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Bitcoin, introduced in 2009 by the pseudonymous Satoshi Nakamoto, operates on a decentralised network that relies on a process called mining. Miners use computational power to solve complex mathematical problems, which validate transactions and secure the network. As a reward, miners receive newly created bitcoins and transaction fees from users.
The Bitcoin network goes through an event known as "halving " approximately every four years, every 210,000 blocks. This process halves the mining reward, reducing the rate at which new bitcoins enter circulation. The halving mechanism controls Bitcoin’s supply, contributing to its scarcity and strengthening its value over time.
Bitcoin's protocol includes a hard cap of 21 million coins, meaning only 21 million bitcoins will exist. So far, over 19 million bitcoins have been mined, leaving fewer than 2 million unmined. This finite supply creates scarcity, contrasting traditional fiat currencies, which central banks can print in unlimited quantities. This scarcity is central to Bitcoin’s design, providing a solid base for long-term value.
Effects on Miners: When all bitcoins are mined, miners will no longer receive block rewards. Their income will rely only on transaction fees paid by users. This will impact miners' profitability, especially those with high operational costs. Miners will need efficient hardware and low energy expenses to stay competitive in a system where only transaction fees sustain the network.
Transaction fees are payments users include to prioritise their transactions on the network. As block rewards diminish, these fees will become the primary income source for miners. A high volume of transactions with reasonable fees will be essential for sustaining miners financially. The network will rely on users paying sufficient fees to motivate miners to process transactions quickly and maintain security.
2.1. Current Analysis of Bitcoin Transaction Fees
The average Bitcoin transaction fee as of late October 2024 is around $0.81 per transaction. However, this rate fluctuates with network congestion, sometimes reaching $4.75 during high-demand periods. Transaction fees currently comprise about 1.61% of total miner revenue, with most income derived from block rewards of 3.125 BTC per block plus an average of 0.0463 BTC from transaction fees. This adds up to approximately 543.75 BTC from block rewards and 8.06 BTC from fees daily BitInfoCharts.
Network security will stay strong even when block rewards decrease. Miners, crucial for maintaining security, will continue to be motivated by transaction fees. As more people use Bitcoin, transactions will increase, leading to higher fees. These fees will provide enough incentive for miners to keep the network secure, ensuring that Bitcoin remains a safe and reliable system for all users.
Bitcoin's finite supply increases demand and value as scarcity becomes apparent, making it a deflationary asset. This leads to value appreciation over time.
With a fixed supply of 21 million coins, Bitcoin contrasts with inflationary fiat currencies. Its deflationary nature enhances its appeal as a store of value, maintaining purchasing power over time. Unlike fiat currencies, where central banks can increase money supply, causing inflation, Bitcoin's limited supply offers secure wealth preservation. As scarcity increases through halving events, its purchasing power is expected to rise, making it a strategic asset for long-term financial security.
Bitcoin's value retention encourages thoughtful spending and saving. Its deflationary nature promotes long-term holding and strengthens its position as a medium of exchange in markets that value scarcity. It offers flexibility for both everyday purchases and wealth preservation.
Bitcoin's deflationary model fosters prudent financial decisions and long-term planning. With a predictable supply and appreciating value, it supports a dynamic economy where users invest in Bitcoin.
The Bitcoin network will continue functioning effectively when all bitcoins are mined, reaching the 21 million limit. Miners will earn income only from transaction fees, motivating them to maintain network security. As Bitcoin’s design progresses toward a fee-based system, there is now a unique opportunity to engage with mining while block rewards remain available. Today's conditions are set to offer the best entry point for investors looking to secure Bitcoin at its foundational level.
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