There are only 21 million bitcoins available for mining. Once all of those bitcoins have been mined, no new more bitcoins will ever be created. This stands in stark contrast to national currencies, which are constantly expanding. Governments like to encourage inflation, so they generally increase the money supply. This leads to the devaluing of currencies, however, and in practice, it can reduce the wealth held by individuals and families.
For bitcoin, there is no parallel devaluation. If anything, bitcoins should become more valuable over time as the number of bitcoins entering the system decreases. Not only is the total supply of bitcoins capped at 21 million, but the flow of new bitcoins into the market has also been tapering off. Roughly every four years, the number of bitcoins awarded for mining a block is cut in half.
Originally, 50 bitcoins were earned for mining a block. Then it dropped 25 bitcoins, and then to 12.5 bitcoins. In 2020, it’ll drop to 6.25 bitcoins. Thus, while a government may constantly increase its money supply, bitcoin has built-in features that encourage the exact opposite. The decreasing flow of new bitcoins and the 21 million cap will help ward off inflationary pressures.
Also, there are many “lost bitcoins” that were stored on old hard drives that were thrown away and can no longer be recovered. This makes the total supply of bitcoins lower than 21 million.
Bitcoin Mining: A Quick Review
If you’re already familiar with the whole bitcoin mining process and how the blockchain works, feel free to skip down to the next section. If not, we’ll quickly bring you up to speed.
Bitcoin mining refers to the process of hashing, or using computers to solve complex algorithms. When an algorithm is solved, a new block of transactions is created and added to the blockchain. The blockchain is the public record, or ledger, of all bitcoin transactions.
Whenever bitcoin transactions are carried out, they’re added to the blockchain. The process of hashing is therefore vital to deciding which transaction takes precedence. If miners stopped mining, the entire bitcoin system might actually collapse.
So what will happen when the 21 million bitcoin cap is reached? Will the system shut down because bitcoins are no longer awarded for mining new blocks? Actually, bitcoin miners are also awarded transaction fees, and these fees will keep the bitcoin system afloat.
Bitcoin after Mining
At some point in the future, probably around 2140, the last bitcoin will be mined. Once 21 million bitcoins have been created, no more bitcoins will ever be created. This doesn’t mean that the bitcoin world will come crashing down, however. Besides awards for hashing, bitcoin also provides transaction fees. Currently, these fees amount to only a small amount-just a fraction of a cent; however, as bitcoin awards go down, the fees will likely increase, as will the value of bitcoin.
Eventually, these transaction fees should become valuable enough that miners will be encouraged to keep on mining. So while new bitcoins will cease to come into existence, bitcoin miners will still get paid. Of course, some miners will be (and already are being) pushed out of the market.
As bitcoin becomes harder to mine, bitcoin miners have to use ever-better equipment to mine bitcoins more efficiently. Energy efficiency is a huge deal: the electricity bill run up by older equipment could become expensive enough that you could actually lose money mining bitcoins. With newer, more efficient machines, this isn’t the case.
Bitcoin’s Value Must (and Will) Continue to Rise
In order for bitcoin transaction fees to become lucrative enough to encourage mining, bitcoin’s value is going to have to rise substantially. Luckily, certain traits are built right in to bitcoin to ensure just that.
Every other currency has an essentially unlimited supply, and governments love to increase their money supplies at will. The problem with increasing the money supply, however, is that the value of the individual currency unit, such as the dollar, decreases. Imagine that the money supply is a gigantic pizza. When you increase the money supply, you’re not increasing the size of the pizza; instead, you’re cutting it into ever-smaller slices. As the government increases the money supply (or cuts up the pizza), the value of the money you have (the size of the slices) shrinks.
Increasing the money supply tends to spur investment because companies and people are encouraged to spend money before it loses too much value. In other words, governments will often intentionally try to decrease the value of your wealth. With bitcoin, the money supply will increase until 2140. However, because the money supply is tightly regulated and predictable, this doesn’t have the deprecatory effect of whimsical government money supply increases.
In fact, in July 2016, the new supply of bitcoins awarded for hashing was cut in half, dropping from 25 to 12.5. In the run-up to this, bitcoin’s price increased substantially, rising from under $450 to over $750. The run-up in price was due to the halving. When the supply of new bitcoins is halved once again-likely in July of 2020-the price of bitcoin will likely increase again. The same should happen four years further down the road.
Bitcoin in the (Distant) Future
As bitcoin’s price rises, the value of transaction fees will increase. In order for this increase to be enough for transaction fees to encourage mining on its own, the value of bitcoin will have to increase substantially. The idea, however, of bitcoins someday being worth $50,000 or $100,000 isn’t outside the realm of reason.
Like any other currency, bitcoins can be broken into smaller units. The smallest current unit is a satoshi. Currently, about 10,232 satoshis equal a dollar. In the past, a nickel (or pence, etc.) used to be worth a lot. Now, they’re not worth very much at all because of inflation. For bitcoin, this could one day be the opposite. Satoshis may become the common trading unit, while bitcoins may be used only to trade larger amounts.
A current mining fee of, say, 10,000 satoshi might not sound like a lot right now, but in the future, it could be quite a bit.
