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. 1
At its core, Bitcoin mining is the means by which new BTC are minted. To mint new Bitcoin (BTC), Bitcoin miners use advanced computing power to solve sophisticated math applications on the blockchain. By doing so, Bitcoin transactions are confirmed and a "new block" is added to the network.
As compensation for this service, miners are awarded certain amounts of btc for every block that is created. Known as a "block reward," the amount currently stands at 6.25 BTC per valid block mined. That means for every new block completed, 6.25 new Bitcoin are minted and awarded to miners. In February 2022, this allocation was worth an approximate amount of US$231,250.
Given the relatively high value of Bitcoin, as well as other coins, people from around the globe are attracted to the potentially lucrative world of cryptocurrency mining. Historically, most of the world's miners were located in China. As of July 2021, a majority resided in the United States and represented 35.4% of Bitcoin's hash rate. Hash rate is a term used to describe the total computing power of a group of miners.
By design, Bitcoin has a finite supply and eventually no more BTC will be mined. 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.
Although the limited supply of Bitcoin is built into its protocol, Bitcoin halving is another reason for the coin's scarcity. Bitcoin halving is the reduction of block rewards by half, which is conducted every four years or after 210,000 blocks have been mined. It is a key determinant of btc's aggregate supply as it makes the minting of new coins more difficult as time passes.
Halving is a key element in the Bitcoin mining process. It ensures that new BTC are minted at a decreasing rate, thus the supply and valuation models become more stable as time passes. In fact, in the first four years, 50% of Bitcoins were mined. Conversely, it is estimated to take another 120 years to mine the existing 50% down to the last Bitcoin.
Upon the launch of Bitcoin back in 2009, miners received 50 BTC for processing each new block. Since then, rewards have been reduced to 25, 12.5 and 6.25. The value of Bitcoin has also risen dramatically since 2009, so the financial reward of securing new coins remains substantial.
The decreasing rate of rewards directly impacts the evolving supply of Bitcoin. A decrease in block rewards reduces incentives for new participants to pursue the mining process. However, as long as the price of Bitcoin remains elevated, the aggregate mining pool is likely to remain strong.
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.
BTC transactions are publicly-verified on an open source network, so a reduction in mining activity is thought to reduce the blockchain's integrity. Theoretically, if the number of miners decreases significantly, it could undermine the security of the Bitcoin network. This could then prompt declines in public perception of the world's largest digital currency, making it less appealing to investors and placing downward pressure on its price. In response to diminished confidence, many BTC enthusiasts would likely turn to private keys to secure their crypto activity.
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 Pricing: FAQs
Over the past decade, the valuation mechanism of bitcoin has become a hotly debated topic. While many bitcoin users maintain BTC is a currency, others claim that it functions as a commodity. Below are a few frequently asked questions regarding bitcoin's price.
Does Bitcoin Have A Tangible Value?
Yes and no. Like conventional fiat currencies, BTC's value largely hinges upon consumer confidence. As long as people see BTC as a viable way to store or transfer wealth, it will have value. If anything encumbers its functionality, then BTC is likely to lose its value.
Is BTC Subject To Traditional Market Forces Such As Supply And Demand?
It appears so. Historically, during periods following a halving, a block of bitcoins sees an uptick in pricing. The reason behind this phenomenon looks to be a perceived shortage of supply. As the introduction of new bitcoins is reduced, supply is negatively impacted. Thus, assuming static demand, the price of BTC is likely to move higher in response to the supply/demand equilibrium. In this way, BTC is similar to a commodity.
Is BTC A Commodity Or Currency?
According to the United States Commodities Futures Trading Commission (CFTC), Bitcoin is a commodity: "Virtual currencies, such as bitcoin, have been determined to be commodities under the Commodity Exchange Act (CEA)."
Despite the CEA's ruling, the commodity/currency argument is nuanced. Without any central banking authority to control the supply and policies toward Bitcoin, pricing is left to the open market. So, it stands to reason that the amount of Bitcoin in circulation at any one time is a key facet of its pricing. As miners reduce efforts to process a block of transactions, fewer BTC will enter circulation, reducing available stocks. In this way, Bitcoin resembles a commodity like crude oil, gold or wheat.
Of course, to realise the value of BTC, most Bitcoin users convert their holdings into conventional currencies. By converting BTC to USDs, euros, or British pounds, users are able to purchase hard goods and services. Thus, the performance of forex currencies is an integral part of Bitcoin's value. For instance, if the USD is devalued, the BTC/USD will rise accordingly, reflecting the negative sentiment toward the USD. This relationship to fiat currencies and transactional functionality make Bitcoin similar to physical money.
The supply of Bitcoin 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 bitcoins available could contribute to the perception that the digital currency is a scarce resource, potentially pushing prices higher.
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