I am the first one to jump on Bitcoin's flaws, but this here just reeks of somebody not understanding the protocol:
> As I argued, once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral.
The cost of mining adjusts depending on the hash rate, so if nobody is mining the cost of mining goes down until people start mining again.
EDIT:
The mining difficulty gets adjusted only every 2013 blocks, so it might be that mining activity drops so low that the block chain starves out before the difficulty can be adjusted down.
The article addresses that further down. frankly I don’t quite know if their argument is valid. I am skeptical, as bitcoin existed before it got any significant value.
“. Similarly, when the price of bitcoin falls and miners exit, the cost of mining decreases. However, the number of miners cannot fall below a certain level, because without the miners providing the computing power to maintain the ledger, the bitcoin blockchain will not remain viable.
Mining at a cost higher than the cost at which you can sell in the futures market destroys value. So, any rational investor — even one who strongly believes the price of bitcoin will rebound — has no incentive to mine if the cost of mining is higher than the future price and is better off buying in the futures market. ”
But buying only makes sense if you can "realize" the gains - for that, the BTC network (i.e. transfers between accounts) has to continue working. In the absence of mining gains from newly-minted coins, rich individuals that want to use their wealth will be paying for mining in transaction fees.
I suppose one source of risk is that if enough miners exit then it becomes viable for a bad actor to purchase enough computing power to mount an attack.
IIRC 51% attack happened on one of the bitcoin forks.
The cost of mining only adjusts after a set number of blocks. It's possible for there to be a sudden drop in price, meaning the majority of miners shut down unprofitable rigs, and then it takes essentially infinite time to mine the required N blocks to adjust the difficulty.
> So, it appears bitcoin is now entering a death spiral: If the price continues to drop and the cost of mining does not fall correspondingly (the cost of mining will algorithmically decrease, but not necessarily to same extent as the decline in prices), bitcoin will quickly go to zero.
Which won't happen since the 'cost' of mining is electricity and hardware costs which for some miners is probably very close to zero. All this is going to do is shuffle out the miners who have no efficiency.
Why would the cost of mining not fall correspondingly? It will adjust until it becomes profitable again, nobody is going to run mining farms if they are clearly losing money every single day.
Because the adjustment window is not real-time-based, but block-based: every 2016 blocks, an adjustment is done - with the obvious caveat being that the duration it takes to mine 2016 blocks is based on the global hash rate. Also, the downward adjustment is limited to (IIRC) halving the difficulty at max.
So, given the number of miners drops too far too fast, Bitcoin may end up in a situation in which the global mining power is too low to even reach the end of the adjustment window in a realistic timeframe, which in turn triggers even more miners to shut off their equipment and sell their coins, which lowers the price even more and lengthens the timeframe, which in turn...and so on. This situation is known in Bitcoin circles as the "chain death spiral", and it has been a purely theoretical thing - until now, at least.
> Because the adjustment window is not real-time-based, but block-based: every 2016 blocks, an adjustment is done ...
This is definitely true. Luckily for miners there are two other blockchains their mining equipment can make use of which don't suffer from the slow difficulty adjustment. They are both version of Bitcoin Cash (BCH and BSV) and they both have 10-block adjustment periods. This makes them much more resilient to sustained periods of depreciation.
Miners probably have a bit of a sunk cost fallacy, since there's a fixed cost associated with acquiring the hardware. Plus, if they're still bullish on bitcoin, the short term loss is probably worth it in their eyes.
I think you nailed it, although I don't think miners even need to fall for a fallacy for your argument to work: some major miners have made big capital expenditures (efficient hardware, cooling, etc.) to keep variable costs low over the long term. Even if the price drop means they'll never mine themselves out of debt, it could still be the rational thing to do for them to keep the machines on, as long as their reduced variable cost is still below than the market price.
You're implicitly assuming that bitcoin will retain value. If the value of bitcoin halves every 6 months and the cost of mining halves every 7 months, bitcoin will never* be worth mining again.
* Of course it wouldn't be a smooth decline so there may be short periods where it occasionally becomes viable.
Where is the author pulling their mining costs from? I'd love to see their source. Mining costs are mostly concentrated in purchasing the equipment and setting up a factory. Once that's done, your day to day expenses are electricity and labor.
Many of the biggest Bitcoin mining operations are in places like China, near hydro-electric dams, where the electricity cost is extremely low. Labor is also cheap. Since they've already paid the setup costs, they are not going to be shutting down even at $1000 BTC.
There have already been hash rate wars. BCH has tried sending BTC into a death spiral before, by luring over miners to their blockchain. It worked, for a bit. Eventually, transaction fees went up on BTC, and miners were incentivized to return to BTC.
The average block time is 10 minutes for Bitcoin. Hash rate adjusts every 2016 blocks. That's 14 days on average. If the hash rate dropped 50%, it's 28 days.
The way the bitcoin protocol is designed, the mining difficulty and rewards only adjust after N blocks have been mined. It doesn't respond in real time to the hash rate on the network.
Aaah. So he's saying that the price might fall so quickly and the hash rate might drop so quickly that the difficulty cannot adjust because they blocks to adjust the difficulty won't get mined?
(The difficulty gets adjusted only every 2013 blocks)
this article is misinformed. there is no single mining profitability threshold and some miners will mine at a loss. some miners are profitable at a very low price.
Exactly. I don't understand how the article can miss such a fundamental aspect of Bitcoin's design. What this means is that the cost of mining will go down and adjust accordingly.
I may still have some bitcoin, but I certainly hope it becomes worthless. It's turned out to be ridiculously energy-consuming, and it seems to be used mostly for speculation rather than payment. Transactions have become too slow and expensive to be efficient for a payment system.
It's entirely possible that cryptocurrencies will be the future, but it won't be bitcoin. It needs to be more efficient and more scalable than that.
Exactly. If a cryptocurrency has some stable basis that's more efficient than proof-of-work (== wasting energy for its own sake), and has cheaper, faster, more efficient transactions so it can actually be used for small purchases, then I totally think that currency could conquer the world. Bitcoin itself is just too limited. Great idea, but too many problems.
Has there been some revolution in bitcoin tech since Dec 2017? Is it not based on wasting as much energy as possible anymore? Is it suddenly being used for far more transactions than before?
I haven't bought bitcoin since it was sitting at $8 a coin... but hey, Buy when there's blood on the streets. I don't think bitcoin is nearly as important as many of people who invest in it believe. But it does seem to be a thing that will be around for a while. I view it as digital gold, and not necessarily a currency. Unless you're buying during one of the large speculative bubbles (which come every few years) it's not a TERRIBLE store of value... though it wouldn't be my first choice, it is an option. I think it has some more life in it.
Bitcoin's price drop might look bad enought to warrant sensational articles, but if you take any bitcoin price chart over the last years (like [1]) and switch it to logarithmic price, it doesn't appear exceptional. The same thing happened in 2013.
If you take any time series asset of the price of any asset, and switch it to logarithmic, none of the drops will appear exceptional either. That’s what logarithmic scale does.
If you assume something grows exponentially (which is roughly how bitcoin behaves), then looking at a linear chart doesn't lead to useful conclusions.
Alternatively you can look at [1] which uses linear scale, but as you look at different parts of the timeline it rescales the chart. Sure, the recent drop looks dramatic. But it looks less dramatic than when in 2011 the price rose from $0.80 all the way to $30 and fell back to $2.20. Or the 2013 event where the price rose from $15 to $100 to $1000 in the span of a few months, only to crash down to a devastating $230.
log charts are misleading because by changing the base and the vertical axis you can make a huge decline look like a blip. but seeing 80% of your money gone is anything but a blip. also there is no guarantee bitcoin will continue to have exponential returns.
> also there is no guarantee bitcoin will continue to have exponential returns
which is true of any investment vehicle. You can only look at past performance and future market factors to make predictions, but even with the safest investment methods there is no guarantee.
In 2013 most people didn't know about bitcoin. A big part of the spike in 2017 was from people who never heard about it before. Today everyone knows about bitcoin.
> And it looks as though the Blockchain economy is here to stay, where many of our transactions will be processed on the blockchain and use cryptocurrency for daily transactions. Indeed, while the world maybe forever be indebted to Satoshi Nakamoto for giving us a viable cryptocurrency, bitcoin may cease to exist.
Huh? Does anyone seriously use cryptocurrencies for daily purchases right now?
It seems to me like cryptocurrencies are entirely useless (except maybe for illegal things and ransomware) and the entire space will be dead after it's done crashing. Ultimately, Satoshi Nakamoto may have accomplished nothing but caused untold misery for thousands of bankrupted people, redistributed money like a lottery, and burned the rest in electricity.
Mining can only become unprofitable for a while: Until the difficulty is adjusted.
There is a whole industry depending on Bitcoin. If mining becomes unprofitable, there will be players that pay for the mining to continue until the difficulty adjusts. To keep their companies alive.
There is also another counterargument. One that does not only apply to the problem of mining but to any problem with Bitcoin in general: If a hard problem occurs, it is very likely that the industry would collectively switch to a fork.
For me, the value of Bitcoin is mainly rooted in that fact. Bitcoin is widely spread. So it will probably be the seed for future currencies that one day will be more valuable then the original.
> Third, the futures markets have changed the game, enabling miners to estimate their mining losses and profits at the outset — if you can buy in a futures market at a price below my mining costs, why mine for a sure loss?
This is wrong argument. Mining costs are different for different miners. Someone has cheap electricity, someone has cheap electronics. If mining is not profitable for some part of miners, they'll stop mining and difficulty of mining will decrease, making mining more profitable again. It's a self-regulating mechanism.
>If mining is not profitable for some part of miners, they'll stop mining //
Real world is always more complex than this.
My expectation would be that done miners will contribute to mine at below profit levels because they seek to cut their losses.
If they have cheap electricity but large sunk costs due to expensive hardware, that's not paid off, then - absent other uses for the hardware - they'd seek to reduce the loss?
So mining wouldn't stop, but it would drop off precipitously.
There is a level below profitability but above electricity costs where most professional miners will keep mining. But at some price level miners start dropping out because the electricity is more expensive than the mining income.
Luckily this wouldn't be one huge even but dragged out over a large price range since electricity prices vary considerably depending on location and source. This ensures that there is enough time for difficulty adjustments to kick in and correct the market.
You might be interested to learn this is a point of some contention. There have been real markets with utterly wild and out of control futures markets where the spot seems to have happily trundled along with the fundamentals.
Chinese commodity markets have been known to be hugely volatile with huge volumes. The actual producers react by pulling out of the futures market. Which I guess might qualify as a trading strategy.
Lol, first going to infinity, now going to zero. This is the typical overshoot/undershoot behavior. When everybody starts believing something is going to zero, it bounces back and vice versa.
Bitcoin price in the past 30 days
Chart https://www.coingecko.com/en/coins/bitcoin has been on a pressure
And that's look mainly driven by market, miners will shake up and driven to mine what's most profitable and they have option to point to Bitcoin Cash and Bitcoin SV for ASICs
Counterargument: actors aren't rational and will continue mining at a loss because of the sunken cost fallacy.
Mining will always continue because it's what keeps the current canonical ledger safe so if nothing else the exchanges and market makers are still economically incentivised to mine.
> When bitcoin appeared it's price was zero, yet people still mined it despite being a clear "worthless" activity.
It was as simple as pressing a button, labelled "Generate" on the original Bitcoin client if I recall, which used your CPU to mine a block of 50 BTC. The button was removed after it started taking more than the time between blocks (10 mins) to mine a block on an average CPU.
Interesting concept that you could simply press a button to generate something that was worth at its peak a few years later US$1M. If you think that sounds like it comes from an old episode of The Twilight Zone you may be thinking of https://en.wikipedia.org/wiki/Button,_Button_(The_Twilight_Z... : "One day they receive a mysterious locked box with a button atop it ... a smartly dressed stranger ... [gives them] the key to the box and explains that if they press the button then two things will happen: they will receive $200,000..."
The only problem is if the hashrate keeps dropping, it will be much easier for some disenfranchise individual/group to just hire the excessive hashrate for just enough time to do a 51% attack and completely destry bitcoin's credibility.
The complexity back then was much simpler; you could mine more with less equipment in less time. So you made more “money”. Heck I mined my first 100 coins on AMD Frozer card in one week time.
Bitcoins' value is in its utility at the moment. Until it stabilizes it is poor as a money (a store of value) while still quite handy as a currency (exchange of value). If it becomes a more stable store of value than competing fiat currencies it will have even more value added.
> In that respect, it is more like gold, in that its value is driven to some extent by its desirability and potential uses, but mostly by its cost of mining
It's actually not that simple, and strangely one of those areas where economics has had a blind spot for a long time.
Lots of businesses use cost-plus pricing, which contradicts the econ 101 assumption that you're repeating.
Now, one might naively argue that even with cost-plus pricing, the outcome is still the same because businesses who set their price too high will be either outcompeted or just find no demand either way and disappear from the market.
However, this assumes that the buyer-side utility functions and price expectations are somehow exogenous, and come from outside the entire market system. But that's obviously not true: people form their expectations of how much things are supposed to cost, and even what the value of goods are (see Giffen goods for an extreme case) by looking at the de facto prices of goods -- and those are usually set by the suppliers, using cost-plus pricing.
The bottom line is that utility functions and price expectations are really endogenous, which radically breaks the econ 101 model of supply and demand. I've heard of economists making various attempts to fix their models to account for this, but I'm not aware that a consensus on how to fix this has emerged.
Even more so in the case of Bitcoin, where the cost of mining is always slowly converging towards the market price (if cost of mining is higher than market price some people stop, difficulty drops and mining becomes cheaper; if cost of mining is lower than market price more people start mining).
I am the first one to jump on Bitcoin's flaws, but this here just reeks of somebody not understanding the protocol:
> As I argued, once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral.
The cost of mining adjusts depending on the hash rate, so if nobody is mining the cost of mining goes down until people start mining again.
EDIT: The mining difficulty gets adjusted only every 2013 blocks, so it might be that mining activity drops so low that the block chain starves out before the difficulty can be adjusted down.
Is this what the article is trying to say?