Bitcoin total supply is capped at 21 million which means that on 21 million bitcoin can be ever created. Unlike traditional currencies that are issued by governments which constantly add more cash supply causing the devaluation of the national currency and reducing the value of money held by people.
Bitcoin is created in a way that while more time passes the value of bitcoin increases. Bitcoin is not only capped at 21 million but also every 4 years there is a halving which means that the miner’s reward is reduced by 50%.
Basically, when a new block is minted by the miners that are rewarded newly generated bitcoins which at the beginning was 50BTC and then became 25 BTC and then 12.5 BTC and about in May 2020 the reward will drop to 6.25 BTC.
Bitcoin a Deflationary Currency
So compared to money issued by governments which supply constantly increases, bitcoin was created in a way that reduces the new bitcoins flow and is capped at 21 million which makes Bitcoin is a deflationary currency.
Additionally, there are many “lost Bitcoins” that were put away on old computers that were discarded and can never again be recuperated. This makes the overall supply of Bitcoins really lower than 21,000,000.
Bitcoin Mining Overview
In case you’re not familiar with bitcoin mining here it is a short overview about how it works. If you already know how it works you can pass this section and move to the next one below.
Bitcoin mining is the hashing process in resolving complex algorithms using computer power. So basically a new block is created when an algorithm is solved. this process is called mining. The purpose of this process is to confirm transactions and create new Bitcoins at the same time.
When a user sends a transaction in bitcoin, initially the transaction is broadcasted to the network and then miners through the process of mining will validate it and add it to the blockchain.
Users pay a fee to compensate the miner for verifying this transaction so the miners have the incentive to continue mining. Otherwise, if miners stop mining the network will become worthless and not function. So miners are paid twice from the block reward and the transaction fees. While more miners join the network the mining difficulty rises, here it is a bitcoin mining calculator to check the mining.
Bitcoin When Block Reward Becomes Zero
Sooner or later, presumably around 2140, the last Bitcoin will be mined. When 21 million Bitcoins have been supplied, no more Bitcoins will ever be supplied. This doesn’t imply that the Bitcoin world will come smashing down. Since other than block rewards for finding new blocks, the Bitcoin network additionally has transaction fees. Presently, these fees are small compared with the block reward which is 12.5 Bitcoins. Meanwhile, the block rewards go down transaction fees will go up.
Transaction fees should become valuable enough to sustain the mining process, so miners have the incentive to mine even after new bitcoins generation has stopped.
Bitcoin Value Must Increase In Future
New generated bitcoins will stop at 2140. Then how will be sustained the network? There will be still the transaction fee. In order for the fees to be enough incentivizing the mining process the process of bitcoin should rise substantially. And Bitcoin is built with these features in it.
Every traditional currency has an unlimited supply. For example, the dollar from 1913 until today (in about 100 years) had a devaluation of about 95% in buying power. All this happens because new dollars are issued by the government constantly.
Increasing the cash supply is an incentive for investments because people tend to spend the money before it is evaluated. So practically governments try to decrease peoples wealth by printing new money. Bitcoin has a capped supply that will stop at 2014 and is deflationary by nature.
An example of that is the 2016 halving when the block reward went from 25 bitcoin down to 12.5 bitcoin. The price rose from $450 to above $750.
The chart below illustrates more the idea how halvings affect the bitcoin price.
Bitcoin in the Far Future
Meanwhile, bitcoin prices rise the value of transaction fees also increases, first because bitcoin is more valuable and second because they will want to process transactions faster.
This factors will continue to rise until the total supply is released in 2140 and the rise should be enough to sustain the mining process and make it profitable.