In 2009, when Bitcoin was put into existence, it was difficult to imagine back then that a digital, electronically and cryptographically distributed currency could equate to $11,000/coin (as of mid-2019) in as little as 10 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, there are only 21 million Bitcoins that can ever be ‘mined’ on the planet. Once miners have reached the threshold of mining 21 million Bitcoins, its supply on the planet will be tapped out, and 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 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 in a similar manner. As we mine gold from the ground, we mine Bitcoin using cryptographic methods (which are digital means synonymous to mining).
Among the huge set of people who do 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 of 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
There are thousands of Bitcoins that are now inactive due to lost and wallets and irrecoverable passwords, in the case of forgotten passwords and in some cases, the death of the owner. A characteristic, both good and bad, of the currency, 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 per March 2018 has been recorded as $1.23 billion USD.
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 moulded with cryptography techniques gives a user atomic transactions and verification of their spendable Bitcoin balance.
In August 2019, we reached a 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 worry some 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, that the Bitcoin threshold will be reached by 2140.
At this point, a lot of questions arise: What will happen when the Bitcoin supply of 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 the benefits of it 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 take place 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; first being 50 BTC, second 25 BTC and the present being 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 long. Thus, even if there are no more ‘mining rewards’ for the miners after the 21 million thresholds is reached, they will still benefit from the transaction fees holding them up.
Therefore, even if new Bitcoins will cease to exist, miners will still be earning through the process in the absence of reward blocks. Though ceasing of rewards will indeed 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 stands considering 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 will transition into transaction fees, the process will become completely inflation free.
Bitcoin Mining in Future: Profitable or Not?
When all the Bitcoins in existence will have been mined, the transaction fee will be the only standing source of the miners’ earning. Whether or not this will be profitable will depend on the current value of Bitcoin and if it would be financially supportive of the miners.
If in the next century, mining hardware compacts down to a more efficient system, 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 to consider is that if block size keeps expanding, users could get the transactions fulfilled at lesser fees. But this will naturally be followed by a decrease in the transaction fee for miners, and again, may prove to be an unsustainable option for them in future. However, if the world altogether decides to completely switch to cryptographic methods of currency exchange, the transaction fee could rise because of eventual demand splurge.
But What Before the Threshold is Reached, in Between?
It took Bitcoin only 10 years to get to 85% of its total mining amount, but there’s still a good 100 years standing ahead of us, and there are invariably infinite possibilities of what all can happen with the cryptocurrency in this period.
In 2010, a 1 MB size limit was put to the blocks to bar miners from making bigger blocks (which could get rejected by the block network). If the size of the blocks wasn’t put to control, the blockchain capacity would overflow, causing it to split. This wasn’t paid much attention to because of the less amount of transactions taking place 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 minimising the overall block size. This revolutionary development allowed the blockchain to store a greater number of transactions than before. Another upgrade perk being in case of absence of signatures, it cancels it out, providing malleability, reducing the weight of the blockchain.
SegWit resulted in excelling 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. In a more widespread reference, Lightning Network opens up more channels for a two-way transaction between users and the blockchain web. The procedures are obviously recorded in the blockchain, as per convention.
Due to the existence of parallel channels, it accelerates the transactions and enhances the network altogether.
To conclude, whether or not the Bitcoin mining and exchange will remain to be profitable in 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.