Why the number of bitcoins is limited to 21 million

What happens after the last coin mined

Miners are rewarded for their work. In 2009, its amount was 50 BTC. As a result of halving every 4 years, the income of miners falls by 2 times. In 2021, the reward is 6.25 BTC. However, mining is still profitable, generating income, the basis of which is the fee per mined block.

In addition, users pay a commission for each transaction. Its size depends on various factors and can be set manually. This is also the miner’s income for adding a transaction to the block.

The last bitcoin will be mined in 2140. However, miners will continue to process transactions and can earn income from transfer fees. Provided the bitcoin price is high, this activity will pay off.

Halving

On the Bitcoin network, miners keep the Bitcoin network running and mining new coins. Satoshi Nakamoto created a sophisticated system that involves reducing the commission per transaction block by 2 times. This stimulates the growth of the coin, reducing the inflationary component.

Bitcoin has emerged as an alternative to fiat that can solve the current problems of traditional money.

Halving is a decrease in the rate of mining newcoins. The process is accompanied by a decrease in commissions. At the same time, the reward to miners for work is reduced. Halving takes place every 210 thousand mined blocks or approximately once every 4 years. By the beginning of 2023, there have already been four reductions in the reward.

The next division of the award will take place in May 2024. Miners will receive 3.125 BTC.

If Nakamoto had set the reward at 100 BTC, the final number of bitcoins would be 42 million (twice as many). The history of cryptocurrencies could have turned out differently. However, the developer did not choose the maximum number of coins, but rather was based on the size of the mining reward.

Why the number of bitcoins is limited to 21 million

The first cryptocurrency is often compared to precious metals, called digital gold. At the same time, parallels are drawn with limited reserves. Gold and bitcoin are expensive because they are scarce.

Developers of different cryptocurrencies have pledged limited issuance in the projects. Some BTC 포크 also have a maximum number of coins of 21 million. There are many theories as to why Satoshi Nakamoto did so. The developer himself did not explain anything about the decision.

One of the versions involves replacing the money supply. Nakamoto limited the supply of bitcoins to a finite amount, introduced into the protocol a mechanism for increasing the difficulty of mining coins after certain periods. The developer’s plan was to keep the exchange rate down. And even increase it over time.

Nakamoto wrote about it to Michael Hearn, a member of Bitcoin Core. The developer gave an example: if the value of 0.001 BTC is 1 euro, the price of an entire coin will be 1,000 euros. This rate has been achieved for a long time.

Nakamoto also gave the example of the dollar money supply. In 2009, there was $21 trillion of M1 format (total amount of physical money) in the world. If bitcoin can replace all dollars, there would be $1 million for 1 BTC. Perhaps the developer was picking up a nice value. In 2011, Nakamoto stopped communicating with like-minded people and disappeared from sight. There is no data about him. Therefore, it is impossible to clarify why he chose such a Bitcoin limit.

Demand and supply

There is another explanation, different from the replacement of the money supply of M1 dollars. It is related to the supply and demand of Bitcoins. The program code adjusts the complexity of mining, selecting the value so that the time to create each block is 10 minutes. In this case, the hashing speed and equipment performance do not play a role. At the beginning of the formation of the crypto market, mining was done on weak home PCs. In 2023, farms of hundreds of processors or video cards are used to mine BTC. At the same time, it still takes 10 minutes to create a block.

As soon as the maximum bitcoin supply approaches its peak value, halving occurs. Miners receive 2 times less income.

During the period between halving, they manage to create about 210 thousand blocks. The total amount of rewards in each 4-year cycle is 100 BTC: 50 + 25 + 12.5 + 6.25 + 3.125 + 1.56 + 0.78 + 0.39 + 0.195 + ….. + 1 satoshi = 100. If 210 thousand blocks multiplied by the reward amount of 100 BTC, you get the maximum number of coins – 21 million.

Fiat money substitution

Whoever Satoshi Nakamoto was, but he created cryptocurrency not for fun. It is a complex economic task based on mathematical algorithms. The purpose of creation is to replace fiat money. They have a number of disadvantages that Nakamoto wanted to avoid in his version of digital assets:

• Centralized management.
• Unlimited issuance.
• Exposure to inflation.

In developing bitcoin, Nakamoto sought to create an anonymous, decentralized monetary unit to replace fiat. He used cryptographic methods instead of traditional financial regulatory mechanisms. Satoshi distrusted the banking system, which accepts deposits and makes loans. At the same time, it does not have enough reserves to pay out money to all depositors at the same time.

The developer limited the number of coins in his system – only 21 million BTC can be mined. After replacing fiat money with bitcoins, there will be a shortage of digital assets, their rate will increase. If the price of BTC reaches $1 million, 1 satoshi will be equal to 10 cents.

Other theories for the creation of Bitcoin

We can only wonder why Nakamoto stopped exactly at the figure of 21 million. It is a mathematical calculation, economic benefit or philosophical background – no one can answer. There are different theories, among which there are quite fantastic.

Perhaps, there is a part of truth in all versions and Nakamoto approached the issue comprehensively, taking into account all the nuances. However, Ethereum – the second most capitalized cryptocurrency in 2021 – grew faster than other digital assets. ETH issuance is not limited to a finite value. Therefore, the version about artificially creating demand in order to increase the rate looks unconvincing for now.

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