Money

21 million bitcoins

The Bitcoin Journey

21 million bitcoins

Bitcoin's monetary policy
How are new bitcoins created?
Guaranteeing digital scarcity
An auditable monetary policy: every second, from the beginning and forever!

Bitcoin's monetary policy

Bitcoin is a decentralized digital currency with a pre-defined maximum quantity of 21 million units. This intrinsic characteristic of scarcity is determined by its computer code and reinforced by the consensus of all users participating in the protocol.

Its monetary issuance can be illustrated by a curve that represents the quantity of bitcoins created over time. For example, in 2022, approximately 18.5 million bitcoins were in circulation. Forecasts indicate that by 2025, there will be around 19.5 million bitcoins, representing around the 93% of the total supply, and by 2037, this figure will reach 20.4 million.

How are new bitcoins created?

The creation of new bitcoins is the result of the mining process. In a nutshell, miners use powerful computers that solve complex mathematical problems (hash), which validate and secure transactions. Once a problem is solved (or a valid hash is found), the miner adds a new block of transactions to the blockchain, a decentralized and distributed ledger that records all transactions made on the network. The blockchain ensures transparency and security, as each block is linked to the previous one, making it nearly impossible to alter past data without consensus from the network.

After successfully performing this task, miners get rewarded with the issuance of new bitcoins every ten minutes. This reward is programmed to halve every 210,000 blocks, which is approximately every four years (an event known as "halving"), giving the monetary issuance curve a stair-like shape. Due to this mechanism, it can be mathematically predicted that the creation of new bitcoins will cease arount the year 2140, when the total number reaches its limit of 21 million.

Halving Number	Block Height	BTC Reward After Halving	Estimated BTC in Circulation After Halving
1	210,000	25 BTC	10,500,000 BTC
2	420,000	12.5 BTC	15,750,000 BTC
3	630,000	6.25 BTC	18,375,000 BTC
4	840,000	3.125 BTC	19,687,500 BTC
5	1,050,000	1.5625 BTC	20,343,750 BTC
6	1,260,000	0.78125 BTC	20,671,875 BTC
7	1,470,000	0.390625 BTC	20,835,937.5 BTC
8	1,680,000	0.1953125 BTC	20,917,968.75 BTC
9	1,890,000	0.09765625 BTC	20,958,984.375 BTC
10	2,100,000	0.048828125 BTC	20,979,492.188 BTC
11	2,310,000	0.0244140625 BTC	20,989,746.094 BTC
12	2,520,000	0.01220703125 BTC	20,994,873.047 BTC
13	2,730,000	0.006103515625 BTC	20,997,436.523 BTC
14	2,940,000	0.0030517578125 BTC	20,998,718.262 BTC
15	3,150,000	0.00152587890625 BTC	20,999,359.131 BTC
16	3,360,000	0.000762939453125 BTC	20,999,679.566 BTC
17	3,570,000	0.0003814697265625 BTC	20,999,839.783 BTC
18	3,780,000	0.00019073486328125 BTC	20,999,919.892 BTC
19	3,990,000	0.000095367431640625 BTC	20,999,959.946 BTC
20	4,200,000	0.0000476837158203125 BTC	20,999,979.973 BTC

We will revisit the concept of mining in more details in the miner chapter.

Guaranteeing digital scarcity

The limit of 21 million is the basis of Bitcoin scarcity, and is guaranteed by two key mechanisms: the adjustment of mining difficulty and the game theory.

The mining difficulty adjustment is a process that takes place every 2016 blocks, or around two weeks, to ensure that a new block is added to the blockchain every ten minutes on average. This frequency of block creation and the total quantity of bitcoins are both fixed aspects of the Bitcoin protocol and cannot be changed without a general consensus, unlike the arbitrary decisions made in traditional monetary systems.

The difficulty of finding a valid hash follows a sort of cycle: if the number of miners increases and more blocks are found faster, this causes a decrease in the average time to find a block and so the difficulty is increased. As a consequence, the number of blocks that miners find is lowered, which means that the mechanism goes back to the average of 10 minutes per block. Please see the image below for a visual display.

Conversely, if fewer miners work and blocks take longer, the mining difficulty decreases, speeding the average block time back up.

Did you know that miners are incentivized to mine a block in order to earn new bitcoins through the block subsidy, as well as transaction fees from the transactions they include in that block?

Thus, as the number of bitcoins issued approaches the 21 million limit, miners will be remunerated more through their transaction fees than through the block subsidy.

Game theory is a mathematical concept that relies on human rationality. It assumes that individuals act logically, seeking to maximize their own benefits while considering the potential decisions of others. In Bitcoin, game theory helps to ensure that the majority of miners and users will act in the best interest of the network. In fact, since protocol changes are voted by the users, any modification to the Bitcoin protocol would require the agreement of the entire community of users, which is highly complex. So, if someone wanted to create a 22nd million bitcoin, they would have to convince all users to voluntarily devalue their own savings, which is unlikely to happen because Bitcoin is global and is not governed by a central group.

The idea of devaluing the currency goes against the fundamental philosophy of Bitcoin, so a change in its overall quantity is highly unlikely to happen.

An auditable monetary policy: every second, from the beginning and forever!

The scarcity of Bitcoin is a major asset, and the maximum quantity of 21 million bitcoins in circulation is public and verifiable by anyone.

In fact, anyone can do this through a Bitcoin node (i.e. a transaction validator) by simply entering the following command: bitcoin-cli gettxoutsetinfo. This transparency strengthens trust in the Bitcoin system, which is not based on central institutions or individuals, but rather on the mathematical and cryptographic guarantees inherent in its protocol (You will learn how to do this easily in LNP201).

{
  "height": 710560,
  "bestblock": "0000000000000000000887384d67103412ea7f18a43953e65c8c4ac36bf42e54",
  "transactions": 473244,
  "txouts": 1018917,
  "bogosize": 2183872374,
  "hash_serialized_2": "eebb9987337700ffaacbbaa11223344",
  "disk_size": 178239584,
  "total_amount": 18745998.12345678
}

Bitcoin guarantees a sound monetary management by limiting its creation by design, which makes it very different from other currencies because it can protect users' savings. Aligned with the principles of Austrian economics, its stable quantity and predictable distribution protect it from the inherent risks of inflation that traditional currencies have to face (see the ECO201 course to know more).

In summary, Bitcoin, with its decentralized nature, programmed scarcity, and transparency, offers a unique alternative to traditional monetary systems. It illustrates how technology can be used to create a currency that not only is useful and verifiable, but also preserves the value of users' savings by strictly limiting its supply.

Quiz

btc1012.4

1/5

How often is the reward for mining halved?