Bitcoin supply is one of the most important topics in the cryptocurrency market. How can we understand what Bitcoin supply is and how it interacts with its emission on a daily basis? We have heard many times how Bitcoin has a limited supply capped at 21 million. But how does it work? How can the Bitcoin network enforce that limit?
In the next sections of this post, we will share with you all the information that you should have about Bitcoin supply and how it has an impact on its network. We will start by telling you which is Bitcoin supply, how it is created, which is the inflation rate of the network and whether BTC is deflationary.
What is Bitcoin Supply?
Bitcoin supply is 21 million BTC. That means that there will never be more than 21 million BTC in existence in the market. This is because Satoshi Nakamoto, Bitcoin’s founder, thought of Bitcoin as a currency that couldn’t be debased. A scarce digital currency that could be used all around the world without having to be worried about centralized parties blocking or controlling the network.
To understand why Bitcoin supply was capped at 21 million, we should know that Bitcoin was created during the financial crisis that expanded in 2008 and 2009. This crisis that had a strong negative impact all around the world was the moment in which Bitcoin was released to the market with a total supply of 21 million.
It is also worth taking into consideration that Bitcoin supply is not the same as Bitcoin’s circulating supply. There are some slight differences between these two terms. The former term refers to the total number of BTC that will ever be created. Instead, the latter makes reference to the BTC coins that are actually in circulation.
Yes, not all 21 million coins are circulating right now. Some of them have not yet been “mined.” Therefore, the current circulation supply of Bitcoin is 19,001,431 BTC, according to data shared by Coingecko.
It is also important to note that users that run a Bitcoin node can easily check which is Bitcoin’s total supply in seconds without having to rely on third parties. Hence, we have 21 million BTC that would ever exist and 19 million BTC that are already in circulation.
Where does the supply of Bitcoin come from?
Now that we know which Bitcoin supply we have and how it works, we then need to know how new coins are created. In traditional banking and financial systems, we see that there is a central bank printing large amounts of money. In the past, it was banks that were also able to create their own banknotes and offer them to the public.
When it comes to gold, increasing its supply means that there should be a mining company extracting physical gold from the ground, refining it and eventually selling it to the market. This is a process that is very expensive and that requires large amounts of work.
If we compare both monetary systems; a system with banknotes that are printed by the governments at a discretionary rate, and a system backed by gold, we can see that there is a clear difference.
But let’s get back to Bitcoin. Bitcoin supply exists thanks to the effort of miners. Not gold miners, but Bitcoin miners. Bitcoin miners are those individuals and companies that run specialized hardware and protect the network from being attacked by third parties. This process is known as Bitcoin mining and it has become very specialized in recent years.
Mining Bitcoin requires large amounts of energy and investments. The larger the number of miners and the hash rate they provide to the network, the more difficult the mining activities become. Hence, it is very difficult to find blocks faster. This is because there is a limited supply that has been programmed in order for Bitcoin supply to always stay at 21 million.
What is Bitcoin’s Inflation Rate?
Bitcoin’s inflation rate is variable. Is not fixed and it changes over time depending on the circulating supply and the new coins that are created on a regular basis. Bitcoin inflation rate is not fixed as many believe, and this is also something that has to be related to the fact that Bitcoin is also not deflationary in nominal terms.
At the time of writing this article, Bitcoin’s inflation is at 1.723% per year. That means that the inflation on the Bitcoin supply and network is below the inflation rates of most developed countries in the world. Indeed, the inflation rate is even below the inflation targets that central banks around the world established between 2% and 5%.
Bitcoin inflation rate decreases every single hour. New coins are mined every close to ten minutes, which are added to the circulating supply. However, the mined coins are fixed, and therefore, they represent a smaller increase in the total circulating supply each hour.
At the same time, there are some specific events that massively reduce Bitcoin’s emission. These events are called halvings and we will get into the details later in the post. Furthermore, Bitcoin’s inflation rate has been fluctuating between 1.91% and 1.38% since May 2020 until now.
Usually, when a large number of miners get disconnected from the network (for example, when China forbade mining activities or when the Bitcoin network split with the Bitcoin Cash vs Bitcoin Satoshi Vision hard fork), the inflation rate decreases. As the hash rate decreases, the possibilities of finding a block with transactions (and getting rewarded with new BTC) fall.
This is why we can sometimes have differences in the inflation rate on the Bitcoin supply.
Is Bitcoin Deflationary?
No. Bitcoin is not deflationary. This is very important to understand because people think that Bitcoin is a deflationary asset. If Bitcoin would be a deflationary asset, that means that the circulating supply should be lower than a few years ago. However, Bitcoin’s circulating supply continues to grow and it is expected to continue growing in the coming years.
One of the reasons why people believe that Bitcoin is deflationary is due to the fact that Bitcoin has a limited supply. Bitcoin supply is limited to 21 million. Nevertheless, we need to wait until the year 2140 in order for all the Bitcoin to be mined, which we do not expect to see.
Until then, the new BTC will be mined in each and every single block that miners process. There might be a moment in which the total coins created per block will be smaller than the coins that get lost on a daily basis. However, we might have to wait some more time in order for this to happen.
Another thing that we should take into consideration is that the price is a very important factor in the Bitcoin network as this is the natural way to stabilize supply and demand in the markets. The higher the price, the more difficult it becomes for investors to purchase Bitcoin. Due to the fact that there is no way to increase its emission, the price works as a way to stabilize both supply and demand for BTC in the market.
The only way for Bitcoin to become deflationary is for the whole network to lose more BTC than the ones that are created on a daily basis. This is something difficult to happen in the near future.
Understanding Bitcoin Emission
Now it is time to understand emission cycles on Bitcoin supply. This would require us to have a clear idea of all the previous concepts discussed in this post. How can we understand Bitcoin emission?
One of the most important things to take into consideration is that every close to four years (210,000 blocks), the Bitcoin network experiences a halving event. This reduces the new issuance of Bitcoin, making demand shocks less easy to absorb.
At the same time, halving events play a very important role in Bitcoin supply. We will discuss that in the next section.
What are Halving Events?
Halving events take place every four years and they are very important for the Bitcoin supply. Why? Because the new issuance of Bitcoin gets reduced by 50%. Nowadays, every single day, 900 BTC are created through block rewards.
This is equal to 6.25 BTC per block (without counting the fees). Miners receive this reward in order to process blocks and keep the network secure. The higher the incentives in terms of BTC price, the larger the hash rate for the Bitcoin network.
In 2024, the Bitcoin network is expected to experience a new halving event. This halving event is going to reduce the new issuance of Bitcoin from 6.25 BTC to 3.125 BTC. As you can see, rather than having 900 new BTC created on a daily basis, 450 BTC would be released to the market.
The lower the new issuance of BTC, the more bullish this is for Bitcoin price. This is something that many investors pay close attention to when purchasing BTC for the long term. The halving event cycles would continue until all the BTC are mined in 2140. However, most of Bitcoin’s supply will already be mined before that date.
What are Bitcoin Miners and How do they Work?
Bitcoin miners play a very important role in the cryptocurrency space. They are in charge of protecting the Bitcoin network and processing transactions that have already been validated by nodes. Thanks to miners, new BTC are created and the network can keep up with transactions.
Miners require large amounts of energy to run their operations, as ASIC miners (hardware machines) are required in order to process transfers. The larger the hash rate on the Bitcoin network, the more difficult it is for miners to be profitable mining Bitcoin.
Let’s not forget that miners would only be able to receive their rewards according to the hash rate that they contribute to the network. The larger the hash rate of the whole Bitcoin ecosystem, the lower the rewards for miners.
Nowadays, most Bitcoin miners operate in different mining pools. These pools work together in order to be able to have higher chances to find a block. The larger the mining pool, the easier it becomes for the miners to get rewarded.
Finally, every single time that miners find a block, they get rewarded with 6.25 BTC + fees. These funds are then added to the Bitcoin supply. This is how new BTC are created and how they can have an impact on the market and the total Bitcoin supply.
What Happens with Lost Bitcoins?
Now, what happens with Bitcoins that get lost forever? We are talking about Bitcoins that were sent to the wrong address (to which no one holds the private keys) or that have been simply forgotten by users. As you already know, Bitcoin does not have a customer support service or a centralized authority that would be able to help you recover your funds.
If you lost your wallet and private keys or if you sent your funds to the wrong address, these funds can then be considered lost forever. Hence, you should know that it is very important to be responsible with the funds that we manage when handling Bitcoin and other virtual currencies.
The BTC that have been already lost and that will get lost reduce the total Bitcoin supply. For example, if we have 19 million BTC in circulation, we should now take into consideration that close to 3.79 million BTC have been lost forever, according to some reports. This shows that the real Bitcoin supply that is in circulation is smaller than the 19 million reported by Coingecko or the Bitcoin blockchain.
If we lose our BTC, then we don’t only lose our funds, but we make Bitcoin scarcer. Nonetheless, it might take some time for the rate at which Bitcoins get lost to be larger than the rate at which new BTC are created.
What Happens After all Bitcoins are Mined?
Once all Bitcoin is mined, miners are going to receive transaction fees as rewards. By that time, it is expected for the value of Bitcoin to be so high that transactions will be worth more than now. Nonetheless, there are some things that should be taken into consideration.
In many years from now, most Bitcoin transactions might be conducted off-chain (i.e. using the Lightning Network (LN)). That means that on-chain transactions would only be processed by large institutions moving funds or closing Lightning Network channels after processing thousands of transactions.
The economic activity on the Bitcoin network is expected to grow even more, therefore, miners should not be worried about what could happen after all Bitcoin is mined. Another thing to point out is that Bitcoin supply will have reached a limit and Bitcoin’s price might now be higher.