Why is the supply of bitcoin limited to 21 million units?

The bitcoin supply ceiling is 21 million units, which means that the number of units of this digital currency is limited to 21 million units and no more will be extracted. But why did Satoshi Nakamoto choose this particular number? With the help of an article from the Decrypt site, we will explore two possibilities to explain this issue.

Like many other digital currencies, Bitcoin was designed with a limited supply principle. This means that the number of bitcoins that can exist is limited.

In the case of Bitcoin, Satoshi Nakamoto has determined that there will eventually be only 21 million units of this digital currency. For other digital currencies, this supply ceiling is significantly different. The range starts at 18.9 million units for Monroe and Dash and reaches 100 billion units for coins such as Ripple and Theron.

Why is the supply of bitcoin limited to 21 million units?

Satoshi intended to help increase the value of bitcoins over time by limiting the supply ceiling and slowing down bitcoin production.

Money supply substitution theory

The proportion of Bitcoin units and the amount of money available in the world could be the main reason why Satoshi has chosen to offer 21 million units for Bitcoin.

Satoshi has argued that if there were 21 million coins to use in a part of the world economy, according to an email apparently exchanged between Nakamoto and Mike Hearn, a co-developer of Bitcoin Core. , .001 bitcoin can be worth as much as 1 euro. This prediction came true in 2013, when the price of Bitcoin first crossed the 1,000-euro mark. Today, 0.001 bitcoin is equal to 8.24 euros.

Although in this email, Satoshi compares the price of bitcoin to the euro, a cursory glance suggests that he may have envisioned a larger future for bitcoin, which better explains why he chose the maximum of 21 million.

At the time of the creation of Bitcoin, the total global money supply was approximately $ 21 trillion. This number, known as the “M1” money supply, is derived from the total value of all physical money in the world, including cash, coins and traveler’s checks.

If Bitcoin were to become the world’s only currency and replace all M1 currencies, each bitcoin could be worth $ 1 million. In this case, since each bitcoin unit consists of 100 million Satoshi, each Satoshi can be worth $ 0.01.

The fact that these numbers are so similar, if not intentional, is an interesting fact.

Block extraction time regulation theory

Although M1’s money supply substitution theory is probably the most logical reason for Satoshi to choose 21 million as the bitcoin cap, there is another simpler explanation.

Looking at the parameters used to control the supply of bitcoins, it is clear that the number of 21 million bitcoins is a guarantee for the extraction of blocks at regular intervals (every 10 minutes) in this network. This figure also means that as the supply ceiling approaches, the amount of bitcoins paid to miners will decrease over time. As it turns out, the parameters set by Satoshi will inevitably generate a maximum of 21 million bitcoins.

Currently, Bitcoin Core code adjusts the extraction difficulty to ensure that a new block is extracted every 10 minutes on average, regardless of the network hash rate. According to this feature, in each four-year cycle, a total of 210,000 blocks must be extracted. After every four years, the block reward is halved. In the first cycle, 50 bitcoins were generated by extracting each block. This amount reached 25 bitcoins per block in 2012 and then in 2016, it decreased to 12.5 bitcoins per block. After Hawing 2020, the block reward has reached 6.25 bitcoins per block.

Is the Bitcoin supply ceiling a philosophical gesture or a product of pure mathematical logic? Only Satoshi Nakamoto knows the answer to this question and he has not revealed the secret of this special number yet.

Why is the supply of bitcoin limited to 21 million units?