Since the advent of Bitcoin software, the cryptocurrency queen price It has been in an ascending process.However, normally after strong increases, important corrections come that, if we observe them over time, usually represent a value of about ten times the price that a bitcoin had twelve or eighteen months ago.

The tendency to increase in value steadily over time is due to different parameters established for Bitcoin to tend to deflation. A limit set on the total number of coins that will be put into circulation, the progressive reduction of the bitcoin issuance rate and the hoarding thereof, are the three main factors that make bitcoin deflationary.

Apart from this, over time we find strong increases in the price of each bitcoin, which can multiply its value several times. This translates into a process of euphoria that usually lasts a few months after which comes a long process of falling in the price of bitcoins or depression, which is usually quite pronounced.

During the period of time when the value of bitcoins rises, hoarding occurs. This occurs in the face of runaway inflation in which the price of a product can be stable. But the amount of bitcoins to pay for any product drops significantly. During the periods of loss of value of the bitcoins we would be in the reverse process. That is, each time the products cost more bitcoins despite the fact that their unit value has not changed over time.

Deflation and inflation

The economy has two correlated periods in terms of the value of the products and the value of the fiat money. During the deflation process, the price of the products falls and, therefore, the value of the fiat money increases. During the inflation process, the price of products increases, so the value of fiat money decreases.

Deflation: It is a general and prolonged decrease over time in the prices of goods and services. It is usually characterized by a decrease in demand (people buy less) and an increase in productive capacity. This period is usually associated with processes of economic recession and economic and financial crises. It usually involves a reduction in economic activity, an increase in unemployment, an increase in economic uncertainty, an increase in interest rates due to the economic fall and there is a real fall in demand for products.

Inflation: It is a general and sustained increase in product prices over a period of time, which is usually approximately one year. When this happens, a greater amount of money is required to acquire the same quantity of goods than just before starting this process, which translates into a decrease in the capacity of purchasing power.

We can summarize deflation as a period of time where people have greater purchasing power, being able to acquire more goods and services for a lower cost and inflation is the opposite process, people have less purchasing power, being able to acquire fewer goods and services with the same money. So we can say that; deflation in Bitcoin leads to each Bitcoin acquiring a greater value over time.

If we look at inflation, here there could be an increase in prices that entails greater benefits for companies and possibly an increase in wages for workers (although this does not have to happen). If there were no wage increase, what would end up happening is that people would not be able to access basic goods and services, causing impoverishment of the people and a contraction of the economy.

Deflation in Bitcoin

The nature of deflation in Bitcoin contains two primary rules:

  1. Only a total of 21 million coins will be issued
  2. Every four years there is a 50% reduction of the bitcoin reward that the miners receive for the validation of the blocks. This reduction is called halving.

In addition to this, it must be taken into account that both hoarding and adoption by users keep the value increasing.

Limited money supply

The first great factor that influences the fact that bitcoins increase in value is in the limitation of the issue of the money supply (total amount of bitcoins that will exist) and in the halving process. These two elements cause the amount of total digital coins that can be distributed to be finite and the coin release to be automatically adjusted every four years. This makes the process transparent and implies an increase in value because every 10 minutes there are fewer coins that will reach the market. This is a clear example of deflation in Bitcoin.

Progressive emission reduction

Find the model you want in bitcoin mining process there are some norms that establish the consensus that all miners and nodes involved respect. The Bitcoin blockchain requires miners for the validation of the transactions and the generation of the blocks, and it also requires nodes to verify the transactions by grouping them into blocks. Block that are then stored and disseminated throughout the network. Mining is encouraged by two factors: transaction fees and the reward for generating the blocks.

When it's made a transaction with bitcoins (and with practically the majority of cryptocurrencies on the market) in addition to the amount that is sent to the recipient, an amount is marked that is the commission that the miner who validates the transaction in question will keep.

Additionally, miners receive a reward for validating transactions and creating blocks. Each of these blocks includes a certain number of new bitcoins that are put into circulation to exchange or store.

This form of issuance is programmed to gradually reduce the amount of bitcoins that are issued or discovered in each new block. In the Bitcoin code it is established that every 210.000 blocks, the amount of bitcoins emitted in each block will be reduced by 50% in a process that, as we have already mentioned, is called halving.

So every ten minutes a certain amount of bitcoins are injected into the network, which is adjusted every four years. This is until 2140, which will be when this bitcoin release process is finished. It will be at that time when the miners will be supported solely by the commissions of the transactions.

Energy consumption

Another important factor is in the energy consumption necessary to keep the blockchain and security in the Bitcoin network. Miners and nodes have the incentive to maintain the network for the reward that they receive fixed every 10 blocks that varies every four years. So they are compensated by the energy, computational and temporal cost for these operations.

When there is no compensation for this work, or rather it is no longer profitable, miners and nodes could stop working on transaction validation and network stability.

This is best understood with an example. We have a bricklayer who goes to a house to reform a room. The bricklayer has material costs, physical labor costs and it will take him a while to complete this work. When the work is done, you will present us with an invoice that will consider these factors and logically will report a certain economic benefit.

Miners do the same, but digitally. And the moment they do not receive a financial consideration that meets their needs and gives a return, they will stop working to maintain the network.

Thus the value of the bitcoins can only increase if the value of these increases. For example, a box of cookies that costs € 1, will cost less in bitcoins if the price of these increases. Although its price in fiat money does not suffer any variation.

Bitcoins acquisition

The value of bitcoins is also influenced by adoption and its hoarding or saving. Miners typically sell the amount of bitcoins needed to cover the fundamental costs: electricity, maintenance, and new equipment. The rest can be stored with the intention of selling it in the future, when the value of the bitcoins grows.

Let's take as an example the first time it was paid with bitcoins that was when Laszlo Hayneck he paid two pizzas at an American pizza chain and it cost him 10.000 BTC, which at the time was roughly $ 30. Those same pizzas in December 2017, when bitcoin was at $ 18.000 would have only amounted to 0.0016666 BTC.

Adoption as a payment method

The fourth and final factor for Bitcoin deflation is adoption as payment method. The more people choose to buy and sell with bitcoins, the more value they will have. Since the amount is finite, not only because there is a maximum amount of bitcoins that can be in circulation. But because people keep a part of these bitcoins and the rest that is available in the market is not the same as the one in circulation.

So that it is better understood. At the beginning of October, we found about 17.3 million bitcoins in circulation. But in reality they are not all in the market through sales offers. In fact, there is a smaller quantity that is impossible to quantify than is actually available on the market.