are run–and making changes if they think something needs fixing or improving.
Every 210,000 blocks (roughly four years), the block subsidy is cut in half.
Every 210,000 blocks (roughly four years), the block subsidy is cut in half. At present, it’s 12.5 bitcoins per block. By 2020, that number will be 6.25 bitcoins per block; by 2024 it will be 3.125 bitcoins per block; and so on until we reach a point where only 1 bitcoin is generated per 2 million blocks.
The idea behind this is to ensure that there’s always an incentive for miners to keep mining–and thus keep Bitcoin secure–even as coins become harder and harder to mine over time due to their decreasing value from inflationary dilution caused by currency supply growth outpacing demand growth (which we’ve seen happen already).
The next halving will happen in 2020 and will reduce the block subsidy from 12.5 to 6.25 bitcoins per block.
The block subsidy is the amount of newly minted bitcoin awarded to the miner who finds the block.
The next halving will happen in 2020 and will reduce the block subsidy from 12.5 to 6.25 bitcoins per block.
Miners are incentivized to stay mining because they receive both new bitcoins in their block reward as well as transaction fees paid by users on the network who send transactions per block mined.
Miners are incentivized to stay mining because they receive both new bitcoins in their block reward as well as transaction fees paid by users on the network who send transactions per block mined.
The block reward is currently 12.5 bitcoins per block, which means that miners will earn roughly $20 million worth of BTC by successfully mining a single block today (assuming an average price of $3,000). This equates to about $838 million annually for all miners combined!
If it costs miners more than 6.25 free bitcoin to mine a block with today’s price of $3,000/BTC, then they will end up losing money!
As we saw above, if the price of bitcoin drops, miners will lose money. This is because they will have to pay more in electricity costs than what they get from mining blocks.
Let’s look at it another way: if miners earn less than 6.25 free bitcoins per block on average (because their mining profits are not enough to cover their electricity bills), then they’ll end up losing money!
When miners lose money, they stop mining or go out of business.
When miners lose money, they stop mining or go out of business. When miners stop mining, the difficulty of finding new blocks goes down and the block reward is worth more than it was before. This makes more miners interested in getting into the game again and helps keep Bitcoin alive.
This will reduce miner hash rate which will, in turn, increase transaction times and push transaction costs up.
Mining is a key part of the Bitcoin ecosystem, but it’s not without its problems. For example, miners can be centralized in certain areas where electricity is cheap and regulations are lax. This leads to an increase in miner hash rate which will, in turn, increase transaction times and push transaction costs up.
The best way to combat this problem is by encouraging more people around the world to start mining on their own computers instead of depending on others for their livelihoods (and profits).
Only 6% of bitcoin has been mined so far and we are currently mining ~900 new “free” bitcoins per day, but this number will decrease to ~450 new “free” bitcoins per day after halving!
You might be wondering what this has to do with the price of Bitcoin. Well, it’s simple: the amount of new bitcoins being created every day is fixed at 12.5 BTC per block, but that number halves every four years until all 21 million bitcoins have been mined (see illustration below). So far only 6% of all available Bitcoins have been mined and we are currently mining ~900 new “free” bitcoins per day, but this number will decrease to ~450 new “free” bitcoins per day after halving!
So how does Bitcoin survive with only 1/4th of its original profitability?
Bitcoin is a deflationary currency. This means that its value increases over time, not decreases. This is because only 21 million bitcoins will ever be mined, so there will never be more than 21 million of them in circulation at any given time.
Over time, people have realized that they don’t need to mine bitcoin anymore because they can just buy it instead–and this has led to a decrease in miners’ profitability throughout the years.
Conclusion
So we’ve seen that mining for bitcoin is a profitable activity, but only if its price stays above the cost of mining. If it doesn’t, then miners will stop mining and the network will slow down or even shut down completely. In order to keep this from happening we need more people buying bitcoin so that miners can continue mining at least until the next halving in 2020 when they will be paid just half as much per block mined! The best way to do this is by convincing others of Bitcoin’s value by explaining why its different from traditional currencies; namely because it cannot be counterfeited or inflated away by governments like fiat currencies can be.