Understanding Bitcoin’s 21 Million Coins
As a long-term member in the crypto space, I have visited countless events and talked to hundreds of people about Bitcoin. Beginners often talk about the protocol’s limit of 21 million bitcoin, as this is usually among the first knowledge items they picks up. We can’t deny that fact that there is a limit. But what many people don’t understand, is what the limit does and the (ir)relevance it has.
The Value of Bitcoin
What makes Bitcoin valuable is a topic on its own and I am not touching it here. What is certain, is that the limit of 21 million bitcoins is much less important than many think. The total supply could be just one bitcoin or a trillion, not much would change. Seeing Bitcoin as a whole and taking the total value as reference is a much better way of looking at it. Because value is always relative, in every way. Doubling the total number of bitcoins simply halves the value of a single one. The total value will always be the same, no matter how it is denominated.
Like with stocks, the important thing is the company value, also called market capitalization. Neither the price nor the number of shares has any relevance if regarded in isolation. Stocks can be split or the reverse operation is possible. A stock is only a denomination. A bitcoin is very much the same.
Inflation Rate
A more interesting figure is the inflation rate because it is independent of the monetary base. A 4 % annual inflation rate is 4 %, regardless of the number of units. The monetary policy in Bitcoin is fixed and deterministic. If this is good or bad depends on the perspective and the use case of Bitcoin.
If There Is a Limit, It Is 2.1 Quadrillion and Not 21 Million
A bitcoin is simply the name of a unit, which could be defined as a twenty-one millionth of all bitcoins that will ever come into existence. What is important to understand, is that we can divide every Bitcoin in an unlimited number of pieces. The Bitcoin protocol currently supports the division of one bitcoin into 100 million pieces, we call them satoshis. So the total supply of monetary units is 21*10⁶*10⁸ (2,100 trillion) satoshis. If ever needed, Bitcoin could upgrade to support even more decimal places. Computationally, this upgrade would require more resources, as more digits require more space in the blockchain and will require more effort for computers to process them.
If the value of a bitcoin climbed to one million dollars, one satoshi would be worth one cent. Still a practical denomination in my opinion. But this also meant all bitcoins would be worth three times all mined gold or $21 trillion. Money supply M2 will hit this value at the current rate around 2025. Considering that the Bitcoin blockchain will likely never be used for such payments and only be used for settlements of more noteworthy amounts in sidechains and payment channels, this limit will likely be enough for a long time.
The Origin of the Number
You may still ask yourself: “Why 21 million?”. Maybe it was its inventor’s lucky number. Although Satoshi never publicly clarified, two reasons seem obvious: Simplicity and optimization for modern computers.
Likely Satoshi designed the monetary policy first because this is what is important. Halving the mining rewards every four years means that half the total bitcoins will be created during the first period and half of the previous period in every successive period. The 10-minute block time was likely a technical consideration but is not relevant here. A 10-minute block time means 210,384 blocks per 4 years. Timekeeping on a blockchain is very difficult. The way these 10 minutes are determined, doesn’t allow much precision. In the Bitcoin protocol, the block halving is defined after a fixed number of blocks and not after a specified time or date.
Likely Satoshi simply rounded down to 210,000, so every halving happens after this many blocks. But this number is an important variable in the calculation of Bitcoin’s money supply. Because this number together with the block reward defines the total money supply.
A simpler way to look at this formula is that the total money supply is twice the block reward times the number of blocks until the next halving. Had Satoshi chosen the seemingly more precise 210,384 blocks between two halvings, the total money supply would be 21,038,400 bitcoins.
On the other hand, we have the mining reward, which was set to 50 bitcoins per block for the first 210,000 blocks. Doubling the reward had resulted in a total money supply of 42 million bitcoins, a number many geeks out there had certainly liked better. As someone who was born on a 21st, I don’t have much criticism for his choice.
The previously mentioned second consideration is a technical one. It basically comes down to how computers handle big numbers. Programmers need to take special measures when dealing with large numbers, Bitcoin’s 2,100 trillion units is a number just below this limit.
Satoshi could have chosen to increase the number of bitcoins to 2.1 trillion (about the money supply M1 in dollars) and make every bitcoin divisible into only 1000 parts. As you can see, this is mostly a matter of definition and naming. But as a result, the value of a bitcoin had been a fraction of a cent for the crucial first few years — a potential psychological downside.
Summary
In a nutshell, the total number of bitcoins has little relevance. The denomination in 21 million bitcoins, which can be divided into 100 million satoshis, is rather practical than anything else.
More than 21 million bitcoins should never come into existence, but this does not limit how many people can use Bitcoin, as we can divide every bitcoin into many smaller parts.
