Why Bitcoin (BTC) Supply Is A Finite Number? Why 21 Million?
On Oct 06, 2020
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One of the issues that raise questions about Bitcoin(BTC) is why the total supply is limited to (roughly) 21 million. When Satoshi Nakamoto built this cryptocurrency, he designed the number of Bitcoin supplies that will ever exist to be a finite number.
Nominal currencies such as Euro, Dollar, Pound sterling, can be printed an unlimited number of times. Central authorities such as the Federal Reserve or the European Central Bank regulates the money supply by issuing more banknotes. Since there is no single central authority in the decentralized cryptocurrency space, Bitcoin production is limited by original design or technical issues.
“An Educated Guess”
Based on an email shared between Nakamoto and Bitcoin Core contributor Mike Hearn, we can say that Nakamoto aimed Bitcoin’s unit prices to eventually line up with traditional fiat currencies, so 0.001 BTC would be worth about € 1. According to his words, the choice for the number of coins and distribution schedules was “an educated guess.”
“It was a difficult choice because once the network is going, it’s locked in, and we’re stuck with it. I wanted to pick something that would make prices similar to existing currencies, but without knowing the future, that’s very hard. I ended up choosing something in the middle.”
The whole point Satoshi talking about is that if Bitcoin remains a small niche and used by a minor fraction of people, it will have a lower value per unit than the currencies that currently exists. But if we imagine it used as part of global commerce, then there will be only 21 million tokens for the entire world. It makes BTC much more valuable per unit.
Why is the total supply is limited?
Halving, whose rules were determined by Satoshi Nakamoto, actually means a reduction of supply. Nakamoto’s intention in limiting the maximum supply of bitcoins was to slow down the rate at which the new Bitcoin emerged. This, allowing each Bitcoin unit to gain value over time. The halving system protects the Bitcoin(BTC) currency against inflation.
When Bitcoin was first launched in 2008 by Satoshi Nakamoto, the inventor of the block set the award for a miner’s block production at 50 BTC. Therefore, his first transaction on the Genesis Block (the first block found) earned him 50 BTC.
This award programmed to halved after every 210,000 blocks. Considering that a new block is created every 10 minutes, this is almost equal to four years. So the reward paid to miners was reduced to 25 BTC in 2012, 12.5 BTC in 2016, and finally 6.25 BTC in May 2020.
Why 21 million? The math behind it
There are at least two plausible explanations behind the selection of this figure.
- A new block is added to the blockchain every 10 minutes.
- The miners’ reward halves after 210,000 blocks approximately every four years.
Now, if we move on to the math part, we will understand why this limit occurred.
- As we know, a new block is formed in the blockchain every 10 minutes
- 6 blocks/hour * 24 hours = 144 blocks/day
- 144 blocks are produced in a day, it takes 1458 days to produce 210,000 blocks. This equals almost 4 years.
- If we summarize all the block mining reward rate over the years, we get: 210,000x(50 + 25 + 12.5 + 6.25 + 3.125 + 1.5625 + 0.78125 + ……..) ≈ 21million
It turns out we are getting a value that approaches 21 million in total but never reaches. So we can say the maximum possible supply limit is 21 million. Theoretically, it is not possible to produce more. Although this mathematical interpretation is acceptable, the real answer will probably never be known until Satoshi Nakamoto’s true identity is revealed.
What will happen after the last Bitcoin is produced
If the amount of bitcoin generated is halved every four years, all coins will be produced by 2040. Bitcoin’s supply is limited to 21 million, and once all coins mined, there will never be new bitcoins. Unless a change in protocol is made to increase the supply. Right now, it is unclear how reaching this limit will affect the price of the digital currency. Many people around the world show interest in trading of Bitcoin and compare to old days, buying bitcoin with cash has become a thing too. Without the incentive provided by a BTC reward at the end of a demanding and costly mining process, it can be hard to oblige miners to support the network with only the transaction fees. But on the other hand, once the supply is stabilized, any increase in demand will put upward pressure on prices.