There Will Never Be More Than 14 Million Bitcoins¶
The maximum number of bitcoins that will ever be in circulation is approximately 14 million -- not the 21 million theoretical cap. Published in 2020, this research estimates that about 4% of available bitcoins are irretrievably lost each year and that, following the May 2020 halving, the rate of loss exceeded the rate of new production for the first time. Bitcoin's available supply has peaked and is now in permanent decline.
Counting Bitcoins¶
Every day, new bitcoins are created by miners as reward for block validation. Basic economics dictates that, all else equal, increases in supply decrease the price of an asset. Even if the production rate is halved, supply still increases and puts downward pressure on price. Only two forces counteract this: an increase in demand, or a decrease in supply.
By all accounts, Bitcoin demand has increased over time. Every metric -- active addresses, transaction counts, hash rates -- has shown increased demand. Since price has also increased, the increase in demand has outpaced the increase in supply. Beginning May 2020, the number of bitcoins lost in a month exceeded the number of new bitcoins generated, marking the first time in Bitcoin's history that available supply began to decline.
Categories of Lost Bitcoins¶
Bitcoins can be irretrievably lost in several ways:
- Discarded hardware: In one high-profile case, a man accidentally threw away 7,500 bitcoins, valued at over $50 million at the time.
- Lost keys: Perhaps the most well-known case is Elon Musk, who publicly acknowledged losing access to his Bitcoin.
- Death without key transfer: Matthew Mellon, an early investor in Ripple, held nearly $500 million in crypto coins in cold wallets scattered across the country, with no one else knowing the codes.
- Wrong addresses and burning: Users sometimes send Bitcoin to inactive or defunct addresses. Sometimes this is intentional, in a process known as burning. One notorious address held nearly 80,000 bitcoins and had never sent a single satoshi since inception.
The distinction between irretrievably lost and buy-and-hold investing (HODL) is critical. A HODLer maintains control and is merely unwilling to transact at current prices; those coins remain part of the available supply at some future price. Irretrievably lost bitcoins are permanently removed from the economy.
Supply Definitions¶
Total Supply is the total number of bitcoins mined -- a known, predetermined figure. Available Supply is Total Supply less irretrievably lost bitcoins. Total Supply is known with certainty, but Available Supply can only be estimated because it is difficult to determine whether an idle address is unable or merely unwilling to transact.
Calculated Market Capitalization -- Price multiplied by Total Supply -- is the figure reported in news and on cryptocurrency monitoring websites. This number is a fiction. Actual Market Capitalization -- Price multiplied by Available Supply -- is significantly lower but not known with certainty.
Price per coin, not market capitalization, reflects actual financial decisions made by people with their money. Price is set by the intersection of demand and Available Supply.
Estimating Lost Coins¶
Using the divergence between Calculated Market Capitalization and Price, approximately 4% of Available Supply has been lost each year since 2010. This puts the current Available Supply at roughly 14 million coins, well below the publicized Total Supply figure. Approximately 28% of all bitcoins ever mined have been irretrievably lost -- a figure consistent with research conducted by Ratcliff [2014] and Chainalysis [2017].
As Satoshi Nakamoto observed: "Lost coins only make everyone else's coins worth slightly more. Think of it as a donation to everyone."
After the 2020 halving, the net change in available coins became approximately -1.4% per year. New coins are still mined, but the rate of loss now exceeds the rate of creation.
Price Elasticity of Supply¶
The relationship between Bitcoin's production rate and price can be understood through a thought experiment: a magic chicken ranch where chickens lay golden eggs at a fixed rate regardless of the eggs' price. If half the chickens are removed, the remaining chickens still lay eggs at the same constant rate per chicken -- they are indifferent to economics, demand, or price.
Bitcoin's price elasticity of supply (Es) is effectively zero across all halving periods. This condition -- price inelasticity -- means supply does not change regardless of what happens to price. The mining protocol produces bitcoins at a predetermined rate irrespective of market conditions.
The implication is profound: supply-based and cost-based measures are poor methods for explaining Bitcoin price formation. Because supply is fixed and inelastic, demand-based models -- such as Metcalfe's Law -- are far more likely to explain how Bitcoin's price is determined.