Satoshi Nakamoto hard-coded Bitcoin’s limited supply of 21 million coins to make it scarce and free it from possible manipulation.
- Restricting the supply increases the price of individual Bitcoin tokens.
- The demand and supply principle applies to most cryptocurrencies, the primary determinant for their growth and value.
- The digital currency’s utility as a store of value depends on its performance as a medium of exchange.
Bitcoin has gained popularity since its inception in 2009. Over time, many people have fronted Bitcoin as a credible store of value and an alternative to central bank-backed fiat currencies. Bitcoin operates on a decentralized network, which means no centralized authority or financial institution controls it.
The ability to operate on a peer-to-peer network distinguishes Bitcoin from other traditional currencies. Nodes on a global network of computers execute and verify Bitcoin transactions, which are then recorded on a digital ledger known as the Blockchain.
Blockchain technology represents an immutable, decentralized ledger that enables secure, verifiable, and transparent transactions. This network contains a trace of all Bitcoin transactions and cannot be altered, making it a reliable and secure online exchange method.
People have compared Bitcoin’s value to gold. Both assets have a limited supply and select use cases. Gold has industrial value, while Bitcoin’s underlying technology, the Blockchain, has found its place within the financial services sector. However, Bitcoin’s limited supply makes it fundamentally different from gold.
Bitcoin’s limited supply
The demand and supply principle applies to most cryptocurrencies, the primary determinant for their growth and value. Bitcoin, the most valuable crypto coin, is no different. Satoshi Nakamoto, the mysterious figure credited with cryptocurrencies’ origin, envisioned the significance of Bitcoin’s limited supply, capping it at 21 million coins.
The limited supply means only 21 million Bitcoin tokens will be mined or circulated. Although Nakamoto did not explain establishing the hard limit cap, many consider it a significant benefit for the world’s oldest cryptocurrency. Consequently, Bitcoin’s limited supply makes it scarce and maintains its price stability for years.
Over 19 million bitcoins have already been mined as of March 2023. This implies that only about 2 million bitcoins are available for mining, and if that limit is met, no more bitcoins will be generated. Current approximations for mining of the final Bitcoin place that date somewhere in February 2140, according to Investopedia.
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Why the limited supply
Satoshi Nakamoto hard-coded Bitcoin’s limited supply to make it scarce and free it from possible manipulation. The hard limit ensures that the creation rate for new Bitcoin tokens remains low even as more mining occurs. This process is known as bitcoin halving, which happens every four years.
The Bitcoin protocol is designed to halve the mining reward for every 210,000 blocks. With more mining, the rate of creating new Bitcoins reduces gradually. The initial reward was 50 bitcoins per block. This figure has halved several times and currently stands at 6.25 bitcoins per block. The halving will continue until the reward reaches zero when no more bitcoins can be created.
Bitcoin’s limiting concept lies in asset scarcity, which remains crucial to the law of economics. Theoretically, restricting the supply increases the price of individual Bitcoin tokens. With the demand for Bitcoin increasing but supply remaining fixed, the price most likely increases as well. This concept emanates from the law of supply and demand.
Bitcoin’s limited supply of 21 million coins also reduces the inflation risk. Inflation represents a decrease in a currency’s purchasing power to an increase in supply. Governments can manipulate fiat currencies and even print more money, causing inflation. Bitcoin’s fixed supply makes it deflationary, with immunity to withstand.
The 21 million coins Bitcoin cap also comes from the mathematical rules set in the code. Bitcoin’s security is based on the proof-of-work concept, where miners compete to solve complex mathematical problems to add new blocks to the Blockchain. Bitcoin’s limited supply ensures that miners will always have rewards. The rewards incentivize miners to continue mining and securing the network. With the limit hardcoded into the Bitcoin protocol, nobody can alter on interfere, including miners and developers.
Challenges with Bitcoin’s value despite limited supply
Despite Bitcoin’s limited supply, issues persist regarding its usage as a store of value. The digital currency’s utility as a store of value depends on its performance as a medium of exchange. If Bitcoin does not succeed as a medium of exchange, it will not find usage as a store of value.
Since Bitcoin’s inception, speculative interest has remained the primary driver for its value. The pioneer cryptocurrency has shown attributes of a bubble with price runs and a trend of media attention. Such characteristics will continue to decline as Bitcoin achieves mainstream adoption. Nevertheless, the future remains uncertain. Recently, frauds, thefts, and hacks, thefts, have plagued the digital currency sector. Challenges around crypto’s exchange spaces and storage also challenge Bitcoin’s transferability and utility.
Doubts as to Bitcoin’s value and money-like functions
The price investors can readily pay for Bitcoins is socially agreed upon on a level influenced by demand and supply principles, just like any other asset or valuable item. Since Bitcoins are virtual and only exist within computer networks, some individuals have difficulty understanding that Bitcoins are finite and have a production cost. Due to their refusal to acknowledge that digital traces can hold value in this manner, they remain reluctant to allocate value to Bitcoin. Others who fully understand the Bitcoin system have no issue attaching value.
Bitcoin’s market price remains highly volatile and susceptible to significant price fluctuations. Consequently, the market price may change drastically from its fair or intrinsic value at any time. Nonetheless, oversold markets tend to recover, and overbought markets calm over time. Without hindsight, it becomes difficult to determine whether Bitcoins are equitably valued at any given moment.
While Bitcoin has several characteristics similar to money, economists and regulators remain unconvinced that it currently functions as money. This is because Bitcoin transactions and Bitcoin-denominated commodities are relatively uncommon. Even though individuals can trade Bitcoin in large volumes and transmit value across the network, there is little commercial activity.
