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Bitcoin is close to becoming worthless?

marketwatch.com

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Re: Bitcoin is close to becoming worthless?

#31

Post by Slartie »

ekianjo wrote: post #19
rhn_mk1 wrote: post #17

Earlier quoted context omitted.

This has been addressed in the article: > 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.

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.

Re: Bitcoin is close to becoming worthless?

#32

Post by simonh »

ekianjo wrote: post #19
rhn_mk1 wrote: post #17

Earlier quoted context omitted.

This has been addressed in the article: > 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.

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.

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.

Re: Bitcoin is close to becoming worthless?

#34

Post by maps »

rhn_mk1 wrote: post #17
konschubert wrote: post #10

The article is misinformed: 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 mi…

This has been addressed in the article: > 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.

Re: Bitcoin is close to becoming worthless?

#35

Post by ucha »

xyzzyz wrote: post #16
wongarsu wrote: post #7

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. 1: https://coinmarketcap.com/currencies/bitcoin/#charts

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.

That's plain false.

Re: Bitcoin is close to becoming worthless?

#36

Post by edoo »

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.

Re: Bitcoin is close to becoming worthless?

#37

Post by coderzach »

ekianjo wrote: post #19
rhn_mk1 wrote: post #17

Earlier quoted context omitted.

This has been addressed in the article: > 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.

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.

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.

Re: Bitcoin is close to becoming worthless?

#39

Post by pbhjpbhj »

vbezhenar wrote: post #9
ckastner wrote: post #3

The key argument seems to be: > 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.

Re: Bitcoin is close to becoming worthless?

#40

Post by acomjean »

konschubert wrote: post #10

The article is misinformed: 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 mi…

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. ”

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