What Happens When All Bitcoins Are Mined

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One morning we were sitting in the office
preparing some crypto reports for our clients.
The birds were singing, the markets were
swinging and all was normal. Then someone said
“What happens when all the Bitcoins are mined?”
After some extensive research and 30 cups of
coffee, we had our answers. And we’re going to
share them with you. We’re nice like that.

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A Gold Rush In Space –
Only Crypto?

Space exploration is good for Bitcoin. The reason?
With the US government enacting legislation that
allows asteroid mining companies rights to own
whatever they mine in space, gold scarcity might
eventually decline. This new era of a “Gold Rush in
Space” could also reduce the appeal of gold,
historically seen as a hedge against inflation,
leading to the yellow metal trading at a higher
premium during times of uncertainty.

So, How Does This
Relate To Bitcoin?

According to the Winklevoss Twins, investors and
founders of the Gemini Exchange, an ever-flowing
amount of gold, combined with a hyper-inflated US
Dollar, sets the grounds for skyrocketing Bitcoin
valuations. The twins recently made a prediction
that the price of Bitcoin could touch $500,000 in the
not-so-distant future.
But what can help Bitcoin usurp gold’s position as
the classic inflation hedge? Essentially, it is its
scarcity, through its fixed supply.

But what happens when all of these 21 million coins get mined? As of September 1, 2020, there are already
18,476,450 BTC in circulation, which means less than 3 million coins are left to be mined. Sure, its scarcity
drives its value, but the Bitcoin network is sustained by miners, who are compensated with block rewards
for every coin they mine. What happens to them and the overall value of BTC after that?
Bitcoin is the only asset with a hard-capped fixed supply of 21 million
coins. So, since supply cannot increase with demand, it is deflationary
and doesn’t face supply shocks that gold or other commodities might be
subjected to.

The Pie Is Shrinking…
In Another 120 Years,
It Will Be Fully
Consumed

On October 18, 2019, as the 18th million coin was about to be mined, the CEO
of the Bitcoin rewards platform, Lolli, remarked:
The pie is shrinking. This [milestone] gives people some simple math
to raise awareness about where we’re at in the [bitcoin mining]
process… It’s good for people to see the progress of bitcoin, to look
back on everything that has been done and will be done for the next
3 million. … You should pay attention to the next 3 million.

And What About
Halving?

But Bitcoin mining isn’t easy. The mining reward
halves every 4 years, in an event called “halving,”
with the most recent one completed on May 11,
2020. When BTC was first launched, the block
reward was set at 50 BTC. It is now 6.25 BTC.

The Bitcoin network further adjusted its mining
difficulty to an all-time high just days before the
halving event, on May 5, 2020. The average hashing
power connected to the network increased to over
119 exahashes per second (EH/s), with the prior 3-
day average surging to 125 EH/s, as per data from
the mining pool, Poolin.

When Will It All End?

By all calculations, the final BTC might not be
mined before 2140.
Eventually, when there are no more BTC coins left
to be mined, miners will rely on transaction fees,
paid by users to make payments on the network.
Many argue that Bitcoin’s transaction fee makes up
a very small percentage of miners’ revenues, which
could undermine the basic structure that motivates
miners to validate BTC transactions on the
blockchain.
Can a pure transactions fee-based system work as
well as a block subsidy network?

Will BTC Lose Its Utility
As A Global Reserve
Currency?

Marcus Swanepoel, co-founder and CEO of Luno, a cryptocurrency
wallet, predicts a 270% increase in BTC price between 2020 and
2024, which is the next year when a halving will take place.
All the interest surrounding BTC is due to its scarcity, which makes it a potential hedge against fiat currencies
in times of economic crisis. This is why all previous halving events have resulted in tremendous increases in
BTC price.
But, the ultimate switch to a sole transaction fee-based network might spell trouble, according to sceptics.

About Those
Sceptics…

According to Paul Brody, global innovation leader for EY, for BTC to be
considered a part of the global monetary system, its hard supply cap
needs to be addressed. That’s because many economists believe that
deflationary systems are not the best way to tackle financial crises.

For starters, this supply cap can be changed easily,
if the community agrees that it is the best solution.
A prospective hard fork, like the one in August 2017,
is imaginable. If we remember, the scaling debates
of 2017 within the community led to the creation of
Bitcoin Cash.
This change in the supply cap or any governance
issues on the blockchain, could impact the stability
of the network. Moreover, it would be less
appealing to BTC investors, who value its gold-like
properties.

So, What About The
Lightning Network?

Total Transaction Fee
0
200
400
600
800
1000
1200
1400
1600
BTC
In August 2017, the Segregated Witness protocol or
SegWit was introduced into the system to counter
the rise in transaction fees, caused by a backlog in
the network, on account of block size limit. The
adoption of the protocol had been slow. By 2019,
less than 50% of transactions used SegWit.
However, the protocol led to lower transaction fees
over the subsequent months, especially after
Bitfinex introduced the protocol in February 2018.

SegWit was not the end. Second-layer solutions,
like the Lightning Network, are in the pipeline, to
further improve the network. Not only will the
speed of transactions be increased, but the
introduction of multiple payment channels between
users and the Bitcoin blockchain will be enabled.
This means there would be a lesser number of
transactions recorded on the network, impacting
the earnings of miners.

And Then What?

As of August 31, 2020, the transaction fee per day
for BTC stood at $91 per unit of BTC, representing
9.76% of the block reward. But, according to
modelling by Dan Held and Awe and Wonder, by
2030, the transaction fee will become a significant
portion of the block reward.

High Transaction Fees
Will Continue to
Provide Network
Security

There is evidence that transaction fees in the future
will be sufficient to sustain miners on the BTC
network, making it economically viable for them to
uphold network security.
When BTC prices rise, the transaction costs rise as
well. When these rise to a level that market
participants can no longer bear, the price corrects
itself. This decline in BTC price puts downward
pressure on transaction costs as well, which have
historically sparked further rounds of BTC price
surges. So, BTC price and transaction costs exist
in mutual feedback loops.

As the number of users grows, the value per coin increases. It has
the potential for a positive feedback loop; as users increase, the
value goes up, which could attract more users to take advantage of
the increasing value.
— Satoshi Nakamoto
This was ingrained in the Original Model introduced by Satoshi Nakamoto.
As BTC price increases, the block reward rises in value too. Miners are incentivized to increase the hashrate.
The higher the hashrate, the more difficult and expensive it becomes to launch 51% attacks on the network.

Wow Fact
According to data from Bitinfocharts, Bitcoin
transaction fees soared over 550% in a month till
August 6, 2020, with a rise in BTC price. At the same
time, mining difficulty also surged. Bitcoin mining
difficulty has increased 9% since the May halving
event, reaching a high of 3.6% on August 24, 2020.

Can Rising Transaction
Costs Deter Users?

Bitcoin has seen a huge surge in 2020, thanks to the
market volatility and economic shocks in the wake
of the Covid-19 pandemic. BTC has surged more
than 60% YTD and was trading near the $12K level
at $11,772, as of September 1, 2020. Analysts predict
this as a signal of a further rally, which could
catapult the price towards $28,000 by the year-end.

Transaction costs are being driven by increased
demand for processing transactions on the BTC
network, which, in turn, is due to escalating prices.
The size of transactions and increased mining
difficulty are also contributing to the surge.
Increased transaction costs can, however, be a
deterrent to usage.

A Real-World Example

The Covid-19 related drop in oil revenues made
local currencies in the African continent highly
volatile. From March to August 2020, the Nigerian
currency (Naira) depreciated 33% against the US
Dollar, while BTC trading volumes have been on the
rise. However, the high transaction fee, due to the
current BTC bull run, is making it less appealing as
an alternative means of transactions and
remittances.

Researchers Say

Maureen O’Hara, the Robert W. Purcell Professor of Finance and Economics
at Samuel Curtis Johnson Graduate School of Management, who wrote the
paper titled “From mining to markets: The evolution of bitcoin transaction
fees,” says in the Cornell Chronicle, “Bitcoin now works essentially how
markets work, because if you want something to happen faster,
you have to pay for it. — Maureen O’Hara
Researchers at Cornell say that over the last 10 years, the BTC transaction fee has continued to rise,
threatening its long-term viability. This negates the very culture of the Bitcoin network.

So, while an increase in transaction fees is good for
network security, it cannot be feasible for everyone.
But market enthusiasts beg to differ. For instance,
the average domestic wire transfer fees at the 10
major US banks is $30 to $40 and for international
transfers, it is $50 to $80 (for both incoming and
outgoing combined).

Market Participants
Say

Average closing costs on a home are 2% of the value, or $8,000. I’m
sure individuals will be fine paying $50 in the future to send an
immutable payment with an asset that can’t be easily taken away
from them (unlike real estate which could be seized in a geopolitical
quarrel at the snap of a finger)
— Dan Held
Dan Held, Director of Business Development at KrakenFX, pointed out the advantage of BTC transactions in
purchasing real estate, stating:
Not to mention, the huge need for contactless finance in the pandemic era. Remittances, that are a
lifeline for many people across the world, can be safely done through cryptocurrency ATMs.

According to Statista, digital remittances have
increased 21% YoY, reaching a figure of $95.96
billion in 2020. By 2023, this is expected to reach
$143 billion.

Will Bitcoin Ever Be
Used As Real Currency?

The supply factor again takes precedence. Supply
of Bitcoin is highly inelastic and inelastic supply
leads to high volatility. So, people don’t want to
hold it for long, and it remains a speculative asset,
rather than a medium of exchange.
The basic theory of finance states that in a
reasonably efficient market, high levels of volatility
can produce high returns. So, an asset like BTC can
either be a good investment option or good for
purchases, but not both, unless the economy is
very dysfunctional. An example of such an
economy is Venezuela, where the economic crisis
and hyperinflation have led to the country reaching
one of the highest rates of cryptocurrency use in
the world, according to a study by Chainalysis.

Economics Of
Cryptocurrencies

Economists, like Michael Choi and Guillaume
Rocheteau, have designed a model, where BTC
slowly settles in a low volatility equilibrium making
it viable as a mode of payment. Other economists,
like Jonathan Chiu and Thorsten Koeppl, in their
paper titled The Economics of Cryptocurrencies—
Bitcoin and Beyond, have argued that BTC cannot
be a viable mode of payment unless it sheds its
image of being “deflationary digital gold” and
behave more like the US dollar, albeit with a
predictable inflation target. This means miners get
paid with inflation, where transaction costs are
spread across everyone who owns BTC and not just
levied on a small population.

BTC Adoption Through Other
Routes – Why Bitcoin’s
Long-term Appeal Holds

Bitcoin, the world’s first internet-native currency, is a network that cannot be evaluated just through
the scope of miners and transaction fees. The fact remains that BTC supply is hard capped at 21
million, unless the network decides to tweak the protocol. Even when all the coins have been
mined, it will have huge use cases.

Divisibility

… you can’t send somebody, you know, one 1000000th of a penny as
compensation for opening an email or making a microloan or whatever it
may be. And so I think that there are a lot of new use cases that Bitcoin lends
itself to as a result of its divisibility.
— Michael Sonnenshein
In a podcast, Michael Sonnenshein, Managing Director of Grayscale Investments, discussed wider
possibilities of Bitcoin usage, particularly in terms of its value divisibility. He stressed that the asset’s
divisibility is its biggest strength, saying:
Globally, companies like MicroStrategy are realising the importance of holding fixed assets in their treasury
and adding BTC to their portfolio. BTC’s definite supply can protect investments against value dilution.

Financial Discontent

Further, the growing discontent in the traditional
financial systems (pushed further by the Covid-19
crisis) is paving the way for a new asset class,
Central Bank Digital Currencies (CBDCs).
In the past, Central Banks had eyed the digital asset
class with much scepticism. Now, they look upon it
as a viable technology to address issues like cost
reduction, financial inclusion, addressing frauds and
thefts and an easier way to implement monetary
policies. The Bank of International Settlements (BIS)
addresses these factors in its research paper, using
a Venn diagram, where Bitcoin and other
cryptocurrencies are marked under the heading
“Private Digital Tokens.”

Central Banks –
It’s In The Name

Over 70% of global central banks are now toying
with the idea of developing their own
cryptocurrency, according to a BIS report. A CBDC
issued by a Central Bank, which takes forward the
conversation related to tax transparency, reporting
standardization and more, is positive for the
adoption of BTC and other cryptocurrencies. It will
become easier to expand the crypto user base,
when blockchain and crypto experience replicates
the traditional banking experience more closely.
Reduced volatility and the stamp of a central bank
will encourage more individuals and merchants to
make crypto payments.

More Bitcoins Being
Tokenized Than Mined

Continuing the conversation around Bitcoin supply,
more BTC is now being tokenized than they are
mined, thanks to the growing popularity of DeFi
(Decentralised Finance) protocols. In July 2020,
Wrapped Bitcoin (WBTC) represented more than
two-thirds of the tokenized BTC on the Ethereum
platform, as per the Q2 DeFi report by ConsenSys.
Just as Ether (ETH) can be wrapped in the form of
an ERC-20 token to be used in various token
mechanisms on the Ethereum network, BTC can be
tokenized to be used in a large number of DeFi
protocols.

About The Defi Sector

With over $9.11 billion locked in various platforms
and protocols, the DeFi sector is booming in 2020.
This is the next step in the disruptive financial
technology revolution that started with Bitcoin in
2009. Unlike traditional means of raising funds,
these platforms offer huge liquidity and exposure.
Platforms like Compound and Aave let users
borrow and lend cryptocurrencies to earn interest, a
welcome portfolio diversification tool in this low-
interest rate financial environment. People can buy
and sell cryptocurrencies pegged to a particular
commodity or fiat currency, known as stablecoins.
In the future, you might be able to purchase real
estate on these platforms, with flexible mortgage
payment terms.

WBTC (Wrapped Bitcoin)
To Be A Major Asset?

Co-founder of Three Arrows Capital, Su Zhu,
predicted that WBTC (Wrapped Bitcoin) will be one
of the biggest assets on the decentralised finance
ecosystem, just like stablecoins USDC and USDT.
The strong demand for BTC for DeFi protocols
emphasises the value of the asset as a hedging
tool, which will push prices higher.

Final Word From The
Simpsons

These are unprecedented times for the financial
markets, and circumstances call for innovative
solutions. Bitcoin, capped at 21 million, provides
safety against the collapsing values of fiat
currencies, which are being printed and injected
into economies by central banks across the world.
From a whitepaper concept, the digital currency
has exceeded $200 billion in market cap. In that
respect, it has made significant progress on gold,
which has a market cap of more than $10 trillion.

Money is a technology, and it has evolved through
the history of mankind. Cryptocurrencies like Bitcoin
are only the latest solution and, like all
technologies, can be improved upon.
We leave the final word to the people who
predicted Trump and many other black swan
events, The Simpsons. Cryptocurrencies is
explained to Lisa by Jim Parsons (of Big Bang
Theory) as the cash of the future.

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What Happens When All Bitcoins Are Mined

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