Discover How Bitcoin’s Scarcity and Algorithm Control Inflation

Bitcoin’s scarcity, predictable supply, and investor behavior influence market dynamics, making it a unique and intriguing asset.

Lots of Bitcoins floating around in an empty dark space, one of them has a golden smile.
Created by Gabor Kovacs from DailyCoin
  • The inflation rate of Bitcoin has remained predictable.
  • The impactful Block Subsidy halving has shaped Bitcoin’s inflation rate.
  • Coin movements have offered valuable insights into accumulation and market trends.

Bitcoin reigns as the undisputed champion, captivating the attention of investors, technologists, and curious minds alike. 

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Bitcoin’s allure stems from its inherent scarcity, with a rigid cap of 21,000,000 coins, setting it apart from other assets and creating a sense of rarity and exclusivity.

A chart showing the percentage of Bitcoin mined up to its 21 million cap, alongside the BTC price chart.
Chart showing Percent of 21M Supply Mined for Bitcoin. Source: Glassnode

The information conveyed by this chart is as follows:

  • Circulating Supply represents the cumulative amount of Bitcoin that has been mined until now.
  • Remaining Supply indicates the number of coins yet to be mined, with the final coin estimated to be minted in 2140.
  • Percentage of 21M Bitcoin Supply Mined demonstrates the proportion of the total Bitcoin supply that has been mined thus far.

The mining process of Bitcoin adheres to a deterministic algorithm known as the Difficulty Adjustment, which governs the Bitcoin supply curve. 

How Bitcoin’s Algorithm Predictably Controls Inflation

This algorithm ensures that irrespective of the applied mining hashpower, the average block interval remains at approximately 600 seconds or 10 minutes. Such stability contributes to the predictability and reliability of the network.

Consequently, the inflation rate of Bitcoin is also deterministic. This rate is determined by dividing the daily issuance of newly minted coins by the circulating supply, providing us with an annual rate of supply expansion for the freshly minted BTC.

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Through Block Subsidy halving, occurring every 210,000 blocks, the inflation rate is roughly halved every four years. 

This mechanism leads to a perpetual decrease and eventual stabilization of the inflation rate. It is an integral part of Bitcoin’s design, ensuring a controlled and predictable supply of coins over time.

A chart showing the inflation rate of Bitcoin.
Chart showing Bitcoins Inflation Rate. Source: Glassnode

Tracing the Paths of Bitcoin Investors Over Time

The Bitcoin network has been operational since the genesis block on January 3, 2009. Coins have been mined, lost, purchased, and sold throughout this period.

We can categorize investors based on the time since their coins were last moved on-chain, as they accumulate and hold (or lose) coins over extended periods.

A chart showing the age bands of the supply with last activity ranging from 1+ year to 5+ years overlaid onto the Bitcoin price chart.
Chart showing the Activity of Bitcoin Supply. Source: Glassnode

As longer-term investors accumulate coins, these metrics generally rise. Conversely, when long-term investors spend and distribute their coins, this metric declines, resulting in older coins changing hands and becoming young again.

The Rise of Young Coins in Bitcoin Trading

These young coins are typically classified as coins that have been transacted within the last three to six months. This supply is unlikely to be lost and actively participates in the day-to-day trading of the Bitcoin economy.

The volume of younger coins tends to surge during two significant events:

  • Bull markets, as longer-term investors spend and divest their holdings in response to market strength.
  • Capitulation sell-off events, where widespread panic prompts coins of all ages to reenter the circulating supply.

A substantial increase in the volume of young coins suggests a greater supply available on the market, potentially overwhelming demand. Conversely, prolonged periods of accumulation result in more coins being placed in cold storage, reducing the immediate supply available on the market.

A chart showing the Supply activity with the activity being less than 6 months. A chart showing the percentage of Bitcoin mined up to its 21 million cap, alongside the BTC price chart.
Chart showing Activity of “young coins”. Source: Glassnode

On the Flipside

  • The limited block size and processing speed may result in congestion and higher transaction fees.
  • The concentration of mining power could compromise the decentralized nature of the network and lead to possible vulnerabilities.
  • While Bitcoin’s inflation rate is predictable, The deflationary nature of the currency could impact its utility as a medium of exchange. As price stability is essential for widespread adoption and use in everyday commerce.

Why This Matters

Understanding the scarcity and supply dynamics of Bitcoin is crucial for investors and enthusiasts alike. The limited supply of 21 million coins and the predictable inflation rate through mining contribute to Bitcoin’s value proposition as a digital asset.

To learn more about the current state of Bitcoin and what analysts are saying about it, read here:

Bitcoin at an Inflection Point? Here’s What Analysts are Saying

To stay updated on the recent development of Circle and the appointment of Heath Tarbert as Chief Legal Officer, read here:

Circle’s New Weapon: Heath Tarbert Joins as Chief Legal Officer

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Kyle Calvert

Kyle Calvert is a cryptocurrency news reporter for DailyCoin, specializing in Ripple, stablecoins, as well as price and market analysis news. Before his current role, Kyle worked as a student researcher in the cryptocurrency industry, gaining an understanding of how digital currencies work, their potential uses, and their impact on the economy and society. He completed his Masters and Honors degrees in Blockchain Technology within Esports and Business and Event management within Esports at Staffordshire University.