What happens when all 21 million bitcoins are mined?
People, who wonder about the long term viability of the bitcoin protocol, ask the question what happens when all 21 million bitcoin are mined and bitcoin reaches its hard cap. Will mining stop and bitcoin fail? What’s all this about?
When bitcoin approaches the 21 million hard cap, mining will be increasingly incentivized by fees. Over time, newly issued coins will be less important to reward miners for their work on the network. The reward for miners will transition to a fee based compensation. Mining will not stop in the future if bitcoin wins against fiat money, which is possible and likely.
Bitcoin mining – How does it work?
To understand what happens when all bitcoi are mined, we need to understand how miners are rewarded. Bitcoin relies on a proof-of-work for mining. This proof of work is a security feature. It keeps the bitcoin network secure from attack. In a nutshell, it works like this: A miner buys mining equipment, which is specialized computer hardware, known as application specific integrated circuits (abbreviated as ASICs.) The miner then runs these ASICs in a mining facility expending physical energy. Every so often, the miner finds a valid solution to the proof of work algorithm, which is then broadcast to the bitcoin network and incorporated into the bitcoin database (which is also called blockchain or timechain) as a new block with transactions. For the effort of converting energy into bitcoin blocks, the miner is paid a block reward.
The block reward is currently 6.25 bitcoin (BTC) for each valid block. The reward started at 50 bitcoin per block at inception and is cut in half every 210,000 blocks in blocktime. That works out to be about every 4 years in human time. The bitcoin block reward issuance into the market looks like this if we plot it over time:
Block Rewards Are coming Down
Block rewards are coming down over time. They will be approaching zero in the future. I've made a table for you to see what that looks like over time:
| Epoch | Year | Block Reward (BTC) |
|---|---|---|
| 0 | 2009 | 50 |
| 1 | 2013 | 25 |
| 2 | 2017 | 12.5 |
| 3 | 2021 | 6.25 |
| 4 | 2025 | 3.125 |
| 5 | 2029 | 1.5625 |
| 6 | 2033 | 0.78125 |
| 7 | 2037 | 0.390625 |
| 8 | 2041 | 0.1953125 |
| 9 | 2045 | 0.09765625 |
We are currently in epoch 3 where the block reward is 6.25. You can see from this table, that we will go below 1 bitcoin per block at the end of the decade. Because of that, some people spread the false idea that bitcoin is conceptually broken and that mining will end in the future because the block reward will not be enough to sustain most mining operations at that time. The next paragraph will explain, why that’s wrong.
Transaction Fees
Miners not only make block rewards, they are also making fee revenue. Every bitcoin transaction has a fee associated with it and miners are paid the block reward plus all of the fees for every transaction in the block. Miners’ fee revenue varies and is a question of how many transactions compete for block space. I am typing these lines at blocktime 706070 (which was the last valid block). The block contained 2525 total transactions and 0.11 BTC in fees for the miner. The block before that included 0.06 BTC and the one before that 0.09 BTC.
In the above table, epoch 9 (which begins around 2045) has the same block reward as fees are currently. In other words, if fees dont change in the future, they will be as important as block rewards around that time frame. If fees increase over time because there’s more competition for transactions, that transition to fees will happen sooner than that.
In any event, fees will outpace block rewards in the future and the incentive for miners will then be to validate blocks with higher fees. Bitcoin will not end at the hard cap because no new tokens are issued. It will transition into a fee based reward system over time.
NgU Technology
NgU is short for number-go-up, which is a meme describing bitcoins relentless monetization process over the last 12 years despite all the naysayers.
You might think, that if fees will not change in 2045 and thereafter, that 0.11 BTC per block does not seem to great a reward as an incentive for mining activity. After all, that’s only around $7000 at the current exchange rate.
Because bitcoin is absolutely scarce, it will likely outlast any fiat currency and possibly demonetize all fiat store of value assets such as gold, real estate, bonds and stocks. The total addressable market for store of value assets is in the order of 100 to 500 trillion dollars in today’s dollars. Bitcoin is about 1 trillion today, which is only 0.2 to 1 percent of the total addressable market. That means, that bitcoin has a runway to increase 100 to 500 fold in value.
If that happens, 0.11 BTC around 2045 could have an equivalent purchasing power of somewhere between $700,000 and $4.5 million on today's’ dollars, and possibly even higher than that. In that scenario, the Dollar and other fiat currencies will have failed and bitcoin will be the money for the world. 0.11 BTC will be a small fortune and plenty in terms of incentivising miners. Considering that fiat currencies last, on average, for 30 years before failing and the fiat dollar would be 74 years of age in 2045, I find that scenario not too far fetched: It is my base case at this time.
Summary
It is true, block rewards are coming down over time, but the bitcoin protocol allows for fees to reward miner activities and bitcoin purchasing power has been relentlessly increasing over time. It reasonably will keep trending up to the point where other currencies will become worthless and only bitcoin is money. At that stage, fee revenue will be enough incentive for mining activity and mining will not stop in the future if block rewards drop to very low amounts.
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