Bitcoin Economics

Abstract

What is most striking about the economics of bitcoin is the juxtaposition of the certainty of supply and the uncertainty of demand. The rate at which bitcoin is mined has been highly predictable and, unlike almost any other asset, currency or commodity, its ultimate supply is a known quantity, fixed in advance. There will never be more than 21 million coins. This feature makes bitcoin supply almost perfectly inelastic. No matter how high the price rises, miners will not ultimately produce any more than the prescribed amount. Moreover, price rises will not even necessarily incentivize a more rapid mining of bitcoin. Even if they did, it would mean miners create more bitcoin today at the expense of creating less of it in the future since the total supply will reach a hard, asymptotic limit of 21 million coins, expected to be reached by 2040 or so, based on the mining algorithms…