We are nearing peak bitcoin! Hold up, you may say. bitcoin has a hard limit of 21 million, and the last coin is expected to be minted sometime around the year 2140 - long past the projected lifespans of any crypto holder alive today. So how can you realistically say we're nearing peak bitcoin?

The term is, admittedly, borrowed from the oil industry. The phrase "peak oil" does not mean that all of the fossil fuels everywhere on the planet have been drilled, pumped, and sucked out of existence.¹

Peak oil represents an important crossover threshold. It is well beyond our scope here to discuss exactly when and how peak oil will be reached, but everyone can agree that at some point, the cost of extracting oil from increasingly hard-to-reach deposits will outweigh its value as a fuel. That is, it will be so prohibitively expensive to get more oil that technologies like solar, wind, and other renewables will seem cheap by comparison.

That's a crude analogy, but it has some direct parallels to the world of bitcoin mining.

In the early days, bitcoins could be mined - very profitably, it turns out - with a common desktop computer's CPU. The difficulty of mining bitcoin now restricts access primarily to application specific integrated circuits, and even those most cooperate in pools. There are some companies that exist solely to mine bitcoin, setting up vast server farms in countries with cheap electricity and cool temperatures, like Iceland.

Clearly, the capital curve for mining bitcoin is increasing. In the next year or so, about 80 percent of all the bitcoins that can ever be mined will be out in the wild.² We're going to take a look at what that "peak bitcoin" threshold means for miners and the market at large.

The Lay of the Land

A little background is in order. The basics are that bitcoin is a proof-of-work coin, and the coin is hard-coded to have a maximum supply of 21 million. This cannot change without a major alteration to bitcoin's code.

This number is a little nebulous, as there have been fairly big chunks of bitcoin lost over the years to misplaced private keys, tossed hard drives, and theft.³ We're going to discount those and work purely with the theoretical 21 million number. That is, in a perfect world, 21 million bitcoin are alive and well in circulation as of 2140.

We should probably take a step back even further. Why cap the supply at 21 million?

A finite coin supply tows to the age-old fundamental of supply and demand. A coin with a limited supply is inherently worth more than a coin with a limitless supply. This makes sense, and currency supply is tightly monitored by most major fiat currency issuers. A glut of currency on the market is one of the indicators of inflation. That is, having more dollars doesn't mean anything, as each dollar is worth less due to the growing supply.

So, that's one reason for capping the supply. The other has to do with bitcoin's proof-of-work mechanism.

Bitcoins are created when miners solve blocks. Every 2016 blocks - or about every two weeks - the rate of block creation is adjusted. The number of bitcoins created per block decreases in a geometric fashion, going down by 50 percent every 210,000 blocks - or about every four years.⁴

The reason 21 million was chosen is debated, and since bitcoin creator Satoshi Nakamoto has never identified him/her/itself, we can only guess. The figure of 21 million fits fairly well into a four-year halving schedule. Some have speculated that 21 million bitcoins, divided up into discrete portions called satoshis, are close to the maximum capacity of a 64-bit floating point number. It's really impossible to say without Nakamoto's input.

Peak Bitcoin

So, what's the big deal about hitting the 80 percent marker? Knowing the bitcoin mining difficulty goes up over time and rewards go down, the 80 percent threshold represents an important limit for some miners.

As some market observers have noted, the 80 percent threshold signals a difficulty increase that may once and for all drive nonprofessional miners from the market. We're using "nonprofessional" here to mean someone for whom mining is at least a part-time source of income. It takes an awful lot of capital in equipment and electricity costs to be a bitcoin miner. Past the 80 percent threshold, that bar goes up considerably.⁵

This will have two interesting side effects. We'll take a look at both the supply and the demand side of the market.

The first and most obvious is that bitcoin mining will become far less democratic. Centralization will take place as only the biggest and most powerful miners can stay profitable. Moreover, this will put in place a trend; once the ball starts rolling toward centralization, it will be impossible to stop without a fundamental change in bitcoin's code. That means the ability to create bitcoin will fall into fewer and fewer hands. Ironically, those hands are likely to be very wealthy and connected - a centralization theme that bitcoin was initially chosen to combat. Only miners with access to lots of computing power and money to pay for electricity will be able to create new coins.

The second big effect this will have is market based. bitcoin adoption is likely to grow. If the available supply of bitcoin's simultaneously shrinks, it should grow in value in keeping with the law of supply and demand.

Like most things in crypto, however, the story is not that simple. The few bitcoins still being created will be in the hands of very few, who might not immediately opt to release them to the market at large. This creates a situation analogous to diamonds.⁶ Diamonds, technically, aren't very rare. In fact, they're fairly abundant. However, diamond producers are a small, tight-knit bunch. By keeping the number of diamonds in circulation low, these cartels can keep prices artificially high. We might see, then, a similar situation developing with bitcoin. Divorced from traditional laws of supply and demand, prices might spike due to hoarding at the highest mining levels.

This isn't a given, however. There are still large numbers of bitcoin that were mined in the coin's early days that were never released into the circulating supply. This could keep the price under control well into the future.

Technological advances might also throw a monkey wrench into this calculation. If new mining rigs are developed that allow smaller miners to stay profitable, the system will maintain something like a status quo. Furthermore, transaction fees could rise, giving smaller miners some parity as the difficulty level increases.

The 21 Club

There's a small group of individuals who count themselves part of the so-called 21 Club. These individuals own at least one full bitcoin. Membership is necessarily limited to 21 million or less, due to bitcoin's finite supply.⁷

Only time will tell whether the club increases meaningfully in number over the next 120 years. bitcoin mining becomes more difficult every day, concentrating mining ability in fewer and fewer hands. However, cryptocurrency and market disruption seem to go hand in hand, so it's still possible for some as-yet-unseen factor to keep bitcoin as democratic as Nakamoto originally envisioned it.

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1) Why the Prospect of Peak Oil is Hotly Debated, Bloomberg.
https://www.bloomberg.com/news/articles/2017-12-22/why-the-prospect-of-peak-oil-is-hotly-debated-quicktake-q-a

2) 80% of All bitcoins Will Have Been Mined In a Year From Now, The Merkle.
https://themerkle.com/80-of-all-bitcoins-will-have-been-mined-in-a-year-from-now/

3) Nearly Four Million bitcoins Lost Forever, Fortune.
http://fortune.com/2017/11/25/lost-bitcoins/

4) Controlled Supply, bitcoin Wiki.
https://en.bitcoin.it/wiki/Controlled_supply

5) What Happens to bitcoin After All 21 Million Are Mined?, Investopedia.
https://www.investopedia.com/news/what-happens-bitcoin-after-all-21-million-are-mined/

6) World Diamond Supply to Peak in 2017, SCMP.
http://www.scmp.com/business/companies/article/2020408/world-diamond-supply-peak-2017-de-beers-chief-executive-says

7) 21 BTC Club Price of Admission now $175,000, Reddit.
https://www.reddit.com/r/Bitcoin/comments/7eil08/21_btc_club_price_of_admission_is_now_175000/