Bitcoin‘s Monetary Policy consists of 2 main parts:
1. The Halving 2. Block Frequency
The Monetary Policy is completely controlled by Software. It’s all preprogrammed.
1. The Halving:
The number of Bitcoins released into the system every 10 minutes is halved after every 4 years. Actually, the halving takes place after every 210000 Blocks which takes approximately 4 years to generate (as on an average one block is generated every 10 minutes).
- When bitcoin started (2009), the block reward was 50 Bitcoin every 10 minutes.
In November 2012, Bitcoin’s 1st Halving took place and block reward(i.e reward for successfully mining one block into the Blockchain) reduced to half i.e., 25 Bitcoin from 50 Bitcoin.
- In July 2016 Bitcoin’s 2nd halving took place(reward reduces to 12.5 Bitcoin) and the next halving which is Bitcoin’s 3rd will take place in May 2020. This is when the current block reward of 12.5 Bitcoin every 10 minutes will be cut into half to 6.25 Bitcoin.
- This also means over time mining will become more difficult. As network difficulty increases over time & the reward rate drop, so the actual cost of mining each Bitcoin increases, which will then cause the trading price of each Bitcoin to increase as well. Also, the limited supply will cause Bitcoin prices to increase, as their scarcity also increases proportionally.
- As total Bitcoin’s supply is set to be limited by Satoshi Nakamoto (who created Bitcoin). Only 21 million Bitcoins can be generated. Right now there is almost 18 million Bitcoin (85% of total supply) in circulation.
- The supply limit of 21 million Bitcoins will be reached by 2140.
2. Block Frequency:
Block Frequency is defined as, how often the blocks come in & break the reward which is now 12.5 Bitcoin per block for Bitcoin.
The Average Block-Time or Block Frequency is different for different cryptocurrencies.
For example, Average Block-Time for Bitcoin is 10 minutes. For Ethereum, it is 15 seconds. For Ripple, it is 3.5 seconds.