The 21 Million Question – Is the Bitcoin Supply Really Limited?
Bitcoin coin throw up
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As bitcoin continues its journey amid the bear market, we continue to see bullish predictions speculating when the cryptocurrency’s price will reach $100,000, $500,000 or even $1 million. But let’s not forget the bears—especially those like the CEO of the nation’s largest bank, JPMorgan’s Jamie Dimon.
Speaking at the Institute of International Finance event in October 2021, Dimon, a noted bitcoin critic, reiterated his negative stance on the asset: “I personally believe that bitcoin is worthless.” He sticks to this view even as JPMorgan rolled out its own digital currency, JPM Coin, in 2020 and created a new blockchain entity. In the summer of 2021, the bank began giving its wealth management clients access to crypto funds.
But this time management took a different approach. Instead of focusing on its intrinsic value, or the lack of it as he sees it, he questioned the very foundations of bitcoin’s popular “digital gold” narrative — its hard cap of 21 million units. “How do you know it will end up at 21 million? Do you read all the algorithms? Do you all believe that? I do not know; I’ve always been skeptical of such things,” Dimon asked the audience.
As you can imagine and may have witnessed for yourself, this set crypto-twitter cards on fire. But let’s take a break. Have you read bitcoins code? (If you don’t have it: click the link here) And what about Elizabeth Warren’s nightmare, “shady supercoders”, who could change that, increase bitcoin’s supply cap or remove it altogether?
The Bitcoin protocol
In fact, the bitcoin protocol can and has been changed, copied and edited. These adjustments, not exclusive to bitcoin and otherwise known as forks, occur when a large enough number of miners agree to update the blockchain’s rules. Now a distinction should be made between the different types of forks:
- Soft fork: Think of it as a software upgrade, designed to bring new features or functionality, to the blockchain. Importantly, a soft fork is backwards compatible with older versions. This means that participants who have not upgraded to the new software will still be able to participate in the validation and verification of transactions. One of the most famous soft fork examples is an upgrade called SegWit (Segregated Witness), which was implemented in 2017 to increase bitcoin’s transaction throughput within a given block.
- Hard fork, on the other hand, involves more complicated code changes, so it does not have backward compatibility. In this scenario, the blockchain splits into two: the original blockchain and new version that follows the new set of rules. Hard forks of bitcoin have resulted in brand new cryptocurrencies such as litecoin, zcash, monero and bitcoin cash.
So, Dimon is correct that bitcoin’s code can be changed, but he is not asking the right question. It is whether a quorum of developers, miners and users will accept such a consequential code change. Evidence suggests they won’t, which is why the hash rate and market capitalization of all bitcoin’s cousins are tiny fractions of the original.
As Blocktower Capital’s founder Ari Paul put it, “the core value proposition of bitcoin is predictable, unchanging supply. Most bitcoiners know that, so they think they would hurt bitcoin and themselves if they changed it,” he wrote. “Bitcoiners would only expect bitcoiners to support a change if it was clearly in their interest. So a change to fix a critical flaw is very plausible. A change to eliminate the value in the assets you have… is not.”
But let’s assume that the majority of bitcoin miners agree that it is indeed in their interest to change the fee to, say, defend their revenue stream. Then they have to agree on the size of the cap: do we issue five million more tokens? Ten million? Should bitcoin supply be unlimited?
Then, even if these groups agree on a change, they would then need to work with developers writing the code, many of whom would strongly disagree, leaving a deadlock. For the record, the debate over bitcoin’s block size has raged for years, leading to the glaring and messy creation of bitcoin cash (BCHBCH) and other derivatives initially.
Institutional investment decisions
Beyond such technical details, industry players will also make choices. When bitcoin cash was launched in August 2017, one of the major cryptocurrency exchanges CoinbaseCOIN essentially boycotted the cryptocurrency, refusing to support it. “We have made this decision because it is difficult to predict how long the alternative version of bitcoin will survive and whether bitcoin cash will have future market value,” David Farmer, Coinbase’s chief product officer, wrote in a statement at the time.
In addition, institutional investors, who largely drove bitcoin’s recent price rally, have repeatedly credited bitcoin’s scarcity as a hedge against rising inflation. Imagine what they would do if the asset was stripped of its deflationary features.
As it stands, the very last bitcoin is estimated to be mined sometime in 2140. There are no guarantees that bitcoin will survive that long, so to answer Jamie Dimon’s question: we don’t really know. But this narrative doesn’t nearly capture the complexity of the issue, and bitcoin’s limited supply cap is at this point an important part of the brand — as is the “full faith and credit” of the US government backing the dollar.
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