Controlled supply
In a centralized monetary system, base money is issued by a central bank as either cash or reserves in the banking system. On top of this, commercial banks create "money" through double-entry bookkeeping whenever they lend money - a process known as fractional-reserve banking. When transfers between account holders at different banks are made, there is a corresponding transfer of reserves at the central bank. The money supply, as usually defined, includes cash and commercial bank-created money, but not reserves. There are two views of how the money supply is controlled. The textbook view is that the central bank controls the money supply, increasing it at a rate that is supposed to match the growth of production so that prices remain stable. The central bank does this by adding reserves through open market operations which banks then lend out. A second view - endogenous money - is that the money supply is controlled by banks, who lend to any credit-worthy customer and borrow reserves later as needed. In this view, the central bank expands or shrinks the supply of base money as necessary to achieve its target interest rate.
In a fully decentralized monetary system, there is no central authority that regulates the amount of base 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
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[1]. This algorithm was chosen because it approximates the rate at which commodities like gold are mined. Users who use their computers to perform calculations to try and discover a block are thus called Miners.
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% |
Money Supply
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.
Deflation
Because the monetary base of Bitcoins cannot be expanded, the currency would be subject to severe deflation if it becomes widely used. 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 counters this criticism, as deflation occurs in all stages of production and entrepreneurs also benefit from it. As a result, profit ratios tend to stay the same and 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. 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