Where do bitcoins come from?

Another important question to answer, which also relates to the trust issues we have initially discussed with fiat money, is where bitcoins come from.

So far, we have discussed how the network comes to an agreement on what transactions of bitcoin have taken place, transactions that are sending bitcoin from one address to another address. Where did these bitcoins come from in the first place and are there still new bitcoins being created?

Earlier we talked about how miners spend computational power to generate proofs of work, and how this process plays an integral part of how Bitcoin works. There has to be an incentive for miners to incur costs for electricity and dedicating computers to perform this valuable work.

To incentivize miners, they are rewarded with bitcoin whenever their block is successfully added to the network. This bitcoin that they are rewarded with consists of two parts:

• The first is that the users that are sending bitcoin transactions are paying transaction fees to incentivize miners to include their transactions in their blocks. These transaction fees go directly to the miner.

• The second is that every new block added to the bitcoin blockchain includes a transaction that sends completely new bitcoin to the miner who created the block. The size of this block reward is hardcoded in the Bitcoin core software, essentially invalidating new blocks that do not comply with the predefined reward schedule. I say reward schedule because the size of this reward actually decreases over time. Every 4 years or so, the size of the block reward is cut in half. This is called the halving.

When bitcoin went online for the first time in early 2009 this block reward of newly issued bitcoin was 50BTC per block. That was halved to 25BTC per block in 2012, and halved once more to 12.5BTC in 2016. As of this writing, the block reward is 6.25BTC and this will be cut in half once more in 2024. This halving process will continue all the way up to around the year 2141 when the block reward will become 0 and miner rewards consist completely of transaction costs.

This predefined issuance of bitcoin is the monetary policy of Bitcoin. It is hardcoded and cannot be changed, and it is how all bitcoins in circulation have been fairly distributed to those that helped maintain the network. It guarantees exactly how many bitcoin will ever be in circulation - which is just short of 21 million bitcoin - and provides complete transparency on what its supply in circulation will be and at what time. Nobody can decide to create more bitcoin for whatever reason, making it the hardest form of money in history.