Bitcoin creator Satoshi Nakamoto certainly took his cue from gold when he thought about how to create a digital asset whose availability was limited. In the document in which he announced his invention to the world, the famous whitepaper, he states:

“The steady addition of a constant of amount of new coins is analogous to gold miners expending
resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”

Bitcoin miners are called so because they are the ones responsible for producing new bitcoins, just as gold miners are the ones who produce “new” gold through their mining.

Bitcoin miners employ a great amount of computing power to solve a mathematical puzzle that, if won, gives them the right to produce the next block, insert valid transactions in it, and receive newly issued bitcoins as reward. For the energy expended to create the new blocks on the blockchain, they are rewarded by the protocol itself with the issuance of new bitcoins (in addition to transaction fees).

Miners are particular nodes in the network, but not all nodes are miners. Nodes validate transactions, while miners enter validated transactions into the blockchain. The incentive mechanism that governs mining activity and ensures that network participants operate in accordance with the rules is the so-called Proof-of-Work algorithm.

Bitcoin vs Gold

Satoshi, even if started by looking at gold, has even managed to create a technically superior asset, and not only because of its digital nature, which makes it much more easily transportable and verifiable, but because he has created the only asset in the world that we can say is perfectly finite, as we know the maximum amount that can ever be created.

Even if in theory the amount of gold in the world is also finite, that amount is unknown. In fact, every year new deposits are discovered, and when the price increases and thus mining becomes more profitable, the amount of gold produced also increases, consequently increasing the amount of gold in circulation and thus its inflation.

As of today it is estimated that there is about 185 tons of gold in circulation. About half exists in the form of jewelry while about 1/3 is used as a store of value by banks and other institutions. Finally, only a small portion is used in dentistry, electronics and aerospace.

Regarding the “stock-to-flow” (S2F) ratio, or the ratio between the quantity currently on the market (stock) and its annual additional production (flow), gold’s S2F is about 62 (185,000 t / 3,000 t), and its inflation is about 1.6% per year (3,000/185,000*100).

How many new bitcoins are being produced?

As for bitcoin, Satoshi announced the rules of its issuance in a message at its launch:

“Total circulation will be 21,000,000 coins.  It’ll be distributed to network nodes when they create blocks, with the amount cut in half every 4 years.”

When Bitcoin was launched in 2009 the reward for the miner who produces the block (a new block is produced about every 10 minutes), was 50 bitcoins. In 2012 it became 25 bitcoins, then 12.5 in 2016 and 6.25 in 2020. In 2024 it will become 3.125 and so on.

In 2023 bitcoin inflation is about 1.8%, which is similar to gold levels. From April 2024 onwards, following the halving of the reward for miners, inflation will be lowered to about 0.8-0.9% per year. The reward will be gradually halved until the maximum limit of 21 million coins is reached, expected around 2140. After that, miners will be rewarded only with transactions fees.

Image Credits: Yegor Petrov