Bitcoin, created after the 2008 crisis by Satoshi Nakamoto, offers a decentralized alternative to fiat money with a fixed 21M supply, avoiding inflation risks.
Why was Bitcoin designed to have a maximum total supply?
Bitcoin was born in the wake of the global financial crisis in 2008, created by the pseudonymous Satoshi Nakamoto as an alternative currency for those disillusioned with the traditional financial (TradFi) system. Nakamoto’s design explicitly avoided some of the perceived pitfalls of TradFi, including reliance on third parties like sovereign governments and banks.
The world’s most-used currencies are fiat currencies. This means that their value is backed fully by the power (or words) of the governments that issue them. In the United States, the dollar used to be guaranteed by the value of gold held in the government’s coffers. However, this “gold standard” was abandoned in 1971, paving the way for widespread fiat currencies. Though this has its advantages, it also means that governments can print—and thus devalue—their citizens’ money.
Given the problems uncovered by the financial crisis and the power granted to centralized, trusted bodies, Nakamoto’s Bitcoin differed substantially in many ways from fiat. One of these differences is that Bitcoin has a maximum supply: 21 million BTC. No one can “print” more coins, and this simple feature ensured a balance of supply and demand that favored price appreciation.
But why 21 million specifically? There are many theories about this. Some are derived from careful examination of Nakamoto’s e-mails, including the belief that the 21 million figure was based on an educated guess, estimating that 0.001 BTC would be worth 1 euro if it were used for “some fraction of world commerce.” Another theory is that Bitcoin’s 4-year cyclic schedule, with 210,000 blocks between each halving, naturally leads to a maximum supply of 21 million BTC. No one knows for sure, and the answer is as mysterious as Nakamoto’s identity itself.
How does the issuance of new bitcoin create disinflation?
New bitcoin is issued (created) at a stable rate of coins per block, which is re-defined every 210,000 blocks (~4 years) by an event called the halving. This occurs through a process called mining, in which computers solve an algorithm to arrive at the answer to a problem and earn the right to create a new Bitcoin block. Bitcoin nodes collect the block reward, and they can sell these coins for a profit.
Every 210,000 blocks, the reward is cut by 50% (“halved”), which fosters a system where new bitcoin is issued at progressively lower rates. This naturally creates disinflation—or decreasing rates of inflation over time—because of supply/demand mechanics. Upon the last halving, inflation will be nearly 0% per year.
What happens when the last bitcoin is mined?
The last satoshi should be mined around the year2140, barring any community-driven changes (or forks) to Bitcoin’s operations. When this occurs, Bitcoin’s inflation will officially be 0%. No more BTC can possibly be created, and all BTC will either be in circulation or otherwise accounted for (e.g., lost). The implication is that Bitcoin’s price will then be tied solely for its demand, as its supply will be constant.
There is additional speculation about what will happen to the operation of the Bitcoin network. Currently, Bitcoin nodes are incentivized to perpetuate the blockchain through mining, because block rewards come with the ability to create profit. When block rewards become zero, what reason will those players have to continue to maintain Bitcoin? The obvious risk is that a lack of incentives will make the network stagnant, because no one will want to maintain the network.
However, the other way that nodes can earn profit from blockchain maintenance is by validating transactions. Nodes can participate in the Bitcoin network by collecting transactions, communicating them with other nodes, and then adding them to blocks. For this service, they collect the fees that users pay with each signed transaction. With a theoretically high demand and flat supply, the rising value of BTC and its network fees would be sufficient for reimbursing nodes—making up for the loss of mining rewards.
In the end, no one knows what the future holds for the Bitcoin community. Through decentralized governance and active development, Bitcoin may evolve as its circulating supply approaches its maximum supply. What is speculation now may become completely irrelevant as the users and developers of Bitcoin help it mature into the future.
Conclusion
Bitcoin was designed to have a maximum supply of 21 million BTC, creating a disinflationary currency to oppose the features of fiat currencies.
Through halvings, the rate that new BTC are mined and enter the market slows down over time, and the last satoshi (sat) will be mined in 2140.
When all 21 million bitcoin are mined, block rewards will no longer exist for miners, but nodes can still earn profits by collecting transaction fees. This will provide the economic incentive to maintain the network.