Bitcoin profit halves due to inflation

Safeguards built into the bitcoin software are about to be triggered as the number of bitcoins in circulation hits a key milestone.

This means bitcoin “miners” will have to work twice as hard to be rewarded with the same number of coins.

The change comes as competition to create the coins gets more intense with the release of custom mining chips.

Since the creation of the bitcoin network in early 2009, bitcoins have grown to become a very widely used digital currency. An increasing number of online shops and businesses accept bitcoins as payments and currently each bitcoin is worth about $12.

As a digital currency, bitcoins are not issued by a central bank or national mint. Instead they are created by the system’s network when a specific amount of computer work, known as a “block” has been completed. Fifty bitcoins are released when that block is done and the work, which involves solving a hard mathematical problem, is completed.

The protocol that defines this block-to-coin ratio reduces the reward given for finding each block every time 210,000 blocks have been found. According to statistics gathered about the bitcoin network, the 210,000 figure looks set to be passed on 28 November. Then, instead of getting 50 bitcoins per block, miners will get only 25.

“The main reason to do this is to control inflation,” said Vitalik Buterin, a journalist at Bitcoin Magazine. Controlling the rate at which coins were created, he said, meant there would never be a surge or shortfall in the number of bitcoins in circulation, either one of which could rapidly change the value of each coin.

It addition, he said, it was a hedge against technological innovation. In the early days of bitcoins, many people used desktop computers to do the hard sums. Then they started to use banks of graphics cards that could do the maths very quickly to speed up the rate at which blocks of work were completed.

Vitalik Buterin said some miners were now using even more specialized hardware to do the mathematical work and firms were starting to produce custom-made chips that stepped up the pace of work even more.

However, he said, the creators of bitcoins had foreseen these changes and built in controls to keep the numbers of blocks completed relatively constant.

“The protocol always calibrates difficulty to make up for increased mining power,so the speed at which people are finding blocks isn’t going to go up by much no matter what.”