Bitcoin has a built-in end date due to one of its most touted benefits, the hard cap. The hard cap for the number of Bitcoins is 21 million coins and for this reason Bitcoin will eventually become a worthless asset. Let’s explore why.
The Bitcoin blockchain is maintained by miners who aggregate transactions into blocks which are then added to the Bitcoin blockchain. The process for adding new blocks to the blockchain is complex and you can read more about it in our earlier post.
In short, miners form the backbone of the Bitcoin blockchain network and without them the network would not exist as no new transactions could be added to the Bitcoin blockchain. Miners are compensated for their services in two ways:
- Receiving a “block reward” paid in Bitcoin for solving the hash code required to add a block of transactions to the Bitcoin blockchain
- Receiving a transaction fee
The block reward is currently 12.5 Bitcoin and at $12,000 per Bitcoin this makes it very profitable for miners to maintain the Bitcoin blockchain network. That being said, what happens when we reach the Bitcoin hard cap? Simple. The block reward goes away and miners will have to depend solely on the transaction fees to cover their mining costs.
How much does it cost to solve a Bitcoin block? The primary cost is simply the electricity required to run the Bitcoin mining machines. Based on the table below, it costs approximately $10,000 in electricity to add a new block to the Bitcoin blockchain. Furthermore, with approximately 2,500 transactions per block, it costs miners about $4.11 per transaction in electricity. Without diving deeper this low transaction cost almost sounds good for Bitcoin.
Bitcoin functions as a distributed ledger and for this reason it is terribly inefficient since a method is required to determine which ledger is the "most valid". In short, the “most valid” Bitcoin blockchain is the one longest in length. This means that all of a miner’s efforts could become worthless if they are not working on the “correct” Bitcoin blockchain. For this reason, if a miner is not the first to add a new block to the Bitcoin blockchain they get no compensation for their work.
Therefore, even though it should cost $10,000 per block ($4.11 / transaction) to maintain the Bitcoin blockchain, the true cost becomes much higher since miners need to account for the risk of not getting paid for their work.
Impact on Bitcoin’s Value
The closer we get to the Bitcoin hard cap, the more Bitcoin’s value will decrease. Without the Bitcoin reward incentive for miners, Bitcoin’s value rests solely on its intended use case. However, as discussed in our earlier post, Bitcoin has no use case and therefore will eventually become worthless.