Bitcoin has a maximum issuance and it is possible to regulate the distribution of coins on the network. The central system issues unsupported money, and thus devalues the work of those that receive the least.
To mitigate the economic crisis created amid the Covid-19 epidemic, the world’s governments have chosen to issue huge amounts of money. In this way, they artificially increase their reserve funds in fiat currencies unsupported since the Bretton Woods agreement was broken in 1971.
Satoshi Nakamoto, the entity behind Bitcoin, contemplated monetary inflation and compensation mechanisms in this protocol, which would contribute to bringing balance to the crypto economy.
In 2008, Satoshi explained that the price of the cryptocurrency will remain stable, provided that the total supply of coins increases in the same measure as the number of users. He added that there has to be a way to distribute the coins and that the best formula seems to be issuing them at a constant rate.
Bitcoin bases the distribution of money on transaction fees that the user pays and on the block reward. The latter consists of new coins, issued when a block is successfully mined.
Satoshi also explains that this reward mechanism provides the incentive for a node to run a proof of work (PoW) consensus algorithm on a block. Once the node claims the reward, it will circulate among other ecosystem participants.
This constant, but not magnified, issuance of coins is not an unwarranted injection of new money. That would undoubtedly undermine the economy, generating inflation anomalies, as has happened with the fiat system for 50 years. Satoshi explained that the protocol itself would regulate this issuance; thus, he would set the network’s difficulty proportionally to the increase in hash rate. In this way, increasingly powerful mining equipment is prevented from accelerating block production, thus receiving more rewards.
It is a few days before the next halving, or reduction of the mining reward to 6.5 BTC per block. Many people’s expectations in this regard are bullish, whilst others argue that there could be a period of decline. However, many members of the community are increasingly excited, since Bitcoin adoption is growing and the halving has never interfered with it.
Under this expectation of growth and adoption, the halving reduces the issuance and distribution of coins. Therefore, a strict application of the law of supply and demand, given that the coins are increasingly scarce, makes their price in US dollars or any other fiat currency higher. This is not a definitive or invariable constant, but the price of BTC until now increased in the measure of the reduction of its total issuance.
The history of Bitcoin’s crucial economic factors and events can be compared with the behavior of the fiat economy since the dissolution of the Bretton Woods agreement. This allows seeing how the prevailing financial system has increased the issuance and distribution of money in effective units. However, its quality and integrity as storage of value have not been taken into account and has caused it to depreciate.
By Alexander Salazar
