Bitcoin vs Traditional Finance - PART 2
In the first post of this two-part series contrasting Bitcoin and the legacy financial system, we discussed how money moves around. This post will review how the money itself is managed: its creation and issuance.
Monetary Supply & Management of the US Dollar
The supply of US dollars (“how many dollars are out there”) is actively managed. The precise management structure is intricate and difficult to understand, much less explain. But there are a few moving pieces to the supply of the US dollar:
The number of US dollars in existence is largely managed by the US Treasury and the Federal Reserve, where the Federal Reserve purchases and monetizes debt issued by the US Treasury. Throughout the entire process, the number of dollars in existence is actively managed in an effort to maintain the stability of prices.
Additionally, individual large and small banks are capable of affecting the number of dollars in existence through the issuing of commercial and consumer loans.
And finally, as an added variable, the Federal Reserve targets a 2% inflation rate (measured by CPI) per year.
Put all of these together, and it's easy to see that this is a complex system. This system, the bedrock for the entire global economy, has certain efficiencies and inefficiencies. One thing to note is that the exact number of US dollars in circulation is unknown.
An audit of the total US dollar supply has never been performed–and likely cannot be due to the size of the project. Finally, there is no technical or theoretical limit to the number of US dollars that can exist.
Now let’s see how Bitcoin’s monetary supply is managed.
How Bitcoin Differs
Bitcoin’s supply is built on a completely different mindset–that being 100% known at any time, present or future.
The number of Bitcoins that exist at any given point in time–past, present, or future–can be known in seconds via any blockchain explorer (like mempool.space) or an individual's own node.
In addition, the maximum supply of Bitcoin (21,000,000) is known as well. In every node is a piece of code that ensures that nobody creates fake Bitcoins in excess of that 21 million maximum.
Not only that, but the issuance rate of Bitcoin (how many new Bitcoins are created, as a percentage of the Bitcoins currently issued) is known–past, present, and future. Currently, 6.25 new Bitcoins are brought into existence every 10 minutes. This equates to an annual inflation rate of approximately 1.75% inflation (Clark Moody, https://bitcoin.clarkmoody.com/dashboard/).
Bitcoin’s issuance rate drops by half approximately every 4 years. The next “halving” (as they’re called) will occur approximately early May 2024, at which point the number of new Bitcoins issued will drop to 3.125 every 10 minutes or an inflation rate of about 0.875%.
These different aspects of Bitcoin’s monetary management add together to create a mathematical certainty around how many Bitcoins exist, both now and in the future.
For a final note on Bitcoin’s monetary management, the network itself performs a full audit of every Bitcoin in existence every 10 minutes. While anyone can technically create fake Bitcoins whenever they want to, the counterfeits will be identified and rejected in very short order.
Bitcoin vs. Legacy Finance. Which is better?
We’ve now spent two full blog posts discussing the difference between the US dollar system and the Bitcoin network. Which is best?
Currently, it is hard to argue against the primacy of the US dollar, especially when considering its effects on the global economy. The US dollar is supreme throughout the world. The majority of international transactions are settled in the US dollar, even between non-US countries.
However, the human aspect of the US dollar’s monetary supply is a consideration. Humans make mistakes, and it is possible that the supply of dollars could be mismanaged, causing inefficiencies in the market.
Bitcoin has barely any track record on an international scale. It’s been around for just over 13 years, a mere 5% of the dollar’s lifetime. Bitcoin’s mathematical certainty, however, shouldn’t be overlooked. A monetary good with a hard-coded issuance schedule and maximum supply has never been experienced by humanity before, and the effects of that are not yet known.
Regardless of which monetary good is considered better, it is an exciting time to see the development of new technologies in the financial industry.
