In November 2008, the unknown 'Satoshi Nakamoto' mysteriously released a paper titled 'Bitcoin: A Peer-to-Peer Electronic Cash System' via a cryptology mailing list. Also known as the Bitcoin White Paper, this nine and a half page document provided detailed analysis of a peer-to-peer electronic cash system created to combat the Internet's reliance on "financial institutions serving as trusted third parties to process electronic payments."
We do not believe the timing of events to be coincidental. This well-thought "purely peer-to-peer" network cut out the middle man for a reason. As major Wall St. banks began to collapse, Satoshi Nakamoto identified the "inherent weaknesses of the trust based model" and created a currency free from world government manipulations. Nakamoto aimed to put currency back in the hands of the people and restore faith in global commerce.
Bitcoin is unlike any other currency ever invented in that, the future supply can be determined with certainty. As you can see from the chart below, the logarithmic algorithm regulating the mining of bitcoin has a mathematical limit of 21 million. There will never be 21,000,001 bitcoins in existence. This means that once all bitcoins have been mined, there will be no inflation of the currency EVER AGAIN FOR ALL OF HISTORY. A truly amazing characteristic.
If bitcoins can't be "printed" like fiat government-backed currency, how are they released into circulation? To put it simply, they are "mined" by ultra-powerful server networks as they solve complicated computing problems. As of this writing, 15,075,575 bitcoins have been mined, which is roughly 75% of the eventual outstanding circulation.
Bitcoins have a built-in, predetermined rate of inflation. Currently, the currency is inflating at a rate of 25 BTC for every block added to the Bitcoin 'blockchain', as that is the current reward to miners for attaching a new block. As you can see from the chart below, we've been at a 25 BTC / Block inflation rate since November 2012, the last time the rate halved.
After bitcoin 15,750,000 is mined something interesting happens. The inflation rate drops from 25 to 12 BTC / Block and continues to halve after smaller and smaller increases in bitcoin circulation. Essentially, we are beginning to reach the plateau of the supply curve, a fact that will become more apparent after 15.75 million BTC mined.
With a truly finite supply, the question is, how strong will demand be in the future? Is speculative investment driving bitcoin exchange activity or are citizens of the world putting their trust in the currency? Can society make the transition from fiat cash and plastic cards to personal, encrypted wallets? We believe there will be significant insight gained from analyzing the price reaction to the 12 BTC / Block reward. Stay tuned for further discussion.
Tyler Logsdon is a CPA and Registered Securities Representative located in Newport Beach, California. He is actively employed in the blockchain industry.
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