100M BTC???...047
Every now and then I do a short piece on topics I think are worth going into a bit greater depth about. I wanted to speak about Bitcoin, and how it is only fixed in anything because the majority agree for that to be the case. Hope you enjoy, feel free to leave feedback.
100M BTC???
You’ll probably know that Bitcoin’s supply is currently limited to 21,000,000, BTC and the current circulating supply is around 17,600,000 BTC (although, a large amount have been lost).
Many investors use this element of scarcity as one of their main arguments for investing in Bitcoin. They often compare it to gold, which has a limited supply. Back to the fundamentals of markets, it comes down to Supply VS Demand. If supply is fixed and demand is only rising, the price will of course increase.
Scarcity is cited many times, saying there is only enough BTC for 21M people to own one etc.
But what if the supply could change? What would that mean for Bitcoin and the digital landscape? Can it change? and at what cost?
This short article will explain that yes, the supply of Bitcoin can change, why the change might happen down the road and the impacts of such change.
First…Why can it change?
This is a great question, many people think that it is fixed in the code that there will only ever be 21M BTC. Which is true. However, the open-source blockchain network that Bitcoin runs on is based off of a consensus algorithm, which is another way of saying the majority of people / computers running the network agree for those rules.
All it takes is the majority of nodes (technical term for computers running the network) to decide that actually, they want to increase the supply of BTC.
Why would they do that?
So, the nodes that run then network use vast computing resources to ensure that the ledger is correct and to compete for the reward. As it currently stands, the miner / group of miners that successfully solves the algorithm and adds the next block to the blockchain, gets rewarded with 12.5 BTC ($50,000). This may seem like a lot of capital, but the resources needed to ‘win’ this amount are extensive. Winning is partial luck and partially due to the amount of computing resources you have. Kinda like buying a stack of lottery tickets, it increases your odds massively but doesn’t guarantee anything.
Back to why miners would seek to increase supply…
In 430 days (24 May 2020) the mining reward HALVES. If the price of Bitcoin remained the same, that’s the equivalent of your income halving but you putting the same amount of work in. The overheads wont halve! When was the last time your electricity bill halved lol.
DEPENDING on the PRICE of Bitcoin, many miners may struggle massively to remain afloat.
Would they increase the supply at this point?
No.
Increasing the supply, would only cause the value of BTC to drop. With the reward being fixed at a certain level, this would only hurt the miners.
The next block halving would hurt much more, this will be near 2025 and drop the reward to 3.125 BTC. Again, depending on the price of BTC, miners may be obsolete or be controlled by a few large entities… this is important (and the trend we are starting to see).
120 years from now, in 2140, all the BTC will be mined, and the miners would have switch to fees, which are more than likely going to be inadequate for a large entity to remain afloat (wouldn’t be profitable).
But yes, that is far far away.
But what is stopping them increasing both the supply and the reward they are given. This way, the investors would take the biggest hit but they would be able to continue taking the larger fee over a prolonged period of time.
I personally think if Bitcoin mining becomes too centralised, we will see this entity controlling the rules for their economic benefit going forward, at the expense of the people.
Rules can be changed, and the only thing the giant mining firms care about is their profits. I expect that this may well be the case if mining becomes too centralised, because remember, it needs the majority consensus for change to happen. Otherwise you just end up with Bitcoin Cash, Diamond, ABC, 123 etc…
I don’t think at the moment, or over the next few years, this will be a threat, but for a lot of long term investors, this is something to think about and potentially plan an alternative to BTC nearer this time.
I hope you enjoyed today’s piece, let me know your thoughts by replying to this email!
All the best,
Devin