Whilst researching the growth of Bitcoin I started thinking about a possible problem with one of its famed advantages. Bitcoins main advantage is that it’s a fixed money supply. This means that there is a limit to how many Bitcoins that there will ever be in existence. Furthermore, Bitcoin is a decentralised monetary system whereby no single entity has control over the supply of money. As a result, no central bank can reduce the existing value of Bitcoin over time by simply printing more money. So, what happens when we reach 21 million Bitcoins – the maximum supply?
The 21 million Bitcoins limit
The current supply of total Bitcoins in circulation is growing. As previously explained the Bitcoin supply grows steady through the process of Bitcoin mining. Essentially, a Bitcoin miner uses computer processing power to record Bitcoin transactions. There are many Bitcoin miners performing this process such that they compete to verify the latest set of transactions.
Why would someone become a Bitcoin miner? Bitcoin miners to sustain the Bitcoin system by using their processing power. Each verified set of transactions pays the Bitcoin miner 12.5 Bitcoins thus increasing the total supply. However, this rate of Bitcoin growth will not always be the case.
New transactions are verified by Bitcoin miners and grouped into ‘blocks’ roughly 1MB in size. For every 210,000 blocks created and added to the blockchain the Bitcoin reward reduces by 50%. At the current rate of Bitcoin growth this is likely to occur ever four years. As such, performing the maths demonstrates that the rewards will reduce and reduce over time. This will continue to occur until such a time that it is no longer worth the computer processing power in order to obtain the reward. Alternatively, the rewards will decline to a rate such that the your supply of Bitcoins will be just under (but tend towards) 21 million Bitcoins.
The problems with a fixed money supply
Bitcoin’s existence relies on the presence of Bitcoin miners. The miners use their processing power to verify new transactions. The miners are rewarded with new Bitcoins for verification. However, we may eventually reach the maximum 21 million Bitcoins. Where is the incentive for Bitcoin mining to continue?
Without the ongoing presence of incentivised Bitcoin mining the transaction verification process will not occur. The result being that the whole system might collapse as fraudulent transactions become prevalent.
There are two counter arguments to this:
- Experts have predicted that this will not occur until 2140 at the earliest. As such, we are some way off from this potentially Bitcoin-ending event.
- It is more likely that over time as Bitcoin rewards decline, miners will take a small fee for the verification of transactions. However, wouldn’t this defeat the point of Bitcoin – its beauty is it’s free at the point of use.