Bitcoin is close to becoming worthless?
marketwatch.com
marketwatch.com
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?
> 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.
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.
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.
* Of course it wouldn't be a smooth decline so there may be short periods where it occasionally becomes viable.
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 difficulty gets adjusted only every 2013 blocks)
Though if that is an option, I would guess it would be more likely for a coalition of miners to choose to do so before any individual achieves 50%.
I'd guess it would get very spiky as people tried to buy up preempting the "rescue" efforts.
“. 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. ”
IIRC 51% attack happened on one of the bitcoin forks.
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.
In fact, any change in bitcoin is unlikely as all parties are hopelessly at odds with each other.
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.
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.
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.
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?
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.
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.
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..."
In an odd way, it seems that possible situation might keep the number of miners higher than it would otherwise be.
I haven't seen a good explanation to that problem.
Miners will mine at a loss for a limited time. Difficulty adjusts lower and price will reach a level where there is demand
Permenantly drop to zero? And nobody here would buy it?
Okay
Great idea... we can go back to the old model of trusting third parties to print our money for us.
This is not how prices work: https://en.wikipedia.org/wiki/Labor_theory_of_value
What matters is how much somebody will pay for an asset (supply and demand) not how much it cost to produce that asset to begin with.
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.