Why there will never actually be more than 14 million bitcoins (BTC) in circulation

Bitcoin has lost zeal – The number of bitcoins (BTC) available would never exceed 14 million, according to this research from Cane Island. This surprisingly low ceiling is said to be due to losses of BTC that, as a result of various events, have become permanently inaccessible.

Never more than 21 million BTC: an erroneous meme

The April 16, 2020 Cane Island research report first defends the thesis that the number of BTC in circulation will never exceed 14 million. Then it questions the impact of a decrease in supply (and vice versa) on the price of bitcoin.

The paper begins by putting a figure on the amount of new tokens created daily, which at the time of the study was around 1,900 BTC (this number having since halved following the May 2020 halving to around 900 daily units).

He then discusses various indicators, such as the number of active addresses and transactions, or the hash rate, which are generally interpreted as metrics proving an increase in demand for BTC. The increase in the price of bitcoin over time proves that the growth in demand tends to irretrievably exceed the reality of available supply.

More impressively, from May 2020 onwards the supply starts to fail to compensate for the number of bitcoins being lost on average every month. These losses would be due to:

  • Misplaced private keys in wallets
  • Bitcoiners accidentally disposing of their physical wallets;
  • Bitcoiners sending bitcoins to the wrong address;
  • To the death of bitcoiners who have made no provision for the transmission of their assets.
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About 4% of the bitcoins in circulation would be totally lost every year since 2010. The number of available BTCs cited by the researchers was 13.9 million, well below the total supply which does not take into account losses, estimated at 18.3 million theoretical BTCs.

The annual net change in Bitcoin supply, based on the number of available BTC and the total supply of Bitcoin, would consequently be -1.4% since the 2020 halving.

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Bitcoin: the golden goose?

The second part of the research looks at the relationship between the variatioThe researchers draw an analogy between the production of BTC and chickens. The researchers make an analogy between the production of BTC and hens that lay an average of 12.5 eggs every 10 minutes, or 75 eggs per hour.

This production rate then drops by half to 37.5 eggs/hr due to a fox attack that kills half the hens. The price will then increase if demand remains unchanged. However, the hens will continue to lay eggs at the same rate with the same supply rate, despite this price increase.

The price elasticity of supply noted 𝐸𝑠 = %∆𝑄 ÷ %∆P is then almost zero. The researchers calculated this elasticity during the first 3 halving periods, and the calculations, in their opinion, returned a value close to zero.

Supply and cost based indicators would then not be the best metrics to explain Bitcoin’s price formation.

Wouldn’t it have been more relevant to determine the robustness of the theories about the adjustment of mining difficulty to a continuous increase in hashing power? While practice tends to qualify the theories, it has already been verified that the banning of miners from China is actually a blessing for the remaining miners.

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