So, what’s up with Bitcoin? Why does it still exist? What makes it special? Bitcoin has often been referred to as digital gold, and that’s not because of how much it’s worth. Bitcoin’s creator intended for it to act similar to gold. So, how is Bitcoin like gold?
To begin with, we need to talk about value. For a bitcoin to be a currency, it has to be a store of value. The first thing people used as money were shells. They were used not because they had inherent value, but because the people using them decided they had value. The same can be said of both gold and bitcoin.
Bitcoin is anti-inflationary. Inflation happens when a country creates more money to add into the economy, thus causing the overall value of the currency to drop. This will never happen to Bitcoin for two reasons. First, bitcoins are produced at a constant rate. Knowing the technology used to mine gold, we know how fast gold can be extracted from the ground. That production can’t be sped up simply because someone wants it to. There is a constant rate of new gold introduced into the world. The same can be said of new bitcoins.
The second reason bitcoins can’t be inflated is because of how many bitcoins are possible to be mined. With gold, we know there is only so much in the earth. There is the possibility that we can mine it all, and if that happens, we won’t be able to create any more. Bitcoin’s creator set a limit to how many bitcoins will ever be mined. In the year 2140, the last of 21 million bitcoins will be mined, and no more new bitcoins will be created.
The miners who added the first blocks to the Bitcoin blockchain were rewarded with 50 bitcoins. That rate of introduction, 50 bitcoins per block, only lasted four years, however. In 2012, after 210,000 blocks were added to the blockchain, the number of bitcoins rewarded to miners was halved to 25. It halved again in 2016, from 25 to 12.5. The next halving will happen in May of 2020, dropping the reward for mining down to 6.25 bitcoins per block added to the blockchain. With fewer bitcoins entering circulation, the supply drops and the demand increases, increasing bitcoin’s value.
Miners provide equipment and pay to power them in order to run trillions of computations to place a new block on the blockchain about every ten minutes. When the miners are paid, new bitcoins enter circulation and it all happens on a set schedule.
Bitcoin was created to act like gold within the economic space. Acting as a store of value that can’t be inflated, bitcoin is a unique currency. Because of its correlation with the mining of gold, we refer to the process of creating new bitcoins as mining. In the next few lessons, we’ll discuss how the Bitcoin network works, starting with the hash function.