Bitcoin is the scarcest asset on the planet because there will only ever be twenty-one million (21,000,000) bitcoin in existence — no more, no less. No one party can change, tamper, or adjust Bitcoin's supply since it’s encoded into the Bitcoin Core client. There is no central party to blackmail or persuade change to Bitcoin's supply, no center to hack, nor any infrastructure to demolish.
There will only ever be 21,000,000 bitcoin in the world.
Since Bitcoin's supply issuance decreases every four years, Bitcoin's inflation rate also slows down every four years, up until the year 2140.
Inflation is the rate of decrease in a money's purchasing value. When goods and services are priced in a particular currency, the prices increase as the supply of the currency increases.
The Philippines' average inflation rate since 1986 is 5.8%, which means your money has devalued 5.8% every year over the past 25 years.
The worst thing about inflation is that it is unpredictable and can get out of hand quickly when the central government mishandles it. For example, the inflation rate in Venezuela went from 11.38% in 1985 to 65,374% in the year 2018. Yep, you read that right. 65,374%.
Countless other countries can also be examples of how bad inflation can get. Zimbabwe, Sudan, Lebanon, Argentina, Yemen… The list goes on.
Inflation can have many causes depending on the country's circumstances. The money supply is one of the significant causes of inflation, but it’s not the only one.
With Bitcoin, the story is different. Over the past years, Bitcoin's inflation rate has steadily dropped every halving event, leading up to its current inflation rate of around 1.8%.
As more years and halvings go by, Bitcoin's inflation rate would steadily decrease over time until it eventually reaches zero by the year 2140. Bitcoin's inflation rate could never get out of hand, unlike what is currently happening in Venezuela and Lebanon.
The inflation rate and other rules in the Bitcoin protocol are all enforced and encoded. No one person or entity can change, alter, or tamper with anything.
Now that we've understood how bitcoin works, let's look into how bitcoin fares as a currency vs. other forms of money.
Quick exercise: Try to consider any other asset or commodity that can be viewed as a form of currency with a fixed supply already set in stone.
Paper money? No. Central banks and governments can always create more of these from thin air.
Gold and Silver? No. They are scarce, yes, but it's also true that there is always a chance for these commodities to be physically mined from places around the world.
Stones, seashells, cattle? No. Even though they were used as currencies before, they can be easily found anywhere.
Paintings and other art forms? No. Every piece of art is of its own kind, but art pieces lack other properties that money should have.
The bottom line is that there is no other form of money that has bitcoin's level of scarcity. As of the writing of this chapter, there are currently 18 million bitcoin in circulation out of the total supply cap of 21 million. That means there is only roughly 2.2 million bitcoin left without any owners.
Now you might be wondering, how can this be possible? Since bitcoin is a decentralized currency, where will the remaining 2.2 Million bitcoin come from? Good question. To answer this, we would need to understand how bitcoin is created.
Remember the miners we discussed in Pedro and Darna's transaction earlier? When they do their tasks correctly, these miners earn newly minted bitcoin as compensation, which is part of the remaining 2.2 Million bitcoin that do not have owners yet. You can review the mining process here.
The rate of new bitcoin coming in actually decreases every four years. This is what we call the Bitcoin halving.
Halving is a process of dividing the block reward received by miners into two (2). This happens roughly every four years.
In Bitcoin's history, there have been three halvings so far.
This halving process is estimated to continue until 2140, where there would be no more bitcoin left to mine. All this is done to control bitcoin's inflation rate while incentivizing miners worldwide to keep the blockchain secure and efficient.
Theoretically, bitcoin's halving process incentivizes miners to continue doing their job, assuming the price of bitcoin goes up. The way this works is as follows:
Halved rewards -> less supply -> more demand -> higher price
In this way, even though the rewards are halved every four years, miners would still receive roughly the same amount of compensation for their work in securing the blockchain. Historically, Bitcoin's halving events have shown a positive correlation with its price.
Now you might be wondering, what happens if the price doesn't go up with the halving events? Good question. The answer to this is…
The way this works is as follows:
Halved rewards -> bitcoin price goes down -> less incentive to mine -> miners stop mining -> mining becomes cheaper and easier -> more rewards for the miners who stay.
If more miners leave the network, the difficulty of mining will automatically reduce. This reduction in difficulty translates into more profits for miners since they would need to expend less energy, electricity, and computational power to do their job.
Bitcoin’s mining difficulty adjustment functions regardless of the bitcoin price going up or down.
Difficulty adjustment in bitcoin is done through the target number we discussed in the previous proof-of-work chapter. When more miners enter the network, the target number decreases, making it harder for miners to find the correct inputs. The opposite happens when miners leave the network. As the target number rises, the miners' jobs become easier.
Now let's talk inflation.