Why is Bitcoin capped at 21 Million?
Unlike government fiat currencies, bitcoin is digitally limited. But why exactly is bitcoin limited to 21 million units?
Bitcoin Whitepaper
The limit of bitcoin is not mentioned in the whitepaper, however Satoshi Nakamoto, the inventor of bitcoin, points out the limit with the following statement:
The total circulation will be 21,000,000 coins. It will be distributed to network nodes as they form blocks, with the amount halved every four years.
First 4 years: 10.500.000 Coins next 4 years: 5.250.000 Coins next 4 years: 2.625.000 Coins next 4 years: 1.312.500 Coins etc.
When that expires, the system can support transaction fees if needed. It is based on open competition, and there will probably always be nodes willing to process transactions for free.
What is Bitcoin Halving?
When miners mine bitcoin, they receive a reward for doing so, called a block reward. This is made up of transaction fees and block subsidy.
In the first 4 years, bitcoin miners received 50 bitcoin per block for this. However, every 210,000 blocks, or the equivalent of every four years, Bitcoin halving occurs. The block subsidy for the Bitcoin mined is halved in each case.
So far, there have been the following bitcoin halvings:
- November 2012: Reduction to 25 bitcoin per block.
- July 2016: Reduction to 12.5 bitcoin per block
- May 2020: reduction to 6.25 bitcoin per block
Conclusion
Probably not the 21 million bitcoin, but the 50 bitcoin per block was at the beginning in the consideration. Because the 21 million is also the mathematical consequence. It is obtained by multiplying the number of blocks produced (210,000 per halving period) by the sum of the halving rewards (50 bitcoin+ 25 bitcoin+ 12.5 bitcoin + 6.25 bitcoin + ...0 ≈ 100).
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