Understanding the limitation of bitcoin tokens, understanding that it is limited, that with the passage of time fewer will be issued is understanding a monetary system different from the prevailing monetary system in the fiat world, where governments issue new currencies without the backing of tangible assets and have value, because users place trust in those coins.
With the passage of time, a new generation of currencies, in this case digital, are closer to the public every day and today, everyone has heard the word bitcoin.
But… how does it really work?
What happens at a price when the supply is finite and also decreases over time, or at least just half is created, with increasing demand?
That is what you have to understand, in a thoughtful way:
“Bitcoin is itself a revolution for the economy and explaining what scarcity is, via the Stock to Flow model, gives us a very interesting long-term overview”
Understanding Stock to Flow (S2F)
Stock to Flow (S2F) is a measure used to evaluate the scarcity and value of a particular asset. It is commonly used in the analysis of commodities like gold, silver, and other precious metals, and has more recently been applied to cryptocurrencies like Bitcoin.
The S2F ratio is calculated by dividing the total stock (or existing supply) of an asset by the annual flow (or production) of that asset. The resulting number indicates how many years it would take to produce the entire existing supply of the asset, based on current production levels.
In the case of Bitcoin, the S2F ratio is particularly interesting because of its limited supply and programmed emission rate. As we know, there will only ever be 21 million Bitcoins in existence, and the rate at which new Bitcoins are produced is cut in half roughly every four years through a process known as halving.
This means that the S2F ratio for Bitcoin increases over time, as the existing supply of Bitcoin becomes increasingly scarce relative to the rate of new Bitcoin production. Proponents of the S2F model argue that this increasing scarcity is a key factor in determining the value of Bitcoin, as scarcity is generally associated with increased value in traditional assets like gold.
In fact, the S2F model has been used to predict future price movements for Bitcoin, with some analysts suggesting that the model accurately predicted the major price increases seen in 2013 and 2017. However, it’s worth noting that the S2F model has also been criticized by some experts, who argue that it oversimplifies the complex factors that influence asset prices.
Despite the debate around its accuracy, the S2F model remains a popular tool for evaluating the scarcity and value of Bitcoin and other assets. By looking at the ratio between the existing supply and annual production of an asset, the S2F model provides a useful framework for understanding the forces that drive asset prices and value.
The key data source for the stock-to-flow bitcoin chart is the supply schedule for bitcoin. This is the number of bitcoins that have been mined to date and will be mined in the future. Because the supply schedule of bitcoin is built into the Bitcoin code, we know exactly what the supply schedule will be in the future.
Bitcoin’s Emission Reduction Over Time
Bitcoin, the first and largest cryptocurrency, has a unique monetary policy that sets it apart from traditional currencies. Unlike fiat currencies, which are subject to inflation as central banks increase the money supply, Bitcoin has a limited supply of 21 million coins that will ever be issued. Furthermore, the rate at which new bitcoins are issued is cut in half roughly every four years, through a process known as halving.
When bitcoin was first created in 2009, the reward for mining a block (the process by which new bitcoins are created) was 50 BTC. In 2012, the first halving occurred, reducing the block reward to 25 BTC. In 2016, the second halving occurred, reducing the block reward to 12.5 BTC. The most recent halving occurred in May 2020, reducing the block reward to 6.25 BTC.
The purpose of halving is to ensure that the supply of bitcoin is limited and that it becomes increasingly scarce over time. This is in contrast to fiat currencies, which can be printed at will by central banks, leading to inflation and devaluation of the currency over time.
As the rate of bitcoin emission slows down over time, the amount of new bitcoins entering circulation decreases, making the currency increasingly scarce. This can have a positive effect on the value of bitcoin, as scarcity is a key factor in determining the value of any asset.
It is worth noting that the emission reduction will continue until all 21 million Bitcoins have been mined, which is expected to occur in the year 2140. After that, no new Bitcoins will be created, and the supply of the currency will be fixed at 21 million.
In summary, the emission of bitcoin is reduced with the passage of time through the halving process, which ensures that the supply of bitcoin is limited and becomes increasingly scarce over time.
This unique monetary policy sets bitcoin apart from traditional currencies and can have a positive effect on the value of the currency.
The world, the people, those who have not yet come to understand bitcoin well, will find that when they understand it, instead of thinking about buying a bitcoin, they will do so in sathosis (the eighth bitcoin decimal after the comma), because with over time, the acquisition cost of bitcoin against fiat currencies, could be much higher.
Not financial advice.