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Crypto 101 Chapter #6 - Quantity of Bitcoin

Crypto 101 Chapter #6 - Quantity of Bitcoin
George Samprovalakis 21 September 2018

The Scarcity of Bitcoin

Fiat currency has a technically unlimited supply in the sense that governments can produce money whenever they want. Obviously, they don’t do that because it will lead to inflation, so the production and release of money is controlled by the government based on intensive research on market trends and needs. Bitcoin, as you might have guessed, does not work the same.

Because Bitcoin is decentralized, there is no authority that decides when to make new bitcoins. The system is designed so that new bitcoins can only be created as part of a reward system for the miners.

And the reward is well-deserved: the backbone of the Bitcoin system is cryptography, or the art of writing and solving codes which requires a hefty amount of work to solve.

To update the blockchain, miners from all over the world have to race to solve a specific math problem called SHA-256, which stands for Secure Hash Algorithm 256 bit.

It’s basically a math problem wherein you’re given an output and you’re supposed to find the input, like solving for x and y given that x + y = 2.

The only way to solve this kind of problem is through guesswork, and to solve the SHA-256, you’d have to go through an insane amount of possible solutions before you find the answer—for which you’d need an extremely powerful (not to mention expensive) computer.

Miners invest a lot of money on these supercomputers (as well as the huge amount of electricity it needs to run) all to mine new Bitcoins.

Jason Bloomberg, in an article for Forbes, writes that the value of Bitcoin is representative of this effort: because mining bitcoins take hard work, they become more valuable. So, first point to its scarcity is that bitcoins are hard to come by. You’d need a sizeable investment just to be able to create new bitcoins.

But they’re even made scarcer due to the fact that there can only ever be a certain number of bitcoins in existence, which is 21 million. (If you’re wondering why 21 million, it’s basically because that’s what’s written in the source code.)

The cap on Bitcoin production is there to ensure that Bitcoin wouldn’t ever be hyperinflated.

It’s even designed to be produced steadily: the reward system goes by half every 210,000 blocks added to the chain (i.e., every four years), with the SHA-256 problems even varying in difficulty depending on the amount of miners—more miners mean harder problems to ensure that not too many bitcoins get produced all at once.

Projecting from this trend, the last bitcoin is estimated to be mined around the year 2140. To put things in perspective, there are about 16.74 million bitcoins in existence at the time of writing.

That fewer and fewer bitcoins can be mined as time goes by drives up the interest of the people in the currency, because rarity is desirable and highly marketable.

This increases the value of Bitcoin, because it operates using a network—the larger the network, the greater use you can get out of Bitcoin.

Read the next chapter:  How Bitcoin Value is Affected Directly by Demand and Supply

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George Samprovalakis

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