Note: “This analysis is an adaptation from the work of Mati Greenspan, Senior Market Analyst at eToro
- Santa Clara professor discusses Bitcoin’s Death Spiral
- Dropping prices bring in new pessimistic opinions in the market
- Recent reduction BTC hash rate has readjusted bitcoin mining difficulty
Has Bitcoin entered a Death Spiral phase?
Well as prices drop, the street gets filled with bearish and pessimistic comments. And this is not restricted to cryptos but happens across asset classes. Over past 24 hours, the crypto world is been discussing about the Bitcoin “Death Spiral”, a term which has gained limelight, thanks to an opinion piece published by Santa Clara University Professor of Finance Atulya Sarin. According to Sarin, with the recent decline in prices the Bitcoin has entered a “death spiral,” and it’s “close to becoming worthless.” In words of Sarin, Death Spiral phenomenon is when,
“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 rebind — 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. And unlike gold, which can retain its value even if mining activity stops, bitcoin can have no value absent the mining activity that maintains the ledger of who owns it. Absent the mining activity, bitcoin is a just a set of encrypted numbers with no value.”
Professor Sarin might have put his points based on some facts, but to be clear it is extremely unlikely for such an event to occur, simply because any time a miner does shut down their rig it makes it more profitable for all other miners to continue their operations. This is the reason Satoshi Nakamoto is called a genius cause his theory practically covers every pitfall that can be envisioned.
The reason there is pessimism in the crypto market today is that there always new people coming into the crypto space and that’s why these types of stories tend to re-emerge. When a newcomer grasps a specific concept, they can sometimes fail to consider the wider implications of their line of reasoning.
Bitcoin mining difficulty has just been readjusted
For most of 2018, while the bear market persisted, mining hash rate and difficulty for Bitcoin continued to increase. But now as Bitcoin price has dropped below $4k, even briefly touching $3,500, the hash rate of the bitcoin network has also taken a dip resulting in the fall of Bitcoin mining difficulty. As the bitcoin prices dipped, Bitcoin miners shut down their rigs that resulted in the fall of hash rate and subsequently the mining difficulty. Actually, every two weeks, the hashing difficulty algorithm of Bitcoin is adjusted in order to maintain the usual 10 minute block time. Since the prices took a hit in mid-November, it has been already adjusted twice. And as a result of this adjustment, the difficulty has been on a downward spiral. And now at a lower difficulty, it will now become easier for new miners to re-enter and receive their bitcoin reward.
Mati Greenspan is the Senior Market Analyst at eToro, a global social trading and investment platform. Mati is a licensed portfolio manager in the European Union and his main focus is on macroeconomic analysis, portfolio diversification and cryptocurrencies. Follow him on Twitter at @matigreenspan