How Bitcoin Could Go To Zero
It's why I don't own the cryptocurrency.
(You’ll find the text version of “How Bitcoin Could Go To Zero” below this embedded video)
Here’s how bitcoin could go to zero.
As you might know, bitcoin is a cryptocurrency that lives on something called a blockchain, which is a decentralized ledger that is maintained by a network of computers rather than a single entity like a company.
The record of who owns bitcoin and how much they own is logged on that ledger, and it’s kept up to date by entities called miners.
These miners use supercomputers to solve complex mathematical puzzles for the privilege of updating the blockchain with new “blocks” of transactions.
They do this because in exchange for their work, they get freshly minted bitcoin called block rewards.
Today, miners get 6.25 bitcoin for every block of transactions they add to the blockchain.
These block rewards are cut in half every four years, so in 2024, the rewards will fall to 3.125 bitcoin per block.
Eventually, block rewards will reach zero. This is projected to happen in the year 2140, when total bitcoin supply reaches 21 million.
But the point at which block rewards reach an extremely small number will happen well before that—within the next decade.
For much of bitcoin’s history, the fact that the supply of bitcoin was capped at 21 million was a major selling point.
It supported the narrative that bitcoin was scarce, unlike fiat currencies like dollar or euro.
But ironically, the supply cap also introduces a key risk to the bitcoin network. If block rewards are cut to zero, then miners may eventually have no incentive to continue participating in the network.
The creator of bitcoin, Satoshi Nakamoto, envisioned that block rewards would eventually be replaced by transaction fees. These are fees that users pay to have their transactions included within blocks on the blockchain.
But in the 14 years since the invention of bitcoin, transaction fee revenue has represented a tiny portion of the rewards going to miners.
That’s because even though bitcoin was originally envisioned to be a currency that people use for every day transactions, it has mostly been used as an investment vehicle and store of value that people hold onto.
Today, around 99% of the compensation going to miners are block rewards and only 1% come from transaction fees.
This is a problem for bitcoin because if people don’t start to use bitcoin in more transactions, then eventually there won’t be enough incentive for miners to continue supporting the network.
Block rewards will continuously go down and eventually reach a point where miners will no longer be willing to put much effort into keeping the network running.
That in turn will reduce the security of the bitcoin network, making it much easier for bad actors to attack the blockchain.
A successful attack would be catastrophic for the price of bitcoin.
So we’ll see what happens. It’s hard to say exactly how long it will be before this is a major issue for bitcoin, but it could be sometime in the next several years—assuming nothing is done to change the way bitcoin operates.
There are some potential solutions. Those include transitioning the bitcoin network to a new model for processing transactions, such as proof of stake (like Ethereum has done), or removing the bitcoin supply cap so the block rewards continue indefinitely.
But these solutions go against the ethos of bitcoin, which values consistency and predictability. The bitcoin community is highly resistant to making major changes to the network, so it will be interesting to see whether they change their tune if and when the security issues start to become a big problem.
As you can see, this is a massive risk to the price of bitcoin and it’s why I don’t own any myself.
I like the Ethereum story much more, but keep in mind that all of crypto—even Ethereum—is extremely high risk.
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