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Bitcoin mining is a crucial process for securing the Bitcoin network. As the block reward decreases, transaction fees will become increasingly important for incentivizing miners. While the future of Bitcoin mining remains uncertain, several factors could contribute to its continued viability, including the rise of Ordinals, demand response programs, access to cheap electricity, and the self-interest of major investors and countries. The future of Bitcoin mining will depend on a combination of transaction fees, innovative income sources, and the involvement of economically invested parties, such as major investment funds or countries adopting Bitcoin as a reserve currency.
One of the most proudly touted features of Bitcoin is its maximum supply of 21 million. The reasoning goes that this property makes it similar to limited resources such as gold – but what happens when all 21 million bitcoin are mined? First, let’s do a quick recap of how bitcoin mining works. New bitcoin enters circulation via a process known as mining. This involves users operating powerful computers to solve cryptographic puzzles in order to add blocks of transactions onto the blockchain. In return, they earn block rewards for their efforts. When Bitcoin was just created, each block added would earn miners 50 bitcoin. After every 210,000 blocks or roughly every 4 years, a ‘bitcoin halving’ occurs which slashes rewards by half. So far there have been 3 halvings, so each block added now earns miners 6.25 bitcoin. The next halving is set for some time in April 2024, where the block reward will further drop to 3.125 bitcoin. You can probably see where this goes – eventually, the block reward will drop to zero as the 21 million bitcoin limit is reached. So, what’s left to incentivise miners to stay? Unlike gold which could still continue to be traded without miners, Bitcoin miners are essential as they are the ones who validate transactions and secure the network. This is where fees come in. Aside from just the block reward, miners also receive all the fees from transactions included in a block, paid by the sender. The idea is that when block rewards eventually run out, ideally adoption of Bitcoin is wide enough or its price is high enough that fees become a big enough reward for miners to continue to mine blocks. However, some have questioned the viability for fees alone to act as sufficient incentive for miners to stay as aside from spikes during bull markets, fees have only made up a small percentage of total miner revenue.
Though, recent developments with Bitcoin Ordinals has led to skyrocketing fees in the midst of a bear market. This is definitely a boon for miners, but it remains to be seen if this will be sustained into the indefinite future. Another potential income source could be via participation in demand response programs. These incentive programs involve large users of electricity, such as bitcoin miners, getting paid for voluntarily pausing operations in order to balance out load on the electrical grid.
In Texas where wind and solar energy is on the rise, miners have earned up to 10% of their revenue via these programs, which will likely become more common as renewable energy capacity expands. Speaking of renewables, there will also likely be miners with access to cheap or free electricity that can afford to keep mining even with decreased revenues. Last but not least, there is also the self-interest of bitcoin holders that we can count on to keep the network functioning. We may eventually have major investment funds hold bitcoin in their portfolio, or even countries which adopt it as a reserve currency. If and when that happens, there will then be powerful and economically invested parties which will be motivated to keep the bitcoin network secure by setting up mining operations if needed. What do you think? Will the bitcoin network run fine just on fees, especially with the rise of Ordinals? If you want to learn more about NFTs and tokens on Bitcoin, check out our video on them right here.