Bitcoin Cost vs. Value

Cost-value graph on blackboard

The Bitcoin network is not free – it costs money to run. It is a network of super-computers. The miners, which run the network, get paid with transactions fees and rewards for providing this valuable service. They are currently rewarded with 25 bitcoins every 10 minutes and the transactions – this is the cost of Bitcoin. When I say value, I am not talking about price. Price is how much a bitcoin costs and value is how well of a service Bitcoin offers. The inflation started off at 50 bitcoins every 10 minutes in 2009 when Bitcoin was first launched. This number gets cut in half every 4 years. This “minting” or “mining” of the bitcoins is inflationary in nature. Every 25 new bitcoins mined will make the rest of the bitcoins worth a little bit less. So, the holders of bitcoins are paying the high transaction fees right now. However, this cost is offset by new-comers buying the newly minted bitcoins, so the current bitcoin holders aren’t taking 100% of the costs. The transaction fees are negligible right now but they will grow over time and should accumulate with the large quantity of transactions. Around 2140, Bitcoin will stop mining new bitcoins since it gets cut in half every 4 years. This is when the inflation stops. The price of bitcoins should be affected dramatically at the next halving scheduled to happen around the end of 2016 or beginning of 2017. The supply will be less and if the demand stays the same, then the price of the bitcoins will have to go up. Currently, the price staying high depends on the number of people entering the bitcoin purchasing market. It seems to be maintaining to some extent right now. The price is still around $250 per bitcoin at the time of this writing. The miners are able to sell their bitcoins. The $250 price seems low compared to the high of $1150, but the high was an artificial spike. The average price of bitcoins has steadily risen since the launch of the Bitcoin network. Some would argue that since the price of the current holders of bitcoins depends on new generations of buyers, then Bitcoin must be a pyramid scheme. However, it is not since the value of the services offered by Bitcoin, the blockchain, and bitcoins. And, the fact that the inflation steadily goes away. If the number of bitcoins generated instead doubled every 4 years instead of halving every 4 years then that would make it much more similar to a pyramid scheme. If it stayed the same, then I think the value of the services offered by Bitcoin would still outweigh the costs of inflation.