Economic effect of Bitcoin

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I am an accounting student and I recently read about bitcoins, I was wondering if anybody could clear up my questions from my basic understanding of the bitcoin system.

Since Bitcoins on a whole, derive its uniqueness from the system of maintenance of a public ledger and an important part of this, are the miners, who are provided an incentive in bitcoins for for their hash creation. The cost of hashing and recording it in the public ledger is technically, the bit coins paid to the miner. My questions are

- Who bears the burden of the cost? Is it the user or is it the network?

- If its borne by the network, wouldn't this cause an increase in circulation of bitcoins in a network and lead to reduction in their value making them unstable?

- If the this cost is borne by the user, then how does it make it an alternative to native banking transaction cost?

2) Based on what I have read online, so far, the circulation of bitcoins is capped of to a certain limit to prevent deflation but my question is

- If the mining of bitcoins also lead to circulation increase, how can the system handle the volume of transaction relating to a global economy? How would this effect the public book keeping system and the miners ?

Can somebody please help me understand this ?

Khalid Mohammed

Posted 2015-11-17T18:53:57.350

Reputation: 1

4This site is meant for single questions. Can you please try to split it up into separate single questions? And you probably want to ask one question and then wait for the answer before asking the next one, because most of your follow-up questions depend on assumptions you make about earlier questions. Also most of these questions have probably been asked before, so try to find them and if it's not exactly what you are looking for, maybe link to that other question or answer and ask for more details. You're on the right path thinking about these issues and not jumping to conclusions. – Jannes – 2015-11-17T19:43:44.543

I'm an economics and finance major, and can probably help you with most of your questions if you split them up. At the moment your thread is too convoluted, and I kinda lost interest :P – Amin Shah Gilani – 2015-11-17T20:46:02.017

Yes, we can help you understand all those issues. However, as others have already mentioned, you need to split them. – Mark Messa – 2015-11-18T11:14:14.923

@Khalid Mohammed: please repost the rest of your questions as separate posts! Thanks. – Murch – 2015-11-24T18:29:08.927

Answers

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Who bears the burden of the cost ? Is it the user or is it the network?

Just like what happens when more dollars are printed, the value of all the existing currency goes down.

If its borne by the network, wouldn't this cause an increase in circulation of bitcoins in a network and lead to reduction in their value making them unstable?

It leads to a predictable increase in the total supply. There's no reason to expect a predictable change in supply to cause instability in value.

Think about oil, for example. If there are unexpected changes in the supply of oil, then the price will jump in response. But if we knew that the supply of oil would increase at a very predictable rate that changed only gradually, there would be no such jumps.

If the this cost is borne by the user, then how does it make it an alternative to native banking transaction cost?

The idea is that by reducing transaction costs relative to existing cross-border payment systems, the Bitcoin system will create enough value to pay the miners and still be competitive. The mining reward drops over time, so it doesn't need to produce value forever to hold its value.

If the mining of bitcoins also lead to circulation increase, how can the system handle the volume of transaction relating to a global economy? How would this effect the public book keeping system and the miners ?

The number of transactions or their size has no effect on the generation of Bitcoins which occurs on a predictable schedule up to the fixed limit at which time it stops.

David Schwartz

Posted 2015-11-17T18:53:57.350

Reputation: 46 931

Asked: 2015-11-17T18:53:57.350

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Active: 2016-02-21T15:45:53.357