Bitcoin is celebrated by supporters and admonished by skeptics because of its finite supply. There are only 21 million bitcoins that can ever be mined, regardless of the earth’s population and its corresponding demand for bitcoins. Once all 21 million have been mined, there will never be any new bitcoins (unless a change to the protocol is made to increase the supply).
Also read: The Subjective Valuations of Bitcoin and Gold
Supporters love Bitcoin’s fixed supply because it harkens back to the days of the sound money gold standard. Gold shares many similarities with Bitcoin, the most obvious being its fixed supply. Gold cannot be created out of thin air in arbitrary amounts, it must be extracted from the earth and put into circulation as market prices dictate. A gold standard hinders banks’ abilities to issue fiduciary media, since at some point the bank will be forced to redeem its paper notes in gold. Bitcoin — if it ever achieves as widespread use as gold — can accomplish these same things with its own fixed supply.
Bitcoin: Gold but Better
Bitcoin takes gold’s benefits a step further, though, by being digital. The Bitcoin supply is not only incapable of being arbitrarily manipulated, it also eliminates the need for paper substitutes by being totally weightless and virtually costless to store. With gold being so heavy and taking up so much physical space, people under a gold standard tend to prefer paper substitutes for gold rather than carrying actual coins on their persons. This practice leaves gold in the bank, forcing people to trust the bank to handle their gold responsibly. Thus, even under a strict gold standard, banks can still betray their patrons’ trust and create new deposits and issue fiduciary media. Bitcoin’s digital nature eliminates this problem; since it costs almost nothing to store, and it takes up zero extra space, Bitcoin can be carried on one’s person with no extra burden. No more paper substitutes are needed, and banks no longer have an opportunity to create money from thin air.
Despite these promising benefits, people still take issue with the fact that Bitcoin has a finite supply. One issue critics like to harp on regarding Bitcoin’s fixed supply is how miners will fare once they lose their block rewards. They worry that the mining system is unsustainable because once all the bitcoins are created, miners will have to rely on transaction fees to keep themselves financially operational. Critics say that a reliance on miner fees instead of a block reward will make mining very unaffordable, which will lead to a contraction of miners, a centralization of the network, and possibly a complete collapse of the network.
Will Bitcoin Mining be Profitable After all the Bitcoins Have Been Mined?
It is true, once all the bitcoins have been mined, transaction fees will be the sole source of income for miners. The main concern, then, is whether or not transaction fees will be enough to keep miners financially afloat.
Using current mining costs as a measure of required mining profitability over 100 years from now is dubious, since we don’t know how mining technology will progress over time. It is entirely possible that mining chips will become so small and cheap that they can be installed on all electronic devices — similar to the goal 21 Inc. hopes to achieve. This development would turn mining from a purposeful business decision to an after thought, surviving in the background of daily life. Furthermore, mining hardware may become so energy efficient over the next century that transaction fees prove to be plenty to keep miners in business.
It may also be the case that transaction fees simply rise to a level sufficient for mining profitability. If, once all the bitcoins have been mined, the entire world uses the digital currency as its primary medium of exchange, then it is possible that transaction fees will rise due to an increase in the demand for transactions.
However, the likelihood of fees rising to such a rate is uncertain at this point, since the consensus in the community at present is to have a gradually increasing block size to ensure network scalability. This means that, if the block size continues to grow, people will always be able to have their transactions confirmed at low fees. This prospect may seem like a threat to the network on the surface, as it entails forcing miners to survive on low fees after the block reward is gone. But not increasing the block size may be an even larger threat to the network than low transaction fees. If blocks reach their maximum size, no more transactions can be confirmed until a new block is created, which means excess transactions will be dropped from the network. This scenario may mean higher fees for miners — since people will pay higher fees in order to get their payments through — but it would also greatly discourage people from using Bitcoin altogether, which could kill the digital currency much faster than a centralized mining network.
Although Bitcoin’s fixed supply means that miners will eventually have to give up their block rewards, it also creates an opportunity for miners to survive on transaction fees through simple monetary theory. Once all 21 million bitcoins have been mined, the supply cannot increase — regardless of growing demand. The result of this discrepancy between the supply of and demand for money is a steady and gradual decrease in the general price level, which equates to an equally steady and gradual increase in the purchasing power of money. Therefore, as Bitcoin miners collect transaction fees over time, no matter how large or minute, the funds gain value. This value appreciation across time turns fee-centric mining into a financially infeasible task to a sensible, long-term investment.
To conclude, there are several different ways that Bitcoin mining can remain profitable after the block reward goes away — the above examples are but a few in a myriad of possibilities.. Furthermore, since the block reward gradually diminishes over time, rather than disappearing all at once, miners have the chance to gradually adapt and adjust to relying more on transaction fees than revenue from mined bitcoins. The most likely combination of factors that will keep miners afloat in the future is evolving mining technology and the steady increase in Bitcoin’s purchasing power. However, our visions of the future should not be limited by our imaginations. Being unable to imagine something does not render it impossible; the spontaneous evolving and shifting of the market economy reminds us of this fact every day.
Do you think Bitcoin mining will remain profitable after the block reward goes away? Let us know int the comments below!
Images courtesy of Pixabay and BitcoinTalk
The opinions expressed in this article are not necessarily those of Bitcoin.com.
Evan is the Senior Editor of Bitcoin.com. He has a bachelor’s degree in History with minors in Economics and Political Science. When he’s not acting like he knows what he’s doing in the newsroom, Evan is most likely playing video games. Follow Evan on Twitter @EvanFaggart.