This article is written by ob of our contributor Iliya Zaki.
Throughout human history, many things have served the function of money: gold and silver, most notably, but also government-issued paper, copper, precious stones, salt, seashells, and even alcohol and cigarettes. People’s choices are subjective, and so there is no “right” and “wrong” choice of money. There are, however, consequences to each choice. The choice is quite complicated because a person’s choice of money itself, paradoxically, sows the seeds of turning it into bad money: choosing something as money raises its market value, incentivizing its producers to make more of it, which will generally bring its price crashing down.
The fundamental concern of a person choosing a medium of exchange is that they would like their money to hold its value over time, in other words, they would like their money to be a good store of value.
Like gold, Bitcoin cannot simply be created arbitrarily. Gold must be mined out of the ground, and Bitcoin must be mined via digital means. Linked with this process is the stipulation set forth by the founders of Bitcoin that, like gold, it has a limited and finite supply. There are only 21 million Bitcoins that can be mined in total. I have to add, that unlike Bitcoin, gold limited supply is very hard to estimate on volume and left time to completely be mined (if that is even possible). Limiting the maximum supply was necessary to achieve a true store of value, deflationary.
Bitcoin Mining is a peer-to-peer computer process used to secure and verify bitcoin transactions — payments from one user to another on a decentralized network. Mining involves adding bitcoin transaction data to Bitcoin’s global public ledger of past transactions. Each group of transactions is called a block. Blocks are secured by Bitcoin miners and build on top of each other forming a chain. This ledger of past transactions is called the blockchain. Bitcoin nodes use the blockchain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere. The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system. Miners are paid transaction fees as well as a subsidy of newly created coins, called block rewards.
Once miners have unlocked all Bitcoins, the planet’s supply will essentially be tapped out.
What will happen when the global supply of Bitcoin reaches its limit?
Right now, the circulating supply of Bitcoin is 17.5 million.
The ‘halving’ of mining rewards is an often-overlooked feature of Bitcoin, one of the most important drivers of Bitcoin’s success, and reflects a deep understanding of monetary economics and the history of money by Bitcoin’s creator. The Bitcoin generation been capped, avoids high inflation rates, and the value to languish and drop. Essentially, it means that every 4 years the rewards for mining Bitcoin will be reduced by 50%, which are the Bitcoins possibly earned by miners.
The ‘halving’ is also called Reward Era. This concept is a part of Bitcoin’s transparent monetary policy, which can be examined in the source code available on the Bitcoin Core GitHub repository. We currently find ourselves in the third Reward Era.
In 2009 when Bitcoin was first transacted, 50 Bitcoins were earned as a reward for mining a block. By 2020, it’ll drop to 6.25 Bitcoins, representing the 4th Reward Era (total 34 Reward Eras).
So, if there is a halving event every four years, it is estimated that the last Bitcoin will be mined during the year 2140, and the block reward would drop below 0.00000001BTC.
What is the effect for Bitcoin miners?
Once the 21 million coin limit is reached, miners will not be able to mine any more Bitcoin. When this happens, they need to rely heavily on the transaction fees only. These fees will be their only source for maintaining operations. This leads to an interesting question. Will their operations be unprofitable? Will miners will not mine bitcoin, and move to other cryptocurrencies? Can we assume that they can make enough profit, considering that the price of Bitcoin might be extremely high?
Bitcoin price should see a substantial increase if all the 21 million coins are mined (exponentially increasing towards next halving). This is an obvious result of limited supply, yet demand.
In 121 years from now, we will know for sure.
The price of 1 bitcoin has gone from$0.00076, in the first recorded transaction (05/10/09), to $19,783.21 at its peak (17/12/18), an increase of 2,603,053,847%.