We’re going to have to talk a bit about Bitcoin mining in order to understand why Bitcoin is disinflationary hard money.
There are computers all over the world dedicated to Bitcoin mining. Every ten minutes or so, a new block is mined and the computer that figure that out is rewarded with the opportunity to accept the Bitcoin reward, along with fees for transactions on that block. This video explains Bitcoin mining.
So how much Bitcoin is rewarded with each new block? When the Bitcoin network first went live the reward was 50 whole Bitcoin for every block mined, however a part of the code that runs Bitcoin core manages the amount issued in a way that cuts that amount in half every 4 years. Here is a quick breakdown of how time plays a role with Bitcoin issuance:
- Blocks are mined every ten minutes.
- A difficulty adjustment happens every 2 weeks. If more miners plug in to mine coins, the difficulty to do so will go up. If miners unplug the difficulty will go down. In this way the Bitcoin protocol ensures that new blocks are mined on average every ten minutes.
- Every 4 years the amount of Bitcoin that is rewarded per block is slashed in half.
Bitcoin code doesn’t actually operate based on time, other than ensuring that blocks are mined every 10 minutes on average. The code uses blocks mined to determine when the rest of the events occur.
What the heck does any of this have to do with Bitcoin being disinflationary money? That boils down to what it costs to mine Bitcoin, because miners aren’t going to sell their Bitcoin for less than what it costs to generate them. And so as more miners add “hashpower” to the network, it gets more difficult to mine a block, which means they mine less. So it costs them more electricity to mine a block.
Back to the (on average) 4 year halving event. Rewards initially started at 50 new Bitcoin per block mined. Combine that with very few miners actually trying to mine Bitcoin and you have easily (cheaply) mined Bitcoin. When the first halving happened the new block rewards went to 25. Then it halved again after 4 years and it was at 12.5. Another halving happened in May 2020, and the brought the reward down to 6.25.
Since this time the amount of hash power added to the Bitcoin network is unimaginably higher. So, it is much harder to mine a block than it was when the reward was 50 Bitcoin per block. So from 50 Bitcoin to 6.25 for every block mined, and unimaginably harder to mine a block means the cost to mine a block requires that miners charge much more for the Bitcoin they are mining. This is a major reason why Bitcoin is disinflationary hard money. As previously discussed, there will only ever be 21 million total Bitcoin, which is why we can call Bitcoin “hard money.” And since the halvings occur every 4 years, Bitcoin is also disinflationary.