The money supply in the United States, calculated by the M2 method, has increased by over 40% since January of 2020. When currencies do not have clear regulations around supply and governments can print at their will, we start to see inflation as demonstrated throughout history and in the present. Given this outcome, the creator of Bitcoin, Satoshi Nakamoto, created a supply cap of 21 million Bitcoin which acts as a definite limit to the supply of outstanding Bitcoin that can ever exist. Bitcoin miners, who process and validate transactions, are the parties that will earn new Bitcoin as it is mined and their revenue is then impacted by a supply cap.
Today, more than 19 million Bitcoin have been mined to date, which only leaves under a few million remaining to be mined. Bitcoin miners earn revenue through two ways, newly minted Bitcoin from “block rewards” and from transaction fees of the users who transact on the network. The supply schedule for Bitcoin block rewards are defined based on the original code from Satoshi and are setup to decrease the reward that miners earn approximately every 4 years.
The algorithm that governs Bitcoin is set up so that every 10 minutes a new block is added to the Bitcoin blockchain and the miner that validates and adds that block earns the block reward. The current block reward is 6.25 Bitcoin per block, which means that every day, 900 new Bitcoin are added. After 210,000 blocks, the reward is cut in half, known as a “halving” event. The impact of a halving event is significant as miners immediately lose half of their revenue from block rewards. When Bitcoin was first released, the block reward was 50 Bitcoin per block, however at the time the value of those rewards were significantly lower as the market price of Bitcoin was well under $100.
Since miners will have their revenue negatively impacted every four years, the alternative source of revenue for them comes from transaction fees that are collected when a Bitcoin block is added. If a person wants to send someone Bitcoin, they must pay a transaction fee for that to occur, which is directly paid out to a Bitcoin miner. Today, transaction fees do not account for a significant amount of revenue for a miner.
In fact, based on current rates only about 0.14 Bitcoin is earned by a miner on average for each block. Accounting for current market prices, this means miners are earning about $4,000 per block or $576,000 per day. Today, this number is low relative to the almost trillion dollars of value that Bitcoin secures in the network, but as the ecosystem grows we could expect that the value of transaction fees will increase.
Based on the current schedule, all Bitcoin will be mined and in circulation by the year 2140, which leaves a significant amount of time ahead for the network to grow and become more globalized. In 2140, all of a miner’s revenue will be associated with just the transaction fees on the network. Although there are no guarantees that transaction fees will ever supplement the current block rewards, many Bitcoin enthusiasts believe that significant development and growth of users will drive increased revenue for miners.
While today many use cases for Bitcoin are limited and the commercial acceptance of it as a payment system is not solidified, it is quite possible that in the years to come, more institutions, banks, and companies will utilize Bitcoin for its settlement qualities. The importance of transaction fees can not be understated as it will be crucial and imperative that miners have a strong revenue stream for the long-term health of the Bitcoin ecosystem. However, today it is safe to say that most miners will continue to earn a majority of their revenue from the block rewards in the near future.
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