You have probably heard that Bitcoin is limited and that the fixed limit is exactly 21 million. But why are Bitcoins limited to 21 million? What happens when we hit that number, and how close exactly are we?
First and foremost, it is important to note that there is a layer of mystery over the reasons why the group or individual who created Bitcoin chose to limit the supply to just 21 million. There are multiple theories, and emails between developers that provide clues. Now, let’s get into it!
As of 2020, we have managed to mine 18 million Bitcoins so far, that’s a huge portion in just 11 years of mining, almost 85% in fact. Despite this fact, we won’t hit the 21 million limit as quickly as you might expect. Though it is impossible to tell the exact date, estimates predict the last Bitcoin will be mined in 2140 which is a whopping 120 years from now.
How Are Bitcoins Created?
This short video summarizes the Bitcoin creation process.
In order to explain why are Bitcoins limited to 21 million, we have to go back to how Bitcoin is created in the first place.
Bitcoin transactions are completed in blocks, by miners, or computers, that solve complex mathematical equations. When a block of transactions is solved, the miner collects transaction fees as a reward as well as a certain number of Bitcoins. With one block being solved every 10 minutes, this fixed number of Bitcoins is also released every 10 minutes. But, how many Bitcoin is one block worth?
Well, when the source code for Bitcoin was written, the creator, Satoshi Nakamoto, decided to:
1. Limit the supply to 21 million.
2. Halve the worth of one block every time 210,000 blocks are mined. This occurs about every four years.
Learn More: How Mining Pools Work?
Keeping this information in mind, in 2008 when one block was mined, the reward was 50 Bitcoins. Now, as of March 2020, the value of one block has just been halved from 12.5 to 6.25, decreasing the value of a block from over $116,000 to just over $58,000. In another four years, the reward will halve again, to 3.125, and so on. By the time 2140 rolls around one block will be worth 0.00000001 BTC (or one Satoshi, the smallest unit of Bitcoin that exists on the blockchain), providing that miners even exist.
What Happens When One Block Is Worth 0 Bitcoin?
A more detailed explanation of what will happen once the supply of Bitcoin runs out.
Mining a block of transactions is highly competitive, and takes a huge amount of power, so it needs to have a sufficient reward to make it worthwhile. With the current system, once the reward dwindles to such a low value, mining would become basically unsustainable and there would be a major reduction in the number of computers that are mining. This could ultimately lead to the collapse or centralization of the network, with no more transactions being made.
The hope is that Bitcoin will be popular enough for miners to receive high enough transaction fees to still make mining worthwhile.
If this doesn’t happen then there could be a few outcomes:
Either, technology develops enough that mining can be done cheaply and highly efficiently. Since at the moment, it takes around 200-kilowatt hours of electricity for every single transaction, and some estimates even compare the energy consumption of the decentralized Bitcoin network to be equal to that of 2 million homes in the US.
Or, the size of the block would need to increase, making transactions cheaper and more scalable, though the second option doesn’t seem to be on the cards, as there has been much debate over this with no sign of change.
With this in mind, it might be logical to assume that the decentralized version of Bitcoin we know and love today might be doomed once the supply of Bitcoin has run out. But it’s very important to note that though Bitcoin has only been in circulation for just 12 years now, there has been a multitude of change and innovation within the community and network itself.
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With new protocols, new methods of completing transactions, and hard forks, Bitcoin has changed a lot in a short amount of time. With over 100 years left of mining with rewards left, there is a huge opportunity for some innovation to completely revamp the landscape of Bitcoin. Sadly, at the moment it’s all debate and what if’s since no one truly knows what could happen in the future.
Why Did Satoshi Nakamoto Decide To Limit The Supply Of Bitcoin?
Emails between a developer and Satoshi Nakamoto describe some of the thought processes behind the 21 million value:
Not knowing exactly how popular or successful the currency would turn out to be, Nakamoto wanted Bitcoin to align with the value of existing fiat currencies in the world at the time. They intended for one Euro to be worth 0.001 Bitcoin and so on. Using this as a goal, the group or individual came up with their 21 million Bitcoin number. The emails don’t exactly explain how they got there, unfortunately, so it remains a mystery.
Learn more: How To Earn Bitcoin Without Mining?
It also turns out that their prediction for the value of Bitcoin was wrong (and an under-shoot) as 0.001 Bitcoin is now worth nearly 11 times that value.
The answer to the question ‘why are Bitcoins limited to 21 million?’ is pretty simple but also very complicated. And, we only sort of know the answer. It seems like Satoshi Nakamoto had an intended value for Bitcoin which was around 0.001 BTC to 1 Euro. We don’t know how they came to 21 million exactly, and a lot of the protocol surrounding BTC remains a mystery.
We know that the supply of Bitcoin will run out in about 120 years give or take and that the longevity of miners, and the decentralization/existence of the Bitcoin network is at risk once it does. It is likely that the value of Bitcoin will only increase in the coming years, as more and more people become aware of it, and demand subsequently increases.
In just a few short years Bitcoin and cryptocurrency have come a long way in terms of innovation, and development of systems and protocol, so it’s likely that the landscape of Bitcoin as a whole will look very different in the years to come. Very few people believed before the 2017 Bitcoin boom that the price of BTC would skyrocket to over $20,000. Though Bitcoin might crash and burn when the supply runs out, it might not. We’ll just have to wait and see.
Now that you know why are Bitcoins limited to 21 million, learn more about Bitcoin Banks!