One of the features that Bitcoin is most proud of is its maximum supply of 21 million. Because this asset is like a finite resource like gold: but what happens when 21 million Bitcoins are mined?
Bitcoin Mining: fast returns
Before we dive into the future of Bitcoin mining, let’s take a quick look at how it works. New Bitcoins enter circulation through the mining process. It involves users using a powerful computer to solve cryptographic puzzles involving part of blockchain operations. In return, they receive a block reward for their efforts.
When the first Bitcoin is created, each block added will earn miners 50 Bitcoins. However, every 210,000 blocks, or roughly every 4 years, Bitcoin halves, which cuts the reward in half. So far it has been 3 and a half and each block added now earns 6.25 Bitcoins from miners. The next halving will happen sometime in April 2024, when the next block reward will be reduced to 3,125 Bitcoins.
Now that we understand how Bitcoin mining works, let’s explore what happens when the limit of 21 million Bitcoins is reached.
The transition from block rewards to transaction fees
You can see where this is going: eventually, once the limit of 21 million Bitcoin is reached, the block reward will drop to zero. So what is left to encourage miners to stay?
Unlike gold, which can continue trading without miners, Bitcoin miners are needed because they are the ones who validate transactions and maintain the system. This includes transaction fees. In addition to just the block reward, the miner receives all the payments from the transactions specified in the block paid by the sender.
The idea is that when the block reward eventually runs out, Bitcoin’s optimal adoption is wide enough or the price is high enough that the payout is enough of a reward for miners to keep building blocks. However, some people question the viability of fees alone as a sufficient incentive for miners to remain, as fees constitute only a small portion of the miners’ total revenues.
Bitcoin Ordinals and recent events have led to an increase in payouts between bear markets. This is certainly a boon for miners, but it remains to be seen whether this will continue into the indefinite future.
