Bitcoin’s Hard Cap
When Satoshi Nakamoto created Bitcoin, he installed a strict limit on the number of Bitcoin that could ever exist. There will never be more than 21 million bitcoin. This limit, known as the hard cap, is encoded in Bitcoin’s source code and enforced by nodes on the network.
Bitcoin’s hard cap is central to its value proposition, both as a money and an investment. Like gold and real estate, Bitcoin is a successful store of value because it is difficult to increase its supply. Thanks to the halving, bitcoin becomes more difficult to produce every four years, and eventually, it will become impossible.
Changing Bitcoin’s Hard Cap
A few Bitcoin critics claim that since Bitcoin is nothing more than software, the rules of the Bitcoin network can be changed easily. These critics believe that as the block subsidy—the amount of new bitcoin minted in each block—shrinks every four years, miners, who expend resources to produce new bitcoin, will seek to defend their revenue stream by increasing the supply cap beyond 21 million bitcoin.
Superficially, miners would have an incentive to change the supply cap and grant themselves the ability to print more new bitcoin. However, for several reasons, this change will not occur.
Why Bitcoin’s Hard Cap Will Not Change
Bitcoin’s hard cap is protected against change by its incentive system, as well as its governance model. Thanks to Bitcoin’s architecture, the entities who control Bitcoin’s rule set have strong incentives to resist a change to the hard cap, while those who may desire to change it have no ability to control the network.
Miners are the actors who may have the strongest motivation to change Bitcoin’s hard cap. Changing Bitcoin’s hard cap may temporarily increase revenue for miners. However, doing so would destroy a core investment thesis for Bitcoin—its scarcity. For many investors, the allure of Bitcoin is the predictable, fixed supply. Wealth managers such as Paul Tudor Jones and institutions such as Fidelity Investments and BlackRock have credited Bitcoin’s scarcity as a significant motivation for its growing value.
Removing the fundamental driver behind Bitcoin’s value proposition is not in miners’ best interest. Although the change would increase miner revenue in bitcoin terms, the loss of faith in the Bitcoin network would result in a catastrophic and irreversible price collapse, leading to a net loss of miner revenue in fiat terms.
Since almost all miners pay their costs—equipment costs, salaries, and energy bills—in fiat, they are more concerned with their fiat-denominated revenue than their bitcoin-denominated revenue. Thus, if Bitcoin’s price crashes, miners lose.
Speculation that Bitcoin’s hard cap could change is rooted in two deeper misunderstandings about Bitcoin as a distributed, consensus-based network. Firstly, there is not one, but dozens or hundreds of versions of the Bitcoin source code. Every node in the Bitcoin network runs independent software that will reject any invalid blocks.
While many nodes run the latest version of Bitcoin Core, a significant number of nodes continue to run older versions and different implementations. Thus, while Bitcoin Core’s source code can be changed trivially, it is far more difficult to convince tens of thousands of nodes to adopt these changes.
Secondly, miners do not control the network or its rules. Miners produce new blocks and validate transactions. When miners submit a new block to the network, tens of thousands of nodes each independently verify this block, making sure it produces an appropriate amount of new bitcoin, includes a valid Proof-of-Work, and all transactions within the block are valid. Nodes will reject all blocks that violate these rules, meaning miners have no control over Bitcoin’s ruleset.
This theory has been validated by reality, when, in 2017, 95% of miners agreed to raise the block size limit in an attempt to allow Bitcoin to scale. Nodes and users however, refused this change and successfully forced miners to adopt an alternative scaling solution.
How Bitcoin’s Hard Cap Could Be Changed
Despite the countervailing incentives outlined above, a supply cap change is still theoretically possible. In order to change the supply cap of Bitcoin, several groups would have to collaborate.
First, developers would have to propose and then write the code to implement this change. There would be community discussion, which would likely be controversial. If these changes were agreed upon by developers, the changes would be integrated into Bitcoin Core.
Next, the community would have to agree to an activation path, in order to ensure that the network transitioned to the new ruleset collectively. Changing the supply cap would necessitate a hard fork, which means that all nodes on the network would have to adopt the changes or be forced off the network.
As part of the activation path, both miners and nodes would signal their support for the change, and once a dominant portion of the network signalled support, the change would be activated. Nodes and miners who refused the change would now operate a minority fork, preserving the original Bitcoin network, and the two networks would compete for market share and hash rate.
- Bitcoin critics claim that Bitcoin’s rules can be easily changed by altering Bitcoin’s source code.
- However, Bitcoin is governed by the software run by nodes, not by the source code.
- Removing the strict limit on the number of bitcoin would destroy the value of Bitcoin as a system and alienate investors and long-time believers.