What's Bitcoin Inflation? 🔑
What happens when the last Bitcoin is mined? Significance of 2140. Is 21 million limit a boomer myth in understanding scarcity. BTC v fiat, what's the play? Dig in for the Bitcoin inflation picture.
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Bitcoin has a unique approach to inflation compared to traditional currencies.
Bitcoin is not inflationary. It is designed to be deflationary in the long run.
The fixed supply and decreasing inflation rate are designed to protect Bitcoin from the erosive effects of inflation, unlike traditional fiat currencies.
Why is that? The answer is tied to a concept called halvings, the year 2140 and number 21 million.
What are Halvings? (as mentioned 100 times)
Bitcoin's supply is released gradually through mining.
Miners are rewarded with new Bitcoins for verifying transactions. Roughly every four years, this reward is cut in half. This is called a halving.
Read: What is Bitcoin Halving?🌛🌜
Unlike fiat currencies, Bitcoin has a fixed supply capped at 21 million coins.
This means no new Bitcoins can be created beyond this limit.
19.70 million is already mined and is in circulation.
Read: 840,000 Blocks of Truth 🙌🏼
Why 2140?
Satoshi Nakamoto, Bitcoin's creator, programmed these halvings to continue until the total supply reaches 21 million.
The final halving is estimated to occur in 2140, 30 halvings from now.
At that point, the reward will be less than one satoshi (the smallest Bitcoin unit).
Satoshi himself explain the mechanics here 👇
That makes Bitcoin 'sound money’?
With each halving, the issuance of new Bitcoins decreases.
Over time, this diminishing supply, combined with a constant (or potentially increasing) demand for Bitcoin, can lead to deflationary pressure.
In simpler terms, as fewer Bitcoins are introduced, each existing Bitcoin becomes relatively more valuable.
This scarcity, like gold, is why some call it sound money.
Plus, it's digital, so it's tough to lose or damage.
Read: Bitcoin is physical: Bits and Bytes have to live somewhere
Critics like Peter Schiff contest Bitcoin's status as money, let alone sound money.
Schiff's argument is based on a more traditional understanding of sound money.
Historically refers to the sound made by dropping gold or silver coins on a hard surface.
Being a digital asset, lacks this physical attribute and therefore cannot be considered sound money by this definition.
He had predicted bitcoin’s decline in a 2014 interview with CoinDesk and called it Tulip Mania 2.0. He hasn't changed his stance since, but given the success he would have invested for the potential for profit.
Schiff said on an Impact Theory podcast with crypto investor Raoul Pal.
“Do I wish I had made the decision to have thrown $10,000, $50,000, $100,000 into it? … Sure. I may be worth hundreds of millions assuming I didn’t sell. But again, I don’t know what I would have done had I made that decision.”
Is Bitcoin truly inflation-proof?
There's some debate on this.
Technically, Bitcoin experiences a small amount of inflation as new coins are mined. The halving mechanism significantly reduces this rate over time.
Even with a minimal inflation rate, Bitcoin's value can still fluctuate significantly.
If Bitcoin's price appreciates at a faster rate than the inflation, it can still act as a hedge against inflation in traditional currencies.
Is it time to rewrite the “21 million in supply” story?
Lost Coins: Millions of Bitcoin are likely lost forever, stashed away in forgotten wallets or belonging to the mysterious Satoshi Nakamoto.
This puts a big dent in the actual circulating supply.
Hodlers on the rise: Investors like Michael Saylor are holding onto their Bitcoin for dear life, taking them out of circulation permanently.
With Bitcoin ETFs, big institutions are in the game too.
Legitimacy has expanded the participation canvas for the ecosystem.
Bitcoin as an asset to have in the longterm portfolio is the trend that's only growing.
Taking these factors into account, estimates suggest the real supply is closer to 16.8 million, a significant reduction from the advertised 21 million.
What happens when we finally reach that limit?
New Coin Rewards Stop: Miners won't receive new Bitcoins as block rewards.
Transaction Fees Take Over: Transaction fees will become their main source of income.
Potential Fee Increases: Transaction fees might rise in dollar terms to maintain profitability.
Difficulty Adjustment: The mining difficulty will automatically adjust to keep block generation consistent.
Bitcoin's Scalability Challenge: Bitcoin might not be ideal for small everyday transactions due to potentially high fees.
Layer-2 Solutions: Technologies like the Lightning Network could handle smaller transactions efficiently.
Sidechains as Alternatives: Sidechains could also be used to handle transactions outside the main Bitcoin blockchain.
Read: Bitcoin’s 21 million limit is a boomer myth by RJ Fulton, Blockworks
Is Bitcoin scarce? Rethinking units and value
How does the cap of 21 million play out in reality.
Bitcoin's supply limit: Finite, but not rare?
Bitcoin has a fixed supply of 21 million coins.
Each coin is divisible into 100 million satoshis (sats).
The current circulating supply is roughly 19.68 million bitcoins, translating to 1.968 quadrillion sats.
Satoshi supply compared to fiat currency - US Dollar.
Scarcity: A matter of perception?
Only 21 million people can own one whole bitcoin each.
There are currently around 1 million addresses with at least 1 BTC.
53 million addresses hold at least one satoshi.
If the current supply were distributed evenly among these addresses:
Each address with 1+ BTC would receive over 37 million sats ($25,500).
Each address with 1+ sat would receive $2.5 trillion (assuming 1 sat = 1 BTC).
Sats: A more abundant unit
The low price per sat (around $0.00069) makes them seem less valuable.
If every sat were worth 1 BTC, an even distribution would give everyone:
$16.7 billion BTC.
The lack of a widely accepted satoshi symbol hinders its adoption.
Rethinking scarcity through Satoshis
The concept of Bitcoin scarcity might be misleading when focusing on whole coins.
With sats, the picture changes.
Considering prices in sats could provide a more nuanced understanding of Bitcoin's value proposition.
Read: If you still think bitcoin is scarce, you’re suffering from fiat brain by David Canellis, Blockworks
Dynamics of Bitcoin inflation
An influence of a lot of factors - The halving events, the fixed supply cap, market sentiment, regulatory developments, and the evolving landscape of digital and traditional assets.
Bitcoin's scarcity highlights the complexities of valuing a digital currency and the different perspectives on its supply and demand dynamics
TTD Week That Was 📆
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Tuesday: Nigeria's Crypto Crime Thriller 🇳🇬
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