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.
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).
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.
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.
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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