In 2009, when Bitcoin was put into existence, it was difficult to imagine that a digital, electronically, and cryptographically distributed currency could equate to $11,000/coin (as of mid-2019) in as little as ten years of its foundation. Yet, here we are, trading in cryptocurrencies and on our way to establishing a colossal digital economic empire.
Bitcoin and Mining: How it Works
As has been known since its establishment, the number of ‘earth-able’ Bitcoins is limited to 21 million. In industrial terms, only 21 million Bitcoins can ever be ‘mined’ on the planet. Once miners have reached the threshold of 21 million Bitcoins, their supply on the planet will be tapped out. Even if there is a demand surge, the total cap of the currency will not increase unless there is a protocol alteration, granting a larger supply.
Just as the gold supply on earth is finite, and when all the gold is mined from Earth, we will only deal in buying, selling, and essentially, exchange of gold. Bitcoin abstractly functions similarly. As we mine gold from the ground, we mine Bitcoin using cryptographic methods (digital means synonymous with mining).
Among the huge set of people who support Bitcoin operation as a currency believe that (like gold), a finite currency amount will ensure that no arbitrary or illegal creation or exchange of the same is taking place and will also serve as a bridge to control inflation. The prices are naturally devised by the surge in supply and demand of the buyers and investors in the market.
Bitcoins and Gold: A Glossary
Bitcoin is a lot like gold but more efficient and beneficial. Being digital, the supply is highly scalable, unlike gold. In areas where physical objects like gold may be inaccessible, Bitcoin can sail distances without any barriers. It is not easily manipulated and is supremely secure due to its advanced cryptographic techniques. It doesn’t require paper substitutes, and being digital; it doesn’t eat up space to store.
Thus, the topmost benefit of Bitcoin is its weightlessness and virtuality. Gold being an entity, has to be carried throughout. Another perk is the absence of interference from a governing authority like banks. Even if one trusts authorities like so, there is always a possibility of the authorities breaching into others’ money, and we are only bound to trust them, irrespective of anything. Betrayal, in such cases, is not an impossible incident. Bitcoin’s cryptographic methods make it 100% fraud-free, and its interoperability is excellent and commendable.
Lost and Forgotten Bitcoins
Thousands of Bitcoins are now inactive due to lost wallets and irrecoverable passwords, in the case of forgotten passwords and some cases, the death of the owner. A characteristic of the currency, both good and bad, is its improbable ability to recover passwords. So if there’s a case of password loss, there is no way one can recover their lost money. A rough estimate of the value of lost coins as of March 2018 has been recorded as USD 1.23 billion.
Current Scenario and Future Prospects of Mining
Going by the conventional method, like any transaction taking place is recorded in a ledger, once a Bitcoin transaction takes place, it is recorded on a ‘blockchain‘ which is the backbone of the entire Bitcoin network; the only difference being that this ledger in the blockchain is public and visible to anyone. This technique, molded with cryptography techniques, gives users atomic transactions and verification of their spendable Bitcoin balance.
In August 2019, we reached the mark of mining 85% of the total number of Bitcoins that will ever exist. Only 3 million more coins remain to be mined, which might sound like a worrying statement, but most of us reading this won’t even live to see that day. Per calculations, it would take 121 more years to mine the rest of the 15% Bitcoins; in essence, the Bitcoin threshold will be reached by 2140.
At this point, many questions arise: What will happen when the Bitcoin supply in the world has reached its threshold? Will Bitcoin still be worth the investment after all of it has been mined?
Mining Rewards and Transaction Fee
In the simplest terms, those who mine Bitcoins are called miners and validate any transaction process. In a two-way transaction, the miner mining the Bitcoins in the execution first is rewarded with a fraction of Bitcoins and some transaction fee. As Bitcoin evolves globally, more and more miners will need to join the pool for its benefits, and subsequently, the rewards for mining an entire block halve at every 210,000th block.
Following the same, in the earliest days, miners received 50 BTC for decoding each block. After 210,000 blocks, it halved to 25 BTC and currently stands at 12.5 BTC in 2019. The next halving will occur in May 2020, amounting to 6.25 BTC as the new reward. This halving event roughly takes place every four years or so. We’re currently in the 3rd reward era; the first is 50 BTC, the second 25 BTC, and the present 12.5 BTC. According to the fashion, there will be 34 reward eras in the history of Bitcoin mining.
In addition to these rewards, miners are also incentivized with a transaction fee for unlocking each block. Naturally, as Bitcoin prices hike, the transaction fee also subsequently increases per transaction.
What Happens When the Last Bitcoin is Mined?
This is an answer the world is curiously chasing. Will Bitcoin become history, or will it thrive to a demand splurge? Will miners become unsustainable post the cap limit? It is a strong probability that the transaction fees presented to the miners will keep the cryptocurrency afloat for a long. Thus, even if there are no more ‘mining rewards’ for the miners after the 21 million threshold is reached, they will still benefit from the transaction fees holding them up.
Therefore, even if new Bitcoins cease to exist, miners will still be earning through the process without reward blocks. Though ceasing rewards will narrow down an array of miners off the market.
However, if the transaction fee isn’t sufficient for the miners by that time, there is a significant threat that miners could opt out of the Bitcoin network, resulting in its security undermining and could potentially affect the investors in business as well.
Another proposed prediction is that once the supply is over, there is a probability of an increase in demand for Bitcoin, resulting in an escalation of its net value among investors. According to Satoshi Nakamoto’s Bitcoin white paper, when the incentives transition into transaction fees, the process will completely become inflation-free.
Bitcoin Mining in the Future: Profitable or Not?
When all the Bitcoins in existence have been mined, the transaction fee will be the only standing source of the miners’ earnings. Whether or not this will be profitable will depend on the current value of Bitcoin and if it would financially support the miners.
If mining hardware compacts down to a more efficient system in the next century, saving energy and money, the transaction amount will most certainly keep the miners afloat. Another theory could be the rise in the value of the cryptocurrency to such a level that the transaction fee would be financially sound for all the miners in business.
Another theory is that users could get the transactions fulfilled at lesser fees if the block size keeps expanding. But this will naturally be followed by a decrease in the transaction fee for miners, which may be an unsustainable option for them in the future. However, if the world decides to switch to cryptographic currency exchange methods, the transaction fee could rise because of the eventual demand splurge.
But What Before the Threshold is Reached, in Between?
It took Bitcoin only ten years to reach 85% of its total mining amount. However, there are still a good 100 years ahead of us, and there are invariably infinite possibilities of what can happen with cryptocurrency in this period.
In 2010, a 1 MB size limit was put on the blocks to bar miners from making bigger blocks (which could get rejected by the block network). If the blocks' size wasn’t controlled, the blockchain capacity would overflow, causing it to split. This wasn’t paid much attention to because of the fewer transactions since Bitcoin’s inception.
In August 2017, these issues were addressed as more concerns were alarmed over scalability and block capacity. This was resolved by the Bitcoin Core Developers, which we know as “Segregated Witness, “or in everyday comfortable language, “SegWit”.
What SegWit was about was extracted from the principle of separating signature and non-signature data of individual transactions, thus saving up spaces by minimizing the overall block size. This revolutionary development allowed the blockchain to store more transactions than before. Another upgrade perk is in case of the absence of signatures; it cancels it out, providing malleability, and reducing the weight of the blockchain.
SegWit improved the overall usability and capacity of the Bitcoin interconnection web. This was followed by a reduction in transaction fees as well.
This was one of the foundation outcomes of SegWit, allowing off-chain transactions in the block, thus, reducing transaction fees for lighter block sizes. Lightning Network opens up more channels for two-way transactions between users and the blockchain web in a more widespread reference. The procedures are recorded in the blockchain, as per convention.
The existence of parallel channels accelerates the transactions and enhances the network altogether.
To conclude, whether or not Bitcoin mining and exchange will remain profitable in the future can’t be assuredly anticipated, but the possibilities are endless. It does depend on how one views Bitcoin and at what angle. Miners may stay or leave, but predictably, if mining techniques are made more efficient, the technology has the potential to thrive.