Economic effect of Bitcoin

Question

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 ?

Answer 1

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.