Bitcoin is the most important cryptocurrency because it was the first one was invented, but also because it was the first one to pave the way for the mass adoption of digital currencies. Today Bitcoin is used with online purchases, payments and it is also a valuable BTC investment.
What a lot of new users want to know is how new BTC is created because this is a decentralized currency. The supply isn’t controlled by any institution. In this article, we explain how new BTC enters the market and why it is important for investors.
How the Blockchain Network Operates
The number of new BTC is directly impacted by the operation of the blockchain network. The blockchain network is a peer-to-peer-based, decentralized payment system that works based on the input of the miners who validate the BTC transactions and get an appropriate block reward for their work. When the miners verify 1 MB of blocks of transactions, they need to solve a computational puzzle in order to add the transactions to the blockchain, and by doing that, new BTC enters into circulation.
Factors That Impact the Number of BTC
But in order to control the supply of BTC and its inflation rate, Satoshi Nakamoto, that is the developer of the blockchain network and the creator of Bitcoin, has written into Bitcoin’s code a protocol that cuts the block reward in half. The block reward is the primary incentive for mining and represents the main reason why anyone wants to mine; in addition to the block reward, miners are also compensated with transaction fees.
However, the block reward is what drives the profitability rate of mining. From 2009 to 2021, the block reward was 50 BTC and the Bitcoin halving, which is happening every four years, reduced the reward to 25 BTC in 2012. Then, in 2016 the reward was reduced to 12.5 BTC, and in 2020 it was set at 6.25 BTC. This process slows down the rate at which new BTC is created because it increases the cost of mining.
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Restricted Supply of BTC
The creator has also put a limit to the number of BTC that can ever be created to 21 million, which means the pool of bitcoins is restricted. At present, there are about 18.5 million BTC that have already been mined and are in circulation; otherwise, it takes about 10 minutes for one block of transactions to be added to the network. Or, in total, six blocks are validated within an hour.
Another factor that controls the number of BTC is the level of difficulty or Bitcoin mining. This is another factor that also impacts the number of blocks of transactions that are approved in the network because if the mining process is more difficult, the process of validation of the transaction will require more time than usual. Hence the number of new Bitcoins that are added to the system will be smaller because it will take more time for the block of transactions to be approved.
Generally, every two weeks or after 2,016 blocks are mined, the blockchain system adjusts the level of difficulty of mining. This is based on the total computing power in the network.
As we know, there is an enhanced interest in every aspect of Bitcoin, including mining, so the process of mining is pretty tedious, competitive, and time-consuming. But, the greatest advantage is the fact that Bitcoin is a rare, safe-haven asset because the system is fully decentralized.