Bitcoin emission

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With a centralized economy national currency is issued by the Central state bank in the amount commensurate with the amount of goods and services produced within an economy. Thus, prices are getting stable and money stock is under control. Central bank increases monetary base by issuing currency and increasing money stock in the process of quantitative easing.

In case of a decentralized monetary system human interference in the process of currency issue is prohibited. Thus, currency issue is completely under control of a cryptographic algorithm that follows the rules of a peer-to-peer (P2P) blockchain. Such algorithm can determine frequency, specific time and number of issued currency units. Attempts to change (or crack) data on the number of issued currency units that do not conform to the rules of the entire blockchain will be cryptographically rejected. It is possible due to the ability to verify transactions without having to synchronize with the entire blockchain.

Currency with limited issue[edit]

Bitcoins are created when user finds a new block of a blockchain. Frequency with which new blocks are generated is constant: six blocks per hour. The number of bitcoins issued in one block decreases geometrically. Reduction rate is 50% in every four years. As a result the algorithm is following clearly detailed schedule according to which the number of bitcoins will never exceed 21 million. The schedule for the issuance of 21 million bitcoins consists of a four-year issue cycle when a certain number of bitcoins is issued and when this number is reduced twice. The mathematical justification for choosing the number of bitcoins, equal to 21 million, corresponds to the rate of gold mining as opposed to the demand for it.

Deflation[edit]

Since the total number of bictcoins cannot be increased, the currency will experience deflation in case it becomes widespread. Keynesian economists are having large disputes about the fact that deflationary spiral has an adverse effect on economic growth as it motivates people to save but not spend money by means of investment or employment creation.

At the same time Austrian economic schools say that as deflation occurs at all levels of production, entrepreneurs and investors will be able to benefit from this. As a result, the ratio of costs and revenues will remain unchanged, only the size of capital will change. In other words, goods and services are cheaper in a deflationary environment and the costs of their production are getting proportionally lower. At the same time demand is not affected. Price deflation encourages people to save money and the number of saved funds will lead to the increase in capital and create necessary incentive for entrepreneurs to make investments.

See also[edit]