Ask Joff Paradise –
by Joff Paradise | 22 Oct, 2017 01:19 pm | News
Ask Joff Paradise: Bitcoin Questions
Often-asked Bitcoin questions at various Joff Paradise speaking engagements:
“What happens when the last Bitcoin is mined?”
Joff Paradise –
Bitcoin mining is finite – meaning that once miners are awarded 21 million Bitcoins for solving cryptographic problems to confirm transactions, no additional Bitcoins will ever be mined. This service to make Bitcoin deflationary and, even if many are lost or forgotten, the number will never exceed 21 million. “Active” Bitcoins will be far lower than that number, and there is no way to ever determine the exact number that are active.
Bitcoins have been lost due to irrecoverable private keys, forgotten wallets from back when Bitcoin wasn’t worth what it is today, from hardware failures, or due to the death of the bitcoin owner. It is extremely improbable and basically impossible to recover lost coins. Some estimates put the total value of lost bitcoins at about $1.23 billion USD. A more recent number suggests that up to 25% of the circulating bitcoins (a little over 4 million) are “inactive”, that would be roughly $23 billion USD at the time of this post. Bitcoins can become lost if the conditions required to spend them are no longer known. If, for example, a private key written down on a piece of paper was lost, the Bitcoin could not be used. The odds of randomly finding a matching private key are generally considered to be impossible. Bitcoins can also be rendered “destroyed” by attaching conditions that make them impossible to spend.
To fully understand when the last Bitcoin will be mined, you must understand the “bitcoin halving events”. Every four years, the amount of new bitcoin that can be created and earned by miners with each new block of transactions is cut in half. This is and element of bitcoin’s predictable, transparent monetary policy, which can be verified in the source code available to everyone on the Bitcoin Core GitHub repository. 50 Bitcoins were earned for mining a block originally, which was halved to 25 in period number 2, then 12.5 last year at the beginning of period 3. There will be 34 total having events, with approximately three years to go before the miner reward is halved once again to 6.25 bitcoins. The last bitcoin, at this rate, will be mined sometime in the year 2140.
While it appears that Bitcoin miners will lose all incentive to continue as the award for doing so is decreased, one should understand that miners are also awarded transaction fees. These fees will increase substantially as Bitcoin becomes more widely utilized, and should keep the system operational. The transaction fees will replace the block reward and encourage miners to continue. All transaction fees go to the person or entity that mines the block. Currently, the average fee is about $2 USD.
Is Bitcoin Deflationary?
Joff Paradise –
A bitcoin question asked by many involves its deflationary property. Bitcoin is inherently deflationary as a currency due to its hard cap at 21 million — or at least it will be deflationary, when that cap is finally hit. Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. Because the monetary base of Bitcoins cannot be expanded, some economists argue that the currency would be subject to severe deflation if it becomes widely used.
Keynesian economists argue that deflation is bad for an economy because it encourages saving money rather than investing in businesses and creating jobs. The Austrian school of thought counters this argument. This belief states that, as deflation occurs in all stages of production, entrepreneurs who invest benefit from it. As a result, profit ratios tend to stay the same and only their magnitudes change. Therefore in a deflationary environment, goods and services do decrease in price, but so does the cost of the production of these same goods and services – proportionally, so profits are not affected. Regardless of these opposing arguments, Bitcoin could survive and indeed thrive, without becoming the “coin of the realm.” It may be a mistake to view deflation or zero inflation as the idyllic, uncorrupted state of a monetary system. Money is not a natural thing, but rather a technology that society deploys to meet certain needs. A money’s strength is in its ability to meet society’s needs. If one currency is deflationary, and another is inflationary, which one would the general public rather store over the long term? Banks hate deflation because it rewards thrift and penalizes debt-holding. On the other hand, monetary inflation encourages borrowing and penalizes saving.
The last Bitcoin mining of blocks will not occur for another century or so. It is very difficult to predict how mining power will evolve in the future, as technological progress will continue to make hardware faster, or faster methods of SHA2 calculation could be discovered – so determining an exact date, or even the year, is difficult. It is equally difficult to determine how Bitcoin will evolve in the future. Will it will co-exist with other currencies primarily as a store of value, or become widely accepted and used by society predominantly? That is one of the bitcoin questions we’ll just have to wait to answer. Have more questions for Joff Paradise? Contact me directly!