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Bitcoin [BTC] “going to 0” because of death spiral phenomenon allows for the appreciation of mining difficulty adjustments

Anirudh VK



Bitcoin [BTC] "going to 0" because of death spiral phenomenon allows for the appreciation of mining difficulty adjustments
Source: Unsplash

Opinion: Bitcoin [BTC] has long been hated by economists, as they believe that it is nothing more than a bubble. Now, in the depths of a rough bear market and declining hashrate, they have resorted to predicting the death spiral of the coin, with one professor of finance saying that it would be due to miners leaving the ecosystem.

Atulya Sarin, the professor in question, teaches at Santa Clara University and has written on currencies in a book known as “Foundations of Multinational Financial Management”. However, he also seems to hold a position as a naysayer of Bitcoin, with articles both last April and recently speaking about how it is headed towards a spiral of death due to the reduction of its price below the cost of its mining.

He stated in his article:

““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…Bitcoin has no cash flows. 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.”

However, Sarin fails to notice that the difficulty of mining on Bitcoin adjusts itself every 2016 blocks. This translates to about 2 weeks if the blocks are produced at Bitcoin’s usual rate of one block every ten minutes. This effectively absorbs any significant changes in the price, without considering that miners operate across a margin of profitability.

A higher mining difficulty would mean that it is more difficult to find blocks, and is deployed whenever the hashrate on the network increases. The opposite also occurs when the hashrate decreases, it becomes easier to find blocks on the chain.

Moreover, while the price of Bitcoin treats the all-in cost of mining as a floor, which was recently broken at around $6000, it is not a determiner of the value of the network. Granted, the price of the coin is mostly derived from speculative trading. The value of the network instead lies in its use-case: a decentralized, permissionless, trustless and uncensorable payments system.

Sarin also picks on the current buyers and miners of the Bitcoin platform, stating that they have been “run-of-the-mill, greed-driven investors”. While that may hold true for the miners which have now become huge operations driven by corporations, the spirit of what drove the coin is still alive. In a bear market where most buyers are down, orders of magnitude from what they invested in, strides continue to be made in the sentiment of the space even as weak hands capitulate.

Chanting the common economist’s mantra, Sarin predicts that Bitcoin was going to go to zero. His logic is as follows:

“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…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.”

The fatal flaw in his arguments is present here as well, as profit margins for miners currently ranging from over 50% to being slightly unprofitable. As mentioned previously, most miners are now run by corporations,and can withstand a huge shock loss. However, as unprofitable miners leave the network, the rest of the network’s difficulty accordingly adjusted to be more profitable for the ones that stay on.

Sarin also states that this is different from previous drops in difficulty, as the recent decline “dwarfs the magnitudes of past declines”. This should not be a matter of concern, and instead can be looked at as a way to appreciate the beauty of the dynamic difficulty changes of the Bitcoin network.

While it is easy to say that Bitcoin is headed towards zero due to it’s nature as a speculative trading asset, the fact remains that the world has seen nothing similar to Bitcoin. It effectively reinvents the concept of money, something that the world has run on.

Something that has built society into the giant it is today, and allows centralized institutions to enforce the need of trust in everyday lives of everyday people. This has effectively been disrupted to allow money to be accessible to everyone without permission. Therefore, as long as there exist two individuals in the world that seek the freedom of money and the value that they create, Bitcoin will not go to zero.

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Anirudh VK is a full-time journalist at AMBCrypto. He has a passion for writing and interest towards the future of blockchain technology and cryptocurrencies. He does not own any cryptocurrencies currently.

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1 Comment

1 Comment

  1. TaxMan

    December 7, 2018 at 10:12 PM

    The threat to bitcoin is not that it will not have enough miners for it to function. That may be the final death blow, but that would only occur after the real value had dropped to nearly zero already. The real threat would be if people stopped wanting to hold bitcoins. Ultimately, I agree that it is going to zero, but not for the reason cited. It will go to zero for the same reason that a poker chip to a long shut down casino is only worth its value as a collector’s item. It’s old value was only based on its ability to be transferred to dollars and the people that used to accept it as a dollar proxy don’t want it anymore.

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