Will there ever be twenty-one million and one bitcoins? When Satoshi Nakamoto first created bitcoin, he set a hard cap on the supply of Bitcoin. There are only ever going to be 21 million bitcoins. But why the hard cap? And more importantly, what happens once the 21 million bitcoins are mined?
Bitcoin’s hard cap is central to driving its value. Understanding that there are only 21 million bitcoins to go around makes it scarce and valuable. And as the laws of the economy dictate, something in limited supply and infinite demand has high value. But while the demand increases, the supply remains fixed. People want Bitcoins, but there isn’t enough to go around. So, the price naturally rises. This was one of the main reasons Bitcoin broke the $1000 mark a couple of years ago. But why is there a 21 million supply cap?
No one knows
Satoshi Nakamoto is an alias. Nobody knows about the face behind the alias, and Nakamoto has remained elusive throughout these years. As a result, most of us speculate why the 21 million supply cap was put into place. One of the reasons could be the Money Supply. When Satoshi first thought of Bitcoin in 2009, the world’s money supply, also referred to as M1, stood at $21 trillion. The M1 money supply often called the “monetary base,” is the sum of all real money globally, including cash, coins, travelers’ checks, and other forms. If Bitcoin became the world’s primary currency, each BTC would be worth $1 million. This implies that each Satoshi is worth $0.01; 1 bitcoin= 100 million Satoshi. This means 1 cent will equal one Satoshi. If not intentional, it’s incredibly coincidental that these numbers align so well.
There’s another reason for the 21 million hard cap. When examining the mechanisms used to manage Bitcoin’s supply, it becomes evident that the 21 million BTC limit allows the network to ensure that blocks are generated regularly (10 minutes). It also assures that block rewards paid to miners will decrease in time as the maximum supply approaches its limit. As it turns out, Satoshi’s parameters for this inevitably lead to a maximum of 21 million BTC being produced.
Another popular theory claims that Satoshi used detailed mathematical calculations to arrive at the number. According to this theory, the Bitcoin core code adjusts the mining difficulty to ensure that a new block is generated every 10 minutes on average, regardless of the hash power directed at the network. Based on this function, 210,000 blocks should be mined per cycle, with the block reward being halved. In 2010, 50 BTC were minted each block; this was reduced to 25 BTC/block in 2012 and 12.5 BTC/block in 2016. The current block reward after 2020’s halving is 6.25 bitcoins per block. At present, the block reward for each cycle is 50 (25 + 25 + 6.25 + 3.125). Extrapolating this forward gives you a figure of 100 (50+ 25+ 6.25+3.125, etc.). The maximum possible supply is calculated by multiplying this number by 210,000 blocks per cycle, which comes to 21 million.
So, what will happen when we reach the hard cap?
Bitcoin has been around for 12 years. As of 2021, 18.77 million bitcoins have been mined, leaving roughly 2.3 million more to be mined. Given that the subsidy is cut in half every four years, it is expected that we will reach the $21 million hard cap sometime around 2140. What happens when all the Bitcoins in the world are mined? There are many theories. Economists claim that since benefits are halved every year, this could mean fewer and fewer incentives and result in a deflated currency. Optimists believe that while the rewards are getting halved, the transaction fees are not. And, in the long run, it’s not the purchasing power of Bitcoin that will matter but the purchasing power of a single satoshi.
It is plausible that the Bitcoin network will continue to operate effectively for a long time after 2140, as the block reward halves and miners move on to other cryptocurrencies. No new bitcoins will be created, but transaction blocks will be confirmed, and fees will become the primary source of income. In the end, Bitcoin’s network may function as a closed economy in which transaction costs are collected much like taxes.
However, it’s difficult to predict the effects of Bitcoin once it reaches 21 million. This is partly because Bitcoin’s ecosystem is still in its infancy. Initially, Bitcoin was designed as a means of exchange, but it has grown in popularity as a store of value and investment. Between now and 2140, it’s feasible that Bitcoin’s technology may change dramatically. Conversely, someone could also figure out a way to pass the 21 million hard cap, and the price of Bitcoin could come crashing down.