There are only 21 million Bitcoins available for mining. Once all of those Bitcoins have been mined, no more new 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.
When Bitcoin miners “mine” a new block of transactions they are rewarded freshly minted Bitcoins. 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 actually 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 first broadcasted to the whole network and then get added to the blockchain via the miners. The process of hashing is therefore vital to deciding which transaction takes precedence (since not all transactions can fit inside a single block). If miners stopped mining, the entire Bitcoin system might actually collapse.
In order to compensate miners for their efforts they are awarded with new Bitcoins, but that’s not all. Miners are also awarded the transaction fees that were attached to all of the transactions they confirmed in their block. So miners get paid twice – once with newly created Bitcoins and once with transaction fees.
Who pays these fees? Anyone sending a Bitcoin transaction that wants to get “ahead in line” and have his transaction approved as fast as possible (hopefully in the next block).
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, however, doesn’t mean that the Bitcoin world will come crashing down. Since besides awards for hashing, the Bitcoin protocol also provides transaction fees. Currently, these fees amount to only a small amount in comparison to the block reward of 12.5 Bitcoins; however, as Bitcoin rewards go down, the fees will likely increase.
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.
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 fiat 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.
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 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.
Some say that the run-up in price was in part due to the halving of the block reward. Others argue that since this reward havling is known in advance it shouldn’t have a dramatic effect on Bitcoin’s price.
Bitcoin in the (Distant) Future
As Bitcoin’s price rises, the value of transaction fees will increase. First because Bitcoin becomes more valuable and second, because people are willing to pay more in fees in order to get their transaction confirmed faster.
However 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.
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I disagree with this assessment. The reason people will mine BItcoin is that all the money will depend on it. People will run their own nodes and miners as insurance that their currency doesn’t go bust.
Hey Player__One,
I think the motivation to keep the Bitcoin monetary system alive is an additional reason why people will continue to mine. The economic incentive of transaction fees is probably a more dependable reason however. It seems safer to rely on the desire to make profit rather than loyalty to or dependence on a particular cryptocurrency.
Who is going to pay the miners (nodes) electric bill?
Hi David,
Hopefully their expenses will be covered from the transaction fees paid by each person whose transaction gets included in that miner’s block.
well rip gamers
I’m concerned that fees high enough to keep miners interested in participating after all Bitcoin has been mined will rise to the point of curbing consumer use of Bitcoin. With a lack of healthy fee based revenue, that in turn will further erode miner incentive to participate in the blockchan which will lead to a continued decline in both Bitcoin’s value and utility. In fact, I suspect this will start to take place well before the last Bitcoin is mined.
Brad,
Another thing that might occur to make Bitcoin still usable is a company much like Visa might invest in ASICs for the transactions and monopolize it to the point that it is the new credit card in the payments world.
You better believe that existing corporations will capitalize on bitcoin as soon as it is profitable for them
the way I see it is that it’s a currency scheme or pyramid. value is only by faith and not by government. If the government collapses hard currency collapses. simple power outage or virus or oh dear we say a huge event from the Sun knocks out All Electronics. which has happened in the late 1800s the reason we don’t know much about the Kerrigan affect, or whatever the name was it fried all electrical wires but back then alls we had was some Telegraph wires In those days. If the Carrington affect happens today we all go back to the 1800s until we rebuild the system from scratch which could take decades. So basically a huge EMP takes out Bitcoin I still have dollars which were around back in the 1800’s I still have gold which is been around forever. Bitcoin is no different then the internet bubble of the 90s that popped and caused a lot of problems. a lot of people got rich most people lost a lot of money some their life savings. it’s nothing more then another stock on a market that the rich can manipulate as just been proven. I dictated this on my phone and I’m not very good at it I’m not going to edit it it’s too long and I just don’t care you get the point. and you’ve been warned
Multiple fiat currencies have collapsed, see the Zimbabwe Dollar or Venezuelan Bolivar. State backing is not the same as intrinsic value, nor is it a guarantee of stability.
If some event knocks out all electronic devices, it’ll be all about survival until civilization is re-established. That could take decades and in the meantime I don’t think any type of money will be worth much – food, water, medicine, tools, weapons, etc. will be used for barter.
As for cryptocurrency’s current market price, sure, it could be overvalued. Or it could be undervalued – no one really knows how big this tech will be in the future so it’s hard to judge its fair value. Price aside, the technology is very interesting. You should investigate how blockchain works and the problems it solves before dismissing it based on how markets have valued it.
I see comments about gold and bitcoin and how either will fail. The truth is either can fail. Instead of arguing about it, we can learn the best way to invest for your own future. I personally want to invest a small amount to have as part of my rainy day fund and put into my business. And yes I know about bitcoin business loans, just not sure how to take advantage since most of my vendors don’t accept bitcoin as payment.