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School / Crypto-asset Fundamentals

Lesson 2 of 6 · 7 min

Bitcoin and the Idea of a Limited Supply

Lesson goalAfter this lesson you know how new bitcoins are created, why there will be at most about 21 million of them and why a limited supply alone does not guarantee a rising price.

Bitcoin was described in a short paper published in October 2008 under the name Satoshi Nakamoto, and the network was launched in January 2009. To this day nobody knows who is behind that name. Bitcoin has no company, no management board and no head office. It is maintained by developers, miners and users who run the software, and changing the rules requires broad agreement.

How new coins are created

Miners gather transactions into blocks and compete to be the first to solve a computational puzzle. The winner adds the block and receives a reward: newly created bitcoins plus the transaction fees. The network adjusts the puzzle’s difficulty roughly every two weeks, so a block is created about every ten minutes on average, no matter how many computers take part.

Every 210,000 blocks, roughly every four years, the reward is cut in half. This event is called the halving. In 2009 the reward was 50 BTC, and since April 2024 it has been 3.125 BTC per block.

You don’t have to buy a whole bitcoin

One bitcoin is divisible into 100 million satoshis. If the hypothetical price is €50,000, for €50 you get 0.001 BTC, or 100,000 satoshis, before fees. A high price per coin therefore doesn’t mean it is “too expensive”, and a low one doesn’t mean it is “cheap”. You will cover this in more detail in the module on fundamentals.

Why a limited supply is interesting

Central banks change the amount of money according to economic conditions. With Bitcoin, the issuance schedule is known in advance and hard to change. Supporters see this as protection against the dilution of money. Critics reply that an inflexible schedule is impractical, that the price swings wildly and that everyday payments in bitcoin remain rare. It is useful to understand both views.

Not all existing coins are available. Some have been irretrievably lost because their owners lost their keys. Nobody knows exactly how many, because a lost coin on the network looks no different from one that has simply sat untouched for years.

Remember

  • New bitcoins are created as a reward to miners, and a block is created about every ten minutes on average.
  • The reward is halved every 210,000 blocks, so the total supply stays below 21 million.
  • Bitcoin is divisible, so the price of one coin does not tell you whether it is expensive or cheap.
  • A limited supply does not guarantee a rising price, because demand can fall, and historical drops have been large.

Test your knowledge

To pass, you need to answer at least two thirds of the questions correctly. You can try as many times as you like.

1. This year miners double the power of their computers. What happens in the long run to the speed at which blocks are created?
2. A friend says: “Bitcoin is too expensive, I can’t buy even one, so I can’t own any.” What is correct?
3. An ad for a new token says: “The supply is capped forever at 1 million units, just like Bitcoin, so the price will surely rise.” Where is the flaw in this reasoning?