The 21 Million Question – Is Bitcoin Supply Really Capped?

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As bitcoin continues its journey in the midst of its bear market, we continue to see bullish predictions that speculate when the cryptocurrency’s price will reach $100,000, $500,000 or even $1 million. But let’s not forget about 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 known bitcoin critic, reiterated his negative stance towards the asset: “I personally think that bitcoin is worthless.” He firmly holds that view even as JPMorgan rolled out its own digital currency, JPM Coin, in 2020 and created a new blockchain unit. In the summer of 2021, the bank started giving its wealth management clients access to crypto funds.

But this time, the executive took a different approach. Rather than focusing on its intrinsic value, or lack thereof as he sees it, he questioned the very thing that pillars bitcoin’s popular “digital gold” narrative–its hard cap of 21 million units. “How do you know it ends at 21 million? You all read the algorithms? You guys all believe that? I don’t know; I’ve always been a skeptic of stuff like that,” asked Dimon of the audience.

As you can imagine and may have witnessed yourself, this briefly set crypto twitter on fire. But let’s pause. Have you read bitcoin’s code? (In case you haven’t: click the link here) And what about Elizabeth Warren’s nightmare, “shadowy super coders,” which could, well, change it, increasing bitcoin’s supply cap or removing 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, happen when a large enough number of miners agree on updating 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 functions, for the blockchain. Importantly, a soft fork is backwards compatible with older versions. This means that participants that did not upgrade to the new software will still be able to participate in validating and verifying transactions. One of the most well-known soft fork examples is an upgrade called SegWit (segregated witness), which was implemented in 2017 to raise bitcoin’s transaction throughput within a given block.

Hard fork, on the other hand, involves more complicated code changes so it does not have backwards compatibility. In this scenario, the blockchain splits in two: the original blockchain and new version that follows the new set of rules. Hard forks of bitcoin have resulted in entirely new cryptocurrencies like litecoin, zcash, monero and bitcoin cash.

So, Dimon is correct that bitcoin’s code can change, but he’s not asking the right question. It is whether a quorum of developers, miners and users will accept such a consequential code change. Evidence suggests that they won’t, which is why the hashrate and market caps for all bitcoin’s cousins are small fractions of the original.

As Blocktower Capital’s founder Ari Paul put it, “the core value proposition of bitcoin is predictable, unalterable supply. Most bitcoiners know that, so they think they’d be hurting bitcoin and themselves if they changed that,” 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 bug is very plausible. A change to eliminate the value in the assets you hold…isn’t.”

But let’s assume the majority of bitcoin miners come to a consensus that it’s indeed in their interest to change the cap to, say, defend their revenue stream. Then, they’d have to agree on the size of the cap: do we issue five more million tokens? Ten million? Should the bitcoin supply be unlimited?

Then, even if these groups agree on a change they would then need to collaborate with developers who write the code, many of which would strongly disagree, leaving a stalemate. For the record, the debate about bitcoin’s block size has raged on for years, which is what led to the rancorous and messy creation of bitcoin cash (BCHBCH
) and other derivatives in the first place.

Institutional Investment Decisions

Beyond such technicalities, industry players will also be making choices. When bitcoin cash 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 hard to predict how long the alternative version of bitcoin will survive and if bitcoin cash will have future market value,” wrote David Farmer, Coinbase’s director of product, in a statement back then.

Additionally, institutional investors, who largely drove bitcoin’s latest price rally, have repeatedly credited bitcoin’s scarcity as a hedge against rising inflation. Imagine what they would do if the asset got stripped of its deflationary features.

As things stand now, the very last bitcoin is estimated to be mined sometime in 2140. There are no guarantees bitcoin will survive this long, so to answer Jamie Dimon’s question: we don’t really know. But this narrative does not nearly capture the complexity of the issue, and bitcoin’s limited supply cap is, at this point, an essential part of its brand–similarly to the “full faith and credit” of the U.S. government backing the dollar.

 

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