This is a continuation of our post: What is Bitcoin?
Bitcoin Supply is Limited!
Traditional Fiat currencies such as dollars, euros, yen, etc. have an unlimited supply issued by the central banks and can manipulate the value of a currency relative to others. The holders of these currencies bear the cost of this manipulation made by the central banks. But in a complete decentralised monetary system like Bitcoin, where no central issuing authority regulates the monetary base, the supply works differently. Currency is generated by the nodes of a global peer-to-peer network. It is tightly controlled by the algorithm on which the Bitcoin system is built. The Bitcoin generation algorithm defines at what rate the currency should be delivered and how many new Bitcoins should be generated. A small number of new Bitcoins are released every hour and will continue to do so at a diminishing rate until a maximum of 21 million has been reached.
This diminishing supply algorithm was chosen to create new Bitcoins but cap its supply. The rate of block creation, one block every ten minutes, was chosen to mimic the rate at which precious metals like gold and silver are mined. Hence the volunteers who use their high powered computers, to perform the calculations and discover a new block are known as Miners. Every time a miner discovers a new block some amount of Bitcoins are rewarded to him. The Bitcoin algorithm also controls these rewards, and they keep reducing then over time. So what were 50 Bitcoins as a reward for one block completion has then come down to 25 Bitcoins, and now it is 12.5 Bitcoins. This reward rate also will keep on reducing with time. So as we said before the total supply of Bitcoins is capped at a number which is slightly less than 21 million Bitcoins. As of May 2109, a total of 17.69 million Bitcoins are issued and 3.3 million Bitcoins are left to be mined. Currently, an average of 1,800 new Bitcoins is being mined per day. If the mining continues at the designed diminishing rate, the last Bitcoin will be mined in May 2140.
This anti-inflationary measure makes Bitcoin more valuable as an asset. It is basic economics. If the demand for an asset grows and the supply is kept constant, the value of that asset will increase.
When a request for a transaction is submitted, the protocol checks all the previous transactions to confirm that the sender has enough number of Bitcoin as well as the authority to send them. The system does not ask for his or her identity. The Bitcoin network is transparent, and the progress of a particular transaction is visible to all. Most exchanges are required by law to perform identity checks on their customers before they are allowed to buy or sell Bitcoin, facilitating another way that Bitcoin usage can be tracked. Hence Bitcoin cannot be an ideal currency for criminals, terrorists, money-launderers or anyone willing to do antisocial activities.
The address you use to send or receive Bitcoins is Pseudonymous, a public address without a name. This means no one can identify who you are when you use just your address to transact Bitcoins. But all transactions that happen with that address are recorded in the blockchain forever. So if your identity ever gets linked to your address, every transaction you made using Bitcoins will be linked to you. Hence the best practice is to use a new Bitcoin address for each of the transactions you make to avoid transaction linkage. This practice is also very clearly mentioned and recommended in the original Bitcoin whitepaper.
Next topic: How Bitcoin Works in Simple Terms