Why bitcoin will become a currency we use and an inflation hedge like gold

By Jurica Dujmovic

The cryptocurrency benchmark will be a stable, long-term asset

Bitcoin, the vanguard of the cryptocurrency world, is on a trajectory to become a stable, long-term asset.

As traditional fiat systems continue to face inflationary pressures, bitcoin's (BTCUSD) fixed supply could make it an attractive alternative, potentially leading to its increased adoption as a hedge against inflation and as part of national-reserve assets?.

While the final bitcoin will not be mined until 2140 - more than a century from now - understanding bitcoin's finite lifespan is crucial for anyone invested in bitcoin's future.

Bitcoin over time will shift from a semi-inflationary to a purely deflationary currency. Its fixed supply is anticipated to have profound economic implications, both for bitcoin as a digital asset and for its role within the broader financial ecosystem.

A deflationary nature for bitcoin would enhance its attractiveness as a store of value. In economic terms, a currency that does not lose value through inflation is appealing to holders looking to preserve or even increase their wealth over time. This characteristic aligns bitcoin more closely with scarce resources like gold (GC00), which have traditionally served as hedge against inflation?.

Mining incentives

When that final bitcoin is mined, the incentive structure for miners will shift entirely to transaction fees. Since its inception, the Bitcoin blockchain has issued new coins as a reward to miners for each block mined - but these rewards are designed to halve approximately every four years, a process known as "halving." This gradual reduction has been preparing the system and its participants for a future where transaction fees will become the primary economic incentive for miners?.

The increasing focus on transaction fees is expected to compensate for the loss of block rewards, ensuring that miners remain financially motivated to continue processing transactions. The exact dynamics of how much transaction fees will rise depend on network demand and the cost efficiencies that miners can leverage over time.

As bitcoin approaches the postmining era, questions about the ongoing security and stability of its network come to the forefront. The end of new bitcoin generation does not mean the end of mining activities. Instead, miners will continue to play a crucial role in securing the blockchain by validating transactions and maintaining the integrity of the network. As I mentioned earlier, the incentive will shift entirely to transaction fees, which are expected to become substantial enough to ensure miners' efforts?.

Additionally, the shift toward transaction fees as a primary incentive is predicted to align closely with the network's usage. As more transactions vie for processing on the Bitcoin blockchain, the fees associated with these transactions could naturally increase, providing adequate compensation for miners to uphold network security without the block-reward subsidy.

Miners are likely to continue seeking regions of the world with lower electricity costs and may increasingly turn toward renewable energy sources.

One of the key strategies for miners will be optimizing energy consumption. Since electricity costs are a significant part of a miner's operational expenses, the ability to mine bitcoin more efficiently can dramatically affect profitability. Miners are likely to continue seeking regions of the world with lower electricity costs and may increasingly turn toward renewable energy sources to mitigate costs and enhance sustainability.?

Furthermore, as the mining industry matures, it could see a higher degree of centralization in regions with the cheapest resources, or a push toward decentralization facilitated by technological democratization - one allowing more participants to engage in mining activities effectively. These changes will not only reshape the mining landscape but also influence the broader Bitcoin network's efficiency and security.

The evolution of mining hardware also plays a crucial role. ASICs, which are tailored specifically for bitcoin mining, have seen significant improvements over the years. These devices are designed to maximize processing power while minimizing energy consumption, thereby boosting the efficiency of bitcoin-mining operations. As these technologies continue to advance, they could help counterbalance the loss of block rewards by reducing the cost base for miners.

Additionally, the integration of technologies such as the Lightning Network and other blockchain innovations could enhance bitcoin's scalability and efficiency - enabling faster transactions with lower fees, thus supporting its use as a daily transaction medium. This technological progression will be crucial in maintaining bitcoin's relevance and utility in a rapidly evolving digital economy?.

More: Who owns bitcoin ETFs since their January launch? Here's an early look.

Also read: Why bitcoin will continue to dominate over ethereum.

-Jurica Dujmovic

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-04-24 1607ET

Copyright (c) 2024 Dow Jones & Company, Inc.