The fixed supply of “21 million coins” is an approximation of Bitcoin’s total supply that will ever be issued into circulation. It is a fundamental design feature that distinguishes it from traditional fiat currencies. The coins or bitcoins are finite in their supply, which gives it the property of scarcity.
The introduction of Bitcoin has presented a different system when compared to the traditional financial system. You have a finite capped supply of currency which is the opposite of how government’s issue their own currencies.
The question is why did its creator Satoshi Nakamoto choose the number 21? Why not 25, 50, or 88 million? Could it have been based on sound mathematics or was this a random number that does not really have an explanation?
The Issuance Of Bitcoin
Bitcoin is a decentralized payment network that allows direct peer-to-peer transactions without requiring intermediaries. There is no authority like a Central Bank and it is purely electronic and digital, no physical currency or coinage is involved.
New bitcoins are issued into circulation through a process called mining (i.e. Bitcoin Mining). This is part of a consensus mechanism called Proof-of-Work (PoW) in which nodes called miners attempt to solve complex mathematical puzzles to produce a block that contains transactions.
The network must validate the transactions and the miner who solves the puzzle first adds a block of transactions to the blockchain. They will then receive a reward (i.e. block subsidy) in the form of newly created bitcoins or BTC (the native currency of Bitcoin). This is an incentive given by the Bitcoin protocol for miner participation.
The halving is a mechanism that reduces the rate at which new bitcoins are created. This occurs approximately every four years (after every 210,000 blocks) and the reward for mining a block is cut in half. This process gradually slows down the creation of new bitcoins, ensuring that the 21 million limit is reached slowly.
The finite supply was designed to mimic the scarcity of hard assets like precious metals (e.g. gold) and minerals (e.g. diamonds). This scarcity is intended to give Bitcoin value because the supply is exceeded by the demand in economic terms.
Why 21 Million Only?
Bitcoin is capped at 21 million coins, which will be reached in the year 2140. There is no actual explanation why that number was chosen, but there are many theories (e.g. on social media).
Andreas Antonopoulos, a veteran Bitcoin proponent and computer science/digital currency professor, explains why a limit was imposed. It is to prevent the currency from inflating, and to do this it was set in the code of the Bitcoin software protocol.
An explanation to why it was set to 21 million, from one source, has to do with a correspondence between Satoshi and an early Bitcoin developer Mike Hearn. In an e-mail, it mentions that Satoshi intended Bitcoin’s price to eventually align with traditional fiat currencies.
According to the e-mail, Satoshi said:
“I wanted to pick something that would make prices similar to existing currencies, but without knowing the future, that’s very hard. I ended up picking something in the middle”
It is now believed that Satoshi arrived at 21 million as an “educated guess” based on two important mechanisms in the protocol he created. The first is the block production time of 10 minutes (on average), and second is the block reward given to miners to issue the currency which halves every four years.
Explaining The 21 Million Limit
A block is mined on the Bitcoin blockchain on average every 10 minutes. A block producer earns a reward that was originally 50 BTC per block. After every 210,000 blocks is produced (approximately every 4 years), a halving occurs and the reward is cut in half.
During the first halving in 2012 the block reward was cut to 25 BTC. This would be followed by another halving in 2016, which cut the reward to 12.5 BTC.
The rewards diminish over time until the last block is produced in 2140. It will eventually approach zero. If we add up all the rewards it will be a total of 100.
If we do the math, perhaps it is easier to understand.
6 blocks per hour (average of 10 minutes per block)
24 hours per day
365 days per year
4 years per cycle
6 * 24 * 365 * 4 ~= 210,000 (210,240)
Sum all the block reward sizes:
50 + 25 + 12.5 + 6.25 + 3.125 + … + 0 = 100
Take the 2 values and multiply them:
210,000 * 100 = 21 million.
The halving events, and the block reward amounts, are what determine that the number will reach approximately 21 million bitcoins. It just happens to fit perfectly, but is that really the reason?
If you go to the Bitcoin StackExchange forum you will see even more explanations. In an interesting take, a user posted:
I suspect it has something to do with the M1 USD supply at the time Satoshi was developing Bitcoin.
There is also the Theory of 42, granularity galore, qold volume theory, and the IEEE rounding threshold issue (interesting explanation).
Now you might be surprised if I tell you that Bitcoin will never reach exactly 21 million coins (in case you are not aware). Even though Bitcoin is capped at 21 million, it is actually not the exact amount.
Bitcoin Is Not Exactly 21 Million Coins
In the Bitcoin protocol math, the total number of BTC issued is not expected to reach exactly 21 million. This is due to Bitcoin’s use of bit-shift operators, which round decimal points to the closest smallest integer.
In the Bitcoin protocol, integer math is used to provide system consistency. No decimal type of calculations (fractional values) are used, which are more precise compared to integers (whole numbers only).
Bitcoin’s internal code represents all values as integers, specifically in smaller units called satoshis or sats. 1 BTC is equivalent to 100,000,000 sats or 1 satoshi is 0.00000001 BTC. If you divide 1 satoshi in half, you will get 0.5. Bitcoin does not process values with remainders, so it rounds it down to 0 using integer division.
A rounding down occurs when rewards are issued to a miner. The Bitcoin blockchain is programmed — using bit-shift operators — to round down to the nearest whole integer if the resulting satoshi calculation has a decimal. This means the decimal part will be truncated during the halving division.
The problem arises when the satoshi reward becomes an odd number. Eventually, after many halvings the satoshi reward will encounter an odd number. When an odd number of satoshis is divided by two, there will be a remainder. And that remainder is then truncated to give a whole integer value.
Conclusion
We could go down the rabbit hole and look for more explanations, but it seems there is one that I think would be plausible. The total supply of 21 million comes from Satoshi’s own design (i.e. Bitcoin mining).
Bitcoin uses an incentive-based system, which start with a block reward of 50 BTC. It undergoes a halving of rewards at 4 year cycles, or the issuance of coins is cut in half every 4 years.
BTC are issued at a rate of 10 minutes per block on average. When you do the math, after the last halving and the last BTC are issued, it will total close to 21 million. The total amount of coins are broken down into the smallest unit in Bitcoin called satoshis.
Satoshi did not give any specific reason why 21 million was the chosen limit, but it could be based on the currency issuance process that was devised. Perhaps Satoshi also did some technical research and testing with other values but somehow stuck with 21 million.
We will never know what the real reason is, unless we hear it from Satoshi. What we know is that a limit was set to make Bitcoin a scarce and valuable asset which has been a part of its value proposition.
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Disclaimer: This is not financial advice. The information provided is for reference and educational purposes only. Investing in cryptocurrency like Bitcoin involves risk. Please DYOR to learn and understand more about cryptocurrency.
