Economic   Information about Bitcoin

  • How are Bitcoins created?
  • How is there a value to a Bitcoin?
  • How is the price of Bitcoin determined?
  • Is it possible that Bitcoins become worthless?
  • Is Bitcoin a bubble?
  • Will it not be a limitation that Bitcoin has a finite amount?
  • Is a deflationary spiral a possible scenario for Bitcoin?
  • Isn’t volatility and speculation a problem for Bitcoin?
  • Can someone buy all Bitcoins?

How are Bitcoins created?

 You basically have earn Bitcoins like you dig for gold which adds ( if you are so lucky to find it) gold to the total global gold reserve

This competitive and decentralized process called “mining” Individuals are rewarded or paid by the Bitcoin network for their services and activities. Bitcoin miners are processing transactions and securing the network using specialized hardware and are receiving the new Bitcoins in exchange.

The Bitcoin protocol is specially programmed in such a manner that new Bitcoins are created at a fixed rate. This is what makes mining for Bitcoins such a competitive business.

when over time more and more miners join the network and start earning all from the same pool it will be harder and harder to actually make a profit on this. they are unable to manipulate the system so they have to find their way in how to cut their operation cost in order to get a positive ROI

Bitcoins are created at a decreasing and predetermines pace and predictable rate. The total amount of new Bitcoins created each year is automatically halved over time until Bitcoin issuance halts completely with a total of 21 million Bitcoins in existence. When this level is reached, the miners of Bitcoins will most likely only make money on supporting the numerous small transaction fees.

How is there a value to a Bitcoin?

In the old days shells Jade or ivory were also used as a legal form of money they all follow the following characteristics of money (portability, durability, scarcity, divisibility, recognizability and fungibility)

Bitcoin is based on Math, unlike gold or silver which is based on its physical properties or trust in central authorities (like fiat currencies). As with all currency, bit coin’s value comes only and directly from people willing to accept them as payment.  All that is needed for a kind of money to hold value is people to start using it and having trust in this currency. When we look at Bitcoin, this can be measured by its growing base of merchants startups and private users.

How is the price of Bitcoin determined?

The oldest way of value is dictating the value of Bitcoin and this is supply and demand. As a result when demand for Bitcoins increases, the price of the Bitcoins will increase, and when demand falls, the price falls. Currently there is only a limited number of Bitcoins in circulation and new Bitcoins are created at a predictable and decreasing rate, which will result in the fact that demand must follow this level of inflation to keep the price stable. Bitcoin is still a relatively small market at this moment so it doesn’t take enormous funds to move the market price up or down.

This results in a very volatile market which in turn is very interesting for traders.

Is it possible that Bitcoins become worthless?

The currencies in recent past that have become totally worthless are the ones that had a hyperinflation. The way Bitcoin is set up makes this scenario not possible, on the other hand there is always possibility of competing currencies, technical failures, political and regulatory issues to just name a few possibilities that could be the end of the Bitcoin. As a basic rule of thumb, no currency should be considered absolutely safe from failures or difficult times. But for the moment Bitcoin has proven reliable for the last couple of years since its inception and there is a lot of potential for Bitcoin to continue to grow. Still we are talking economics here and contrary what many claim, is able to predict what the future will be for Bitcoin.

Is Bitcoin a bubble?

An artificial over-valuation that will result in a sudden downward correction defines a bubble. A fast rise in price does not constitute a bubble.

The rate of Bitcoins is determined by question and demand by the thousands of people in this market and because of this question and demand dictates the rate.

Reasons for changes in sentiment might be a loss of confidence in Bitcoin, a large difference between value and price not based on the fundamentals of the Bitcoin economy, more coverage in the press creating more traders and any other human emotion that at the same time are reasons to speculative demand as they create a volatile market which allows for day trading to be active.

Bitcoin is also not a Ponzi scheme, as the definition of a Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money, or the money paid by subsequent investors, instead of from profit earned by the individuals running the business.

Will it not be a limitation that Bitcoin has a finite amount?

Bitcoin is the only currency which is capped in this case at 21 million Bitcoins. no other Bitcoins will ever be created this will not be a limitation thou as Bitcoins can be divided up to 8 decimal places ( 0.000 000 01 BTC ) and if so requires in the future,  even smaller units. As the average transaction size decreases, transactions could be simply be denominated in sub-units of a Bitcoin, such as Millibitcoins ( 1 mBTC or 0.001 BTC ).

Is a deflationary spiral a possible scenario for Bitcoin?

The deflationary spiral theory states that if prices are expected to fall, people will move purchases towards the future in order to benefit from the expected lower prices. That decline in demand will in turn cause merchants to lower their prices to try and in turn stimulate the demand, making the problem even worse and leading to an economic depression.

Although this theory is commonly used amongst central brokers to justify inflation, it does not look like it always the case. In Bitcoin’s case the value has gone up over time and yet the size of the Bitcoin economy has also grown dramatically at the same time. Because both the value of the currency and the size of its economy started at zero in 2009, Bitcoin has proven itself to be a counterexample to the theory and thus showing that it must sometimes be wrong.

Bitcoin is also not designed to be a deflationary currency. the concept is that Bitcoin is intended to inflate in its early years, and become stable in its later years. With a stable monetary base and a stable economy, the value of the Bitcoin should remain the same.

Isn’t volatility and speculation a problem for Bitcoin?

Volatility does not affect the main benefits of Bitcoin as a payment system to transfer money from point X to point Y. It is possible for businesses to convert to Bitcoin payments to their local currency pretty much instantly, allowing them to profit from the advantages of Bitcoin without being subjected to price fluctuations. Since Bitcoin offers unique features and properties numerous people choose to use Bitcoin. The more people will use it the more stable the rates become, so time will tell.

Can someone buy all Bitcoins?

Just a small fraction of Bitcoins issued to today are to be found on the exchange markets for sale. Bitcoin markets are the price of a Bitcoin will rise or fall depending on supply and demand. In addition, new Bitcoins will continue to be issued for decades to come. till the total amount of 21 million is reached. As a result even the most persistent buyer with deep pockets could not buy all the Bitcoins in existence.