Why is Bitcoin capped at 21 million? Are 21 million Bitcoins enough? And can I buy fractional bitcoins or do I have to buy a whole bitcoin every time I need to?
Since early 2014 I have used Bitcoin, as well as other cryptocurrencies (altcoins), and services around them. In the process, I have found answers to many of these questions.
And I must say I am amazed at the genius in Satoshi Nakamoto. The founder of Bitcoin seems to have thought through every technical detail regarding how the system works.
In particular, the inventor was thorough with the game theory, with every possible scenario considered. And that includes how the number of coins in circulation plays out with other variables.
It is important to point out that Satoshi Nakamoto chooses to remain anonymous. And they exited the stage in April 2011, leaving the project in the hands of the community of users, which has gradually grown to include tens of millions from around the globe.
While Satoshi Nakamoto was active on online forums like P2PFoundation and Bitcointalk.org in the early days and engaged the community, a few questions about the project, including what informed some of the decisions relating to the deflationary nature of Bitcoin, were never given clear and detailed answers.
So, all the community was left to do is to speculate on some interesting particular questions.
Why 21 million bitcoins?
The question of why bitcoin is capped at 21 million is one of those that Satoshi Nakamoto never answered to, both in the Bitcoin white paper as well as in the many conversations they had with community members on forums like P2PFoundation, Bitcointalk.org and email.
However, several theories have emerged to try to explain why the specific number of 21 million was picked.
But before we look at two of these theories, first let me bring two interesting facts about the 21 million bitcoins number to your attention.
First, the number of Bitcoins that will ever be mined is not exactly 21 million. The exact number is 20999999.9769. This is almost always rounded off for easy reporting and consumption.
Second, and more importantly, a significant number of bitcoins will be lost through what is known as ‘burning.’ This is where some coins are sent to an address whose private keys are lost forever or can never be retrieved.
The burning of Bitcoins is a critical factor to consider about Bitcoin’s deflationary nature, and in particular the number of coins that will ever be in circulation. Each day, a few people around the globe forget or lose their wallet private keys.
It is also true that others die without sharing their private keys with the next of kin.
Remember, that there is no Bitcoin Support to contact when you lose your private keys. Or when someone in your family with a stash of bitcoins dies without sharing them with you. There is no password reset option with Bitcoin wallets, and there is no backend access.
And therefore when private keys are lost, the bitcoins in the corresponding public key are also lost forever. According to one report, by 2017, close to 4 million bitcoins had been lost to burning.
The loss of bitcoins through ‘burning’ will end up making the currency even more deflationary. That means a reduced amount in circulation over time. And that adds to the question is 21 million bitcoins enough?
But first, why 21 million bitcoins?
Back to the theories that try to explain why Satoshi Nakamoto picked 21 million.
M1 supply theory
This is a theory that posits that the founder of Bitcoin wanted to replicate the M1 supply of the US dollar in 2008, which was apparently around 21 trillion.
The M1 supply of a currency is the total number of the smallest unit of that currency. In the case of the US dollar, the smallest unit is a cent, and apparently, there were 21 trillions of those at the time Satoshi was designing the Bitcoin architecture.
The total number of the smallest units of Bitcoin is 21 trillion. We are going to look at how that is the case in the following sections of this post.
The originator of the M1 supply theory is not exactly known, but it popped up on forums like the BitcoinsStackExchange and Bitcointalk.org as well as blog posts where community members had to deal with the question of why bitcoin supply is capped at 21 million coins.
2. The 64-bit theory.
The second theory opines that decision to use 21 million was based on the technical constraints or dictates of the 64-bit computer capacity, which when used on a decimal arrangement that avoids rounding off errors handles integers only up to 21 trillion.
Like the first theory, this too has been floated on forums where the question of why bitcoin is capped at 21 million is asked. Also, like the first theory, the originator of this theory is not exactly known.
Do you have to buy a whole Bitcoin?
Indeed very few people that own bitcoins can boast to having a whole bitcoin. The majority of users and HODLers own or handle fractions of bitcoins. So if you’ve wondered ‘can I buy fractional Bitcoins?’ Yes, you can, and it is the norm.
Indeed, if you own a whole bitcoin now, you are considered to be in a select group of a small percentage of bitcoin owners (below 2%).
What many people miss about Bitcoin, at least initially, is that a single bitcoin is divisible up to 8 decimal points. And you can send, receive or spent anything below one bitcoin up to that range.
While you can break a Bitcoin into many decimal values, there about ten major or primary units. Some call them the bitcoin denominations.
Four are above a bitcoin and five are below a bitcoin. Those above a bitcoin are:
- A decabit (daBTC)- 10 bitcoins
- Hectobit (hBTC)-100 bitcoins
- Kilobit (kBTC)-1000 bitcoins
- Megabit (MBTC)-1000 bitcoins.
The units that are below a bitcoin are:
- A decibit (dBTC)-0.1 bitcoin
- A centibit (cBTC)-0.01 bitcoin
- A millibit (mBTC)-0.001 bitcoin
- A microbit (µBTC)-0.000001 bitcoin
- A satoshi (SAT)-0.00000001 bitcoin.
Most of these unit terms are hardly used. They are just mentioned in articles and forums. People choose to count their holdings in terms of bitcoins or fractions of a bitcoin (decimals).
What is the smallest fraction of a Bitcoin?
The one unit that seems to get some traction with Bitcoin users is the Satoshi (SAT), the smallest unit, which is named after the Bitcoin founder.
It is also the one that should interest us the most regarding whether 21 million bitcoins are enough for use by the global population.
The SAT is a 100 millionth of a bitcoin. So how many SATS is a Bitcoin?
A single bitcoin is made up of a hundred million SATs. With a bitcoin going for around ,$10,000, each dollar is worth 10,000 SATs. Remember a dollar can only be divided into 100 pieces (cents).
Will a Satoshi ever be worth a dollar? Very much likely, especially with the expected appreciation of Bitcoin over the coming months and years. We expect halving of the mining reward and demand from the growing Bitcoin awareness.
So, are 21 million bitcoins enough to serve a global population of over 7 billion that is growing at an annual rate of 1.07%?
Consider that a bitcoin has 100 million pieces (SATs). That means that 21 million will translate to 21 trillion SATs. And if that is divided by 7 billion people on earth, each man, woman and child will get 3000 satoshis.
That is indicative that the value of 21 million bitcoins, or even slightly lower due to loss to ‘burning,’ is enough even if Bitcoin became the primary global currency and the population doubled.
Also important to consider is that Bitcoin will never be the only available digital currency or even cryptocurrency.
We already have close to 3000 other cryptocurrencies (altcoins), and I can bet my own share of Satoshis that we should expect a lot more in the coming years.
Each of these cryptocurrencies is going to have a particularly special or primary function of money. Bitcoin, for example, has started proving itself as best suited to be a store of value. Some have called it the digital gold.
Meanwhile, Litecoin has characteristics that make it best suited to be a medium of exchange. Its transactions are confirmed quicker, and its network does not require high capacity and energy-intensive mining equipment.
On its part, Ethereum’s ether is a building a niche as a currency for powering applications. Its best use case is turning out to be as gas.
Of all the challenges Bitcoin might face in the foreseeable future, having enough units to serve the global population is not one of them.