Only 21 million bitcoin will ever be mined, at least according to existing rules. This limit was built into the Bitcoin Protocol in order to serve as a control on inflation. Since Bitcoin prices are determined by supply and demand, investors can benefit from knowing what could happen when this digital currency finally reaches its cap.
A key consideration is that once the supply of new bitcoin is shut off, any increase in demand would place upward pressure on the price. Further, investors may perceive Bitcoin as being more scarce than before once the supply hits its limit.
Bitcoin's Mining Rules
While the Bitcoin Protocol capped the total number of bitcoin that can be mined, this limit is not expected to be reached until approximately 2140. At the time of this writing (September 2018), roughly 17.3 million units of the cryptocurrency, or approximately 82% of the 21 million total, have been mined.
In less than 10 years, the vast majority (80%) of bitcoin has already been mined. While the supply is expected to change between now and 2140, it is not expected to change a whole lot.
Impact On Miners
As to how reaching the 21 million cap will affect miners, no one knows for sure. However, one thing we do know is that unless the Bitcoin Protocol changes, miners will no longer receive the block reward once the cap is reached. At that point, they will be incentivised by transaction fees, which may be enough to keep miners interested.
If the number of miners decreases significantly, it could undermine the security of the Bitcoin network. This could then reduce the public perception of the world's largest digital currency, making it less appealing to investors and placing downward pressure on its price.
One development that could potentially affect this situation is the implementation of Segregated Witness (SegWit), an upgrade that allows blocks in Bitcoin's blockchain to store a greater number of transactions.
By increasing this amount, SegWit enhanced the capacity of the Bitcoin network. Further, this update coincided with reduced transaction fees.
When the Bitcoin network rolled out SegWit, it laid the foundation for the Lightning Network, which enables off-chain transactions. By allowing users to make these transactions off-chain, SegWit has helped expedite transactions, which should in turn place downward pressure on transaction fees.
Bitcoin's supply is capped at 21 million, and it is uncertain how reaching this limit will affect the digital currency's price. By removing the mining reward, hitting this limit could discourage miners from participating. This could then make the network less secure, negatively affecting sentiment and therefore lowering prices.
At the same time, Bitcoin's price could benefit from its supply hitting its upper limit. Once the supply is fixed, any increase in demand would place upward pressure on prices. Further, reaching a hard cap on the total number of bitcoin available could contribute to the perception that the digital currency is a scarce resource, potentially pushing prices higher.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…