What Happens to Bitcoin Once it’s All Mined?
Masterworks All fiat currencies have minting, the process by which a national government prints new currency using a protected process. It does this as part of a complex financial policy calculation to strike the right balance between inflation and unemployment.
But cryptocurrencies like Bitcoin aren’t controlled by any central government, and they don’t have any physical counterpart to a real life mint. Instead, cryptocurrency relies on mining, which is a surprisingly telling choice of phrase because of another key difference between fiat currency and cryptocurrency—while fiat currencies could theoretically be minted without limit to introduce a new currency, there’s only a finite number of cryptocurrency coins that will ever enter circulation.
What happens to Bitcoin once it’s all mined? It’s a more complex question than you’d think, and it has to do with how Bitcoin will function in the future. Here’s what investors should know.
What is Bitcoin Mining?
First, it helps to understand what Bitcoin mining is and how it actually works, which is fundamental to how Bitcoin functions (and any cryptocurrency in the world, for that matter).
Bitcoin is the earliest, most popular, and most widely recognized type of cryptocurrency. It exists solely online without any oversight or guarantee of value from any national government. Instead, it runs on blockchain: a decentralized, distributed ledger used to track transactions and make it all but impossible to counterfeit or double-spend.
When computers on the blockchain network verify a new transaction, new Bitcoins are created, or mined. Think of it like a never-ending receipt, with new lines being added to the receipt all the time. Bitcoin mining is the process of adding new lines to the receipt (or, in technical terms, adding new blocks to the chain).
How It Works
Of course, it’s not quite as easy as just typing in any new transaction as you please. Otherwise, there would be a lot more Bitcoin in circulation right now.
Bitcoin mining serves two essential roles:
- Mining allows new Bitcoins enter circulation
- Mining confirms new transactions, thus fulfilling an essential maintenance and development role for the whole ledger
Here’s the catch: mining is hard. Really, really hard.
Essentially, in order to add a single new block (a single new transaction) Bitcoin miners have to complete a complicated math problem. Complex meaning the problems are impossible to complete without specialized (and extremely expensive) computers supported by an equally expensive amount of electricity. Such computers are called application-specific integrated circuits, or ASICs, and can cost up to $10,000 just to purchase (never mind the electricity consumption, which has drawn significant environmental criticism).
However, if a miner gets the right system, can afford the electric bill, and does manage to successfully complete a transaction, they receive 6.25 Bitcoins for their efforts. The reward cuts in half every four years as more coins enter circulation. At the time of writing, 6.25 Bitcoins are worth roughly $381,800.75.
That said, Bitcoin’s trading price is quite volatile, so it’s impossible for miners to know the exact value of their reward until they see the exchange rate on the day of receipt. Also, the IRS is looking to crack down on virtual currency taxation, so you might be facing a potentially steep income tax in the future.
What Happens to Bitcoin Once it’s All Mined?
Bitcoin’s inventor, Satoshi Nakamoto, capped the total number of Bitcoin at 21 million, meaning that there will only ever be 21 million Bitcoin in existence. Once it’s all mined, there’s no more left to be created. At present, roughly 90% of Bitcoin has been mined, or about 18.7 million Bitcoins (leaving about 2.3 million up for grabs).
Current estimates say it is unlikely that Bitcoin will ever reach its cap thanks to the use of rounding estimators built into its codebase, which reduces the amount of Bitcoin released into circulation over time. However, the current unpredictability of the cryptocurrency ecosystem makes it difficult to make such predictions with any certainty.
If Bitcoin does reach its cap, it will completely alter Bitcoin as an economic system. Here’s a look at what happens to Bitcoin once it’s all mined.
Bitcoin as a Closed Economy
The most basic change is that once Bitcoin is all mined, the system will transition to a closed economy (a fully self-sufficient economy with no imports or exports).
At present, Bitcoin’s major source of revenue is new transactions and issuing new coins. But once Bitcoin is capped, no new coins will be introduced, and the system will rely on transaction fees as its primary revenue stream. Such fees would be assessed much like taxes. And while it is possible that Bitcoin might switch to offering a lower denomination reward instead of complete Bitcoins, it’s unlikely that such a change would happen since it would require rewriting Bitcoin’s operating protocol.
That said, keep in mind that Bitcoin’s ecosystem is still highly undeveloped. Current predictions are based on what Bitcoin looks like right now, and that ecosystem will likely be significantly different by the time Bitcoin reaches its cap.
How Reaching the Cap Might Affects the Bitcoin Network
Most analysts agree that Bitcoin’s most valuable attribute is its network, irrespective of how the currency itself performs. This, too, will evolve once Bitcoin reaches its cap.
Based on historical precedent, and assuming that Bitcoin gains widespread popularity as a currency, odds are that transaction numbers will shoot up, which in turn means that the network’s processing speed will slow down. That’s because Bitcoin’s architecture sacrifices speed in favor of accuracy. At this point, Layer 2 technologies will take over confirming the majority of Bitcoin transactions.
However, if Bitcoin functions as a reserve asset rather than an alternative currency, it is possible that the network itself could fail. If that happens, Bitcoin will function like most other alternative assets—transactions will be few and expensive, completed predominantly by large institutional players who can afford them.
Investing for Your Financial Future
What happens to Bitcoin once it’s all mined? In short, a major alteration to the entire Bitcoin ecosystem that will change how Bitcoin functions as an investment asset. Either way, if you’re currently investing in Bitcoin, it’s worth the time and money to counterbalance with other assets.
Here at Masterworks, we’re here to make that possible. We democratize blue-chip art investing for ordinary investors so that you can purchase shares in authenticated multi-million-dollar art with the highest potential risk-adjusted returns. Then, when we make a sale, you collect your dividends.
Sound good? Then fill out your membership application to learn more, and don’t forget to check out our blog to learn more about investing across the market.
