Controlled supply

In a centralized economy, currency is issued by a central bank, at a rate that is supposed to match the growth of the amount of physical goods that are exchanged, so that these goods can be traded with stable prices. The money supply is controlled by a central bank through Open Market Operations. In the United States, the Fed sets the Federal Funds rate, and more recently, prints money electronically in a process called Quantitative Easing.

In a fully decentralized monetary system, there is no central authority that regulates the amount of currency in circulation. Instead, currency is created by the nodes of a peer-to-peer network. The Bitcoin generation algorithm defines, in advance, how currency will be created and at what rate. Any currency that is generated by a malicious user that does not follow the rules will be rejected by the network and thus is worthless.

Currency with Finite Supply

File:Total bitcoins over time graph.png

Number of bitcoins over time

Bitcoins are created each time a user discovers a new block. The rate of block creation is approximately constant over time: 6 per hour. The number of Bitcoins generated per block is set to decrease geometrically, with a 50% reduction every 4 years. The result is that the number of Bitcoins in existence will never exceed 21 million.

Projected Bitcoins Short Term

Block	Reward Era	BTC/block	Year	Start BTC	BTC Added	End BTC	BTC Increase	End BTC % of Limit
0	1	50.00	2009	0	2625000	2625000	infinite	12.500%
52500	1	50.00	2010	2625000	2625000	5250000	100.00%	25.000%
105000	1	50.00	2011	5250000	2625000	7875000	50.00%	37.500%
157500	1	50.00	2012	7875000	2625000	10500000	33.33%	50.000%
210000	2	25.00	2013	10500000	1312500	11812500	12.50%	56.250%
262500	2	25.00	2014	11812500	1312500	13125000	11.11%	62.500%
315000	2	25.00	2015	13125000	1312500	14437500	10.00%	68.750%
367500	2	25.00	2016	14437500	1312500	15750000	9.09%	75.000%
420000	3	12.50	2017	15750000	656250	16406250	4.17%	78.125%
472500	3	12.50	2018	16406250	656250	17062500	4.00%	81.250%
525000	3	12.50	2019	17062500	656250	17718750	3.85%	84.375%
577500	3	12.50	2020	17718750	656250	18375000	3.70%	87.500%
630000	4	6.25	2021	18375000	328125	18703125	1.79%	89.063%
682500	4	6.25	2022	18703125	328125	19031250	1.75%	90.625%
735000	4	6.25	2023	19031250	328125	19359375	1.72%	92.188%
787500	4	6.25	2024	19359375	328125	19687500	1.69%	93.750%

Projected Bitcoins Long Term

Block	Reward Era	BTC/block	Year	Start BTC	BTC Added	End BTC	BTC Increase	End BTC % of Limit
0	1	50.00000000	2009.007	0.00000000	10500000.00000000	10500000.00000000	infinite	50.00000006%
210000	2	25.00000000	2013.000	10500000.00000000	5250000.00000000	15750000.00000000	50.00000000%	75.00000008%
420000	3	12.50000000	2016.993	15750000.00000000	2625000.00000000	18375000.00000000	16.66666667%	87.50000010%
630000	4	6.25000000	2020.986	18375000.00000000	1312500.00000000	19687500.00000000	7.14285714%	93.75000010%
840000	5	3.12500000	2024.978	19687500.00000000	656250.00000000	20343750.00000000	3.33333333%	96.87500011%
1050000	6	1.56250000	2028.971	20343750.00000000	328125.00000000	20671875.00000000	1.61290323%	98.43750011%
1260000	7	0.78125000	2032.964	20671875.00000000	164062.50000000	20835937.50000000	0.79365079%	99.21875011%
1470000	8	0.39062500	2036.956	20835937.50000000	82031.25000000	20917968.75000000	0.39370079%	99.60937511%
1680000	9	0.19531250	2040.949	20917968.75000000	41015.62500000	20958984.37500000	0.19607843%	99.80468761%
1890000	10	0.09765625	2044.942	20958984.37500000	20507.81250000	20979492.18750000	0.09784736%	99.90234386%
2100000	11	0.04882812	2048.934	20979492.18750000	10253.90520000	20989746.09270000	0.04887585%	99.95117198%
2310000	12	0.02441406	2052.927	20989746.09270000	5126.95260000	20994873.04530000	0.02442599%	99.97558604%
2520000	13	0.01220703	2056.920	20994873.04530000	2563.47630000	20997436.52160000	0.01221001%	99.98779307%
2730000	14	0.00610351	2060.913	20997436.52160000	1281.73710000	20998718.25870000	0.00610426%	99.99389658%
2940000	15	0.00305175	2064.905	20998718.25870000	640.86750000	20999359.12620000	0.00305194%	99.99694833%
3150000	16	0.00152587	2068.898	20999359.12620000	320.43270000	20999679.55890000	0.00152592%	99.99847420%
3360000	17	0.00076293	2072.891	20999679.55890000	160.21530000	20999839.77420000	0.00076294%	99.99923713%
3570000	18	0.00038146	2076.883	20999839.77420000	80.10660000	20999919.88080001	0.00038146%	99.99961859%
3780000	19	0.00019073	2080.876	20999919.88080001	40.05330000	20999959.93410001	0.00019073%	99.99980932%
3990000	20	0.00009536	2084.869	20999959.93410001	20.02560000	20999979.95970001	0.00009536%	99.99990468%
4200000	21	0.00004768	2088.861	20999979.95970001	10.01280000	20999989.97250001	0.00004768%	99.99995236%
4410000	22	0.00002384	2092.854	20999989.97250001	5.00640000	20999994.97890001	0.00002384%	99.99997620%
4620000	23	0.00001192	2096.847	20999994.97890001	2.50320000	20999997.48210001	0.00001192%	99.99998812%
4830000	24	0.00000596	2100.840	20999997.48210001	1.25160000	20999998.73370001	0.00000596%	99.99999408%
5040000	25	0.00000298	2104.832	20999998.73370001	0.62580000	20999999.35950001	0.00000298%	99.99999706%
5250000	26	0.00000149	2108.825	20999999.35950001	0.31290000	20999999.67240001	0.00000149%	99.99999855%
5460000	27	0.00000074	2112.818	20999999.67240001	0.15540000	20999999.82780001	0.00000074%	99.99999929%
5670000	28	0.00000037	2116.810	20999999.82780001	0.07770000	20999999.90550001	0.00000037%	99.99999966%
5880000	29	0.00000018	2120.803	20999999.90550001	0.03780000	20999999.94330001	0.00000018%	99.99999984%
6090000	30	0.00000009	2124.796	20999999.94330001	0.01890000	20999999.96220000	0.00000009%	99.99999993%
6300000	31	0.00000004	2128.788	20999999.96220000	0.00840000	20999999.97060001	0.00000004%	99.99999997%
6510000	32	0.00000002	2132.781	20999999.97060001	0.00420000	20999999.97480001	0.00000002%	99.99999999%
6720000	33	0.00000001	2136.774	20999999.97480001	0.00210000	20999999.97690000	0.00000001%	100.00000000%
6930000	34	0.00000000	2140.767	20999999.97690000	0.00000000	20999999.97690000	0.00000000%	100.00000000%

Inflation and Deflation

While the number of bitcoins in existence will never exceed 21 million, the money supply of bitcoins can greatly exceed 21 million due to Fractional-reserve Banking. So while the limited number of "hard" bitcoins will cause deflation in the long term due to positive non-zero reserve requirements, a fast increase in the money supply due to an adoption of Fractional-reserve banking can cause inflation in the medium term.

Worth noting are the Keynesian economic arguments against deflation; such that deflation tends to reduce profits and hence provides a dis-incentive for entrepreneurs to continue their operations. The Austrian school of thought adequately counters this theory, as deflation occurs in all stages of production and entrepreneurs also benefit from it. As a result, profit ratios tend to stay the same, only their magnitudes change. In other words, in a deflationary environment, goods and services decrease in price, but at the same time the cost for the production of these goods and services tend to decrease proportionally, effectively not affecting profits at all.

Price deflation encourages an increase in hoarding - hence savings - which in turn tends to lower interest rates and increase the incentive for entrepreneurs to invest in projects of longer term.

See also

• Milton Friedman interview, where he proposed to replace the central bank with a computer, and to fix the money supply growth at 4% annually
• Deflationary spiral