Determining the Usefulness of the Bitcoin

Determining the Usefulness of the Bitcoin

How many bitcoins are in circulation around the world? At the time of this article, approximately 17 million bitcoins are circulating (up from 10 million bitcoins in 2013), with a cash supply of about $6 billion in 2016 (compared with $1 billion in 2013). The quantity of a bitcoin in circulation is automatically defined by a network of computer servers, called minors, scattered around the world. They are responsible for confirming transactions and adding them to a decentralized transaction log. The volume of bitcoins in circulation will reach precisely 21 million units by 2040.

Victim of its success, the bitcoin network, and its current configuration, will soon saturate itself, which can cause both traffic congestion and degradation of service. Faced with this danger, a solution seems to be needed: introduce technical innovations in order to allow the network to absorb more traffic. How are bitcoins produced? This is where it gets a bit technical – and a bit strange. But why should people buy bitcoin?

Bitcoins are “excavated” according to a predefined algorithm; They come in bundles of 25 units. The role of the algorithm is to ensure that the progress of the bitcoin stock stays increasingly slow, halving the reward every four years. Thus, in early 2017, the reward fell to 12.5 units. At the same time, the level of difficulty to be solved increases with time, which has the effect of spacing the rewards out.

The algorithm was designed in such a way that the Bitcoin behaves exactly like a rare commodity whose exploitation offers decreasing marginal returns. This is a bit like gold or oil, for example (easy and cheap to find at the beginning, then more and more difficult and expensive). In order to undermine bitcoins, more and more time and resources are needed (computing power, hardware, developers). The result is that, although it is virtual, the bitcoin is a constrained commodity.

The algorithm, thus, gives the bitcoin an immunity against inflation. In this, the Bitcoin is just the opposite of the Linden dollar, the online virtual world currency. The latter is produced by a central authority, a de facto monopoly, used at will, without any limit. The rarity of the Bitcoin is one of the elements giving it value. Another element is its usefulness as a means of payment.