Bitcoin Mining Death Spiral Only Exists In Theory; It's Not Happening, Maybe Ever

    Less than two months before the halvening, the price of bitcoin has more than halved. But this according to CoinShares’ Head of research, Christopher Bendiksen, is a “perfect prelude because the end effect on miners is the exact same.”

    Apart from newly created BTC as block rewards, miners receive transaction fees as part of their mining reward to cover their ongoing electricity costs which are denominated in their local currency. As such the purchasing power of Bitcoin income of miners is dependent on the exchange rate between bitcoin and their local currency.

    When the price of bitcoin falls, the miners’ are no longer profitable as such they are forced to stop mining, which then results in overall network hash rate dropping. As we have been seeing recently, hash rate has nosedived, 39.7% down from ATH on March 1st.

    Bitcoin Hash Rate
    Source: Bitcoin Hash Rate

    However, interestingly, the same amount of bitcoin will be produced as the bitcoin protocol is designed to adjust the difficulty as per the average hash rate every 2016 blocks, about 14 days. Bendiksen said,

    “No matter how little or how much hashrate the combined mining network produces, the Bitcoin protocol will automatically adjust the difficulty such that new blocks are found every 10 minutes on average.”

    Because no amount of added hash rate could make BTC produced any faster than the predetermined and vice-a-versa, the cost of mining always tends towards the market price of bitcoin.

    Bitcoin Mining will Find a New Balance

    From Feb. high of $10,500, Bitcoin price is currently down 50% meaning miners' income lost over 50% purchasing power. As such, the highest cost producers are unprofitable with some even in a cash flow negative in which case they turn off their gear and hash rate fall.

    And this is exactly what is happening in the market, miner’s profitability is at its lowest ever, and the hash rate has taken a drop with a 7 to 9% negative difficulty adjustment coming next week.

    As difficulty is adjusted, the remaining hash rate finds blocks at the same frequency as before. Whichever miners remain cash flow positive will end up having the cost of mining reduced. And the downward difficulty adjustments means, “a new balance is found where the remaining miners find a higher percentage of blocks than they used to” — which means their BTC incomes increased making up for loss from a reduced price.

    That’s what Network Designed to Handle

    As for those that are worried about the mining death spiral, Bendiksen says it only exists in theory.

    According to him, if bitcoin price fall, mining becoming unprofitable caused the hash rate to drop and grinding the network to halt, causing the price to drop further and more miners to shut down with no one mining and BTC price hitting zero, is a “weak” argument.

    This hasn't been witnessed before either despite the flagship cryptocurrency having two halvings in the past.

    Source: Coinshares

    However, there is a “steel man” form of this argument which is conceivable where exactly after a difficulty adjustment the bitcoin price suffers an “extreme” amount and very few or none of the miners believe the price will ever come back up. And miners are “physically able” to immediately shut down all the mining gear.

    This means the next difficulty adjustment is 100 times higher than normal, taking more than 4 years and about 75 weeks for things to be normalized. But the markets don’t move like that in real life as it would mean the system is fundamentally wrong.

    Bendiksen says the bitcoin network was designed to handle exactly the situations we are experiencing. Dramatic pullbacks aren’t unprecedented for bitcoin, neither are the halvings.

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    AnTy has been involved in the crypto space full-time for over a year now. Before his blockchain beginnings, he worked with the NGO, Doctor Without Borders as a fundraiser and since then exploring, reading, and creating for different industry segments.

    [Alert] Use the author's self-conducted information at your own risk, do you own research, never invest more than you are willing to lose.

    [Disclosure] The published news and content on BitcoinExchangeGuide should never be used or taken as financial investment advice. Understand trading cryptocurrencies is a very high-risk activity which can result in significant losses. Editorial Policy \\ Investment Disclaimer


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