Why is Bitcoin supply limited?
The majority of people think that the answer regarding the Bitcoin coin limit has something to do with Satoshi Nakamoto or whoever the anonymous developers of Bitcoin are. They made an approach to create electronic cash that can never be inflated and would therefore serve as “hard money”. However, there are other reasons too that one needs to focus on.
To begin with, how is the number of Bitcoin limited? When the Bitcoin system was introduced and launched, the developers had issued all the Bitcoin. This is a reason why there are no new Bitcoin creations done by the block reward miners. This means that there was a strict Bitcoin supply limit that could exist in any time frame. What needs to be emphasized here is that the issuance of new Bitcoin is not done but its distribution is taking place.
The fact that the original BTC was limited to a precise $21 million is very surprising. The anonymous developers of Bitcoin have never discussed what might have been the reasons behind the Bitcoin limit. As per the beliefs of the experts, Bitcoin’s $21 million limits must have been set when its developers made two decisions. Firstly, the requirement of Bitcoin to add a new block in its blockchain with the passing of every 10 minutes. Secondly, the miners' reward halves every four years.
The Principle of Finite Supply
As per many other cryptocurrencies, Bitcoin was also designed around the principle of finite supply. The finite supply means that there comes a fixed upper limit on the amount of Bitcoin that can ever come into existence. Here a question is often put forward; is there a limited number of Bitcoins? The answer to this is yes. Why bitcoins are limited? This is a question that most of you must be thinking of. Setting a limit to the supply of Bitcoin is highly advantageous. It helps in keeping Bitcoin scarce and ensures that it continues to be at a steady rate in the upcoming years. For this very reason, Bitcoin is often regarded as the “digital gold”. The reason being that like gold, Bitcoin also exists in a limited quantity. Today, around $18 million Bitcoins are already mined. The worth of every single bit increases according to the supply and demand factor.
Block Reward Halving
Now that we have looked into the BTC supply limit, we must know what exactly is Bitcoin halving. It is the process of halving the rewards after the mining of Bitcoin, that too after every 210,000 blocks are mined. This prevents the amount of Bitcoin from increasing exponentially which later also puts upward pressure on the worth of Bitcoin.
How does this work? We know how the reward falls by half after the mining of 210,000 blocks. In the early days of Bitcoin, the reward was 50BTC per block for the first 210,000 blocks. By 2012 the reward was further halved to 25BTC per block. For 2016, another set of 210,000 blocks were successfully mined and so the block reward was cut to a new value of 12.5BTC. The most recent halving took place last year on the mining of a total of 630,000 blocks. The reward was set at 6.25BTC per block. This indicated that the block reward halving takes place after the passing of every 4 years. This means that the next year for the block reward halving to be in 2024.
We are aware of what the Bitcoin limit is by now, it is 21 million. Therefore, block reward halving makes the mining of Bitcoin more difficult making Bitcoin more expensive and valuable because of how scarce it becomes.
What’s next? (After Bitcoin reaches its supply limit)
The Bitcoin blockchain was specifically designed to control the supply of Bitcoin. This means that only a fixed amount of Bitcoin can be mined a year. Once all of the bitcoins are mined, no new Bitcoin will ever be generated.
When all the bitcoins will be mined, the network will continue to operate similarly as it does now. However, there will be some differences with regards to the miners and the mining activities. They will still be able to fully participate in the procedure of block discovery as they did before. But they will not be incentivized in the forms of Bitcoin block reward. They will still be rewarded nonetheless.
The miners get paid for the transactions involved in the new blocks that are discovered. Presently, the transaction fees account for a small part of the revenue of the miner. This can be proven by how miners mine around approximately 900BTC per day but only get 60-100BTC as transaction fees for that particular day. This makes up for the miner’s revenue to be 6.5%. But in 2140, the approximated time when all $21 million Bitcoins will be mined, their revenue will have a stark increase to 100%.
It is considered to be a wise decision made by the developers of this crypto regarding the issuance of a limited supply of bitcoins. Since it was possible that this cryptocurrency might not have gotten the hype that it currently has. With the anonymity and secrecy of transactions and payments, Bitcoin has now also gained control of the trading world. Promising huge turnovers and profits, Bitcoin is expected to perform exceptionally well in the coming times.