A new Bitcoin (BTC) is created by verifying previous BTC transactions on the blockchain, whereas with the USD, the Federal Reserve increases or decreases the money supply.
To understand this better, let’s take a quick look at how the supply of currency is managed.
USD and other fiat currencies (currencies backed by a nation) are based on an inflationary economic model. In an inflationary economy, citizens are meant to spend and consume more because the value of a dollar depreciates over time.
Each year, the government and central banks will increase the supply of money to outpace debt. Thus, encouraging citizens to buy more and save less.
Bitcoin has a controlled supply of 21 million BTC. Roughly every four years, less BTC are rewarded to miners. Bitcoin is based on a deflationary economic model. In a deflationary economy, the value of a currency appreciates over time.
In the short run, this increases saving (or hoarding) of the currency because the currency is cheaper. But in the long run, people will be able to use their currency to invest in the economy in a way that suits them.
This is because their purchasing power, or the value of the currency, has increased substantially since they first bought it.
Now that we’ve brushed up on these two different models, let’s take a closer look at how a transaction is verified on the blockchain and how bitcoins are generated.
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