Bitcoin Death Spiral - How Bitcoin Can Drop To Zero

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Bitcoin Is Cash

8 months ago

Topics: Bitcoin, BTC, Death spiral, Blockchain, Cryptocurrency, ...

Are you curious about the thrilling yet uncertain world of cryptocurrency? Well, in this video, we're diving deep into the wild world of Bitcoin! We'll be discussing the possibility of a "Bitcoin Death Spiral" and how Bitcoin's price could potentially drop to zero. Buckle up and join us as we explore the euphoria and chaos that characterize the crypto dimension, where fortunes are made and lost in the blink of an eye.

We discuss the delicate balance between Bitcoin's code and market forces, as well as the impact of difficulty adjustment and the halving event on mining profitability. The video also delves into the role of price speculation and market forces in driving the price of Bitcoin BTC and questions the long-term potential of the cryptocurrency.

So, grab your popcorn and tune in to learn more about this exciting and ever-shifting market!

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The transcript of the video follows.

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Introduction

In the wild world of cryptocurrency, euphoria, and chaos are twined together in a piece of digital art painted with strokes of uncertainty and innovation.

An environment characterized by ongoing uncertainty and ever-shifting trends, where fortunes are made and lost in the blink of an eye.

During bull cycles, prices skyrocket, and mining operations thrive as miners rush to capitalize on the frenzy.

New mining facilities emerge with modern mining hardware models selling out immediately.

But as the excitement reaches its peak, a sobering reality sets in. Speculation reaches unsustainable levels, and a devastating but inevitable price collapse ensues.

Prices begin dropping at a frantic rate and billions of dollars evaporate.

And the profitability of miners also declines.

"Difficulty Adjustment" is a line in the Bitcoin code that regulates the mining difficulty, aiming to sustain an average time of 10 minutes for each new block.

Mining difficulty adjusts based on changes in the combined energy of miners, the hash power, whether it increases or decreases.

However, here's a catch:

Bitcoin's mining difficulty changes every 2016 blocks, which is approximately every two weeks.

And within this timeframe, a lot can happen.

The Theory

Mining can become unprofitable for the majority of participants if the difficulty grows fast or the price of Bitcoin in exchanges drops. It can also become unprofitable right after the halving kicks in.

When miners anticipate losses, they can reduce their hash power or even quit mining entirely.

This has been the standard procedure, with no major negative impact on the network so far.

Within these economic conditions a dire scenario has emerged, theorizing the possibility of a mass exodus of miners, enough to bring the network to a complete halt.

This theory is known as the Bitcoin Death Spiral, a concept rooted in the delicate balance between Bitcoin's code and market forces.

During bear markets, we witness mining equipment discarded and mining facilities abandoned. ASICs, which serve as the backbone of Bitcoin mining, become obsolete as technology advances, forcing miners to upgrade to newer models or risk being left behind. Miners may shut down older models, sell them for scrap, and replace them with new and profitable hardware.

Miners are motivated to upgrade their hardware due to the potential for price appreciation and mining profits. However, it is uncertain if this will remain the case in the long run.

Besides difficulty adjustment, Bitcoin also contains the halving event. This feature kicks in approximately every four years, and it reduces in half the mining rewards in terms of newly mined Bitcoins.

So, with each halving the reward from mining new blocks drops significantly.

The community suggests that fees will continue to rise indefinitely to compensate for the loss that miners experience with each halving. However, this hypothesis is ambiguous since, who will actually want to use a network with ever-increasing fees?

This approach transforms BTC into a highly expensive network of transferring value that only a few can afford to utilize.

Yet, if these few already have control over the banking sector, what motivation would they have to switch to a different monetary network?

Bitcoin proponents tend to overestimate its long-term potential, as the cryptocurrency currently maintains a narrow use case, price speculation.

In general, both the profit from mining and the potential for an increase in the price of BTC have been the driving force behind miners' decisions to expand and upgrade their operations.

We should also take into account the fact that BTC today serves a limited purpose, while the price is influenced primarily by speculation, aggressive marketing, and unstable market forces like stablecoin Tether.

For how long will miners foresee profitability under these conditions, especially when the price of Bitcoin is hovering at overheated levels, already 50,000 times higher than a decade ago?

Miners profit from newly-mined Bitcoins and transaction fees, while also adjusting sales of their coins' inventory depending on the price action. Their cost includes expenses such as electricity bills, land, facility, hardware, loans, and salaries, among other things. The halving event, which occurs every 210,000 blocks, reduces newly mined Bitcoins by 50%. This feature is designed to control the rate at which new Bitcoins are introduced and ensure scarcity over time.

While each halving event has so far resulted in a surge in Bitcoin's price, it has also reduced mining rewards severely impacting and transforming the approach Bitcoins are mined, and lately creating uncertainty for the long-term viability of mining operations. Several factors, including mining difficulty, hash power, Bitcoin's price, and transaction fees, can impact miners' profitability.

The Main Threat Is The Price

The Bitcoin death spiral theory suggests a rapid and irreversible decline in the Bitcoin network's functionality due to a cascade of events.

A sharp drop in the price of Bitcoin timed at the beginning of a new difficulty epoch with a much higher difficulty than the previous one could be a condition to support this concept.

Under these conditions, the price should experience a significant decline of 70 to 90% to signal the beginning of the death spiral.

Can we consider such a price scenario impossible?

Here are some instances that demonstrate why it is not.

a) Mining ban

The China Bitcoin crackdown of 2021 led to a significant drop in both Bitcoin's price and hash-rate. Though the price recovered later, a more organized ban and crackdown by the US, Europe, Russia, and other nations and organizations will result in far worse consequences for mining, exchanges, and crypto companies and a sharp decline in Bitcoin's price.

b) Software bugs

Though they say "code is law," flawed code can have catastrophic results.

In 2018, Bitcoin Core introduced an inflation bug in the code which was discovered by Bitcoin Cash developers. The BCH devs notified Core immediately, and they actually saved BTC from devastating consequences.

It was Bitcoin Cash that saved the BTC version of Bitcoin from an impending disaster, and still, we only witness an extensive propaganda campaign against Bitcoin Cash by BTC proponents all this time.

c) Tether

Tether's role in the cryptocurrency market is uncertain. Acting like helium, it inflates the price of Bitcoin but also poses a significant risk of a $100 Billion market cap.

Tether has been manipulating the price of Bitcoin for years, and even though this fact does not remain hidden anymore, many prominent personalities and institutions in Bitcoin endorse this scheme.

Tether's practices have been marred by controversy, and it is crucial to acknowledge how it has evolved into a nuclear ticking time bomb for the entire cryptocurrency industry.

What purpose does Bitcoin BTC serve?

It is evident that Bitcoin BTC is not being used for commerce as it was initially intended.

People are buying and holding BTC on centralized exchanges and other custodians, but the high fees are preventing it from being used.

Bitcoin advocates encourage people to stack sats, but they don't mention the risks associated with centralized exchanges or the consolidation fees associated with self-custody.

See, each transaction in the Bitcoin network has an input and an output.

When someone is stacking sats on a self-custody wallet for months or years and tries to move the funds, that transaction will require fees for all the previous inputs. It can be hundreds or even thousands of inputs that will require consolidation.

Today, transaction fees can vary and reach even up to $70, but we should also expect fees to increase even more since this is the intention.

The fees will pay for the security budget as the block rewards from newly mined Bitcoins get halved every four years. Therefore, self-custody makes sense just for the addresses that contain several BTC, the addresses of whales.

So, you just can't stack sats on a network that plans to sustain security on high transaction fees. Everyone is lying about this part.

Initially, Bitcoin strived to succeed as P2P Electronic Cash, by offering utility and delivering a valuable service to our societies.

The plan was to have millions of people using Bitcoin daily for payments, with fees low enough to enable freedom money for everyone.

The competition was Visa, Mastercard, PayPal, the euro, and the dollar.

Millions of daily transactions would have ensured a dynamic network flow that would have covered the security budget with small transaction fees, competitive with traditional finance.

Satoshi's system was going to work, however, events took a different turn.

Those who changed the narrative were not planning Bitcoin to serve society anymore.

And they brag about excluding billions from the network.

Most people just buy and hold at a centralized exchange and never use Peer-to-Peer Cash.

However, exchanges don't provide permissionless money. They don't provide any better security and safety, in fact, the opposite happens, and exchanges don't provide censorship resistance.

Why did you enter the world of cryptocurrency, and what exactly are you expecting from all of this, if we just trust third parties in control all over again?

Vast deception lies in this field.

Actually, for the most part today, it is all lies and propaganda.

Since 2015, market forces decided to censor debates and monopolize the narrative, forcing Bitcoin not to proceed as a method of exchange.

BTC does not provide censorship-resistant P2P electronic Cash to the world as it was initially intended.

And who gets to decide the narrative? In 2015, a for-profit company called Blockstream assumed control of Bitcoin's developments, pushing out the developers of the Satoshi era. It is believed that bankers played a significant role in this takeover, leading to concerns about the direction of Bitcoin's future development, a one-sided debate dominated by Blockstream, and the 2017 community split.

These forces erased the Peer-to-Peer Cash functionality from Bitcoin and tore the whitepaper to pieces.

This distortion of the original Bitcoin statement and mission was the reason for the emergence of Bitcoin Cash with the 2017 hard fork, and since then, this part of the Bitcoin community has sustained the original intention.

For BTC, all that matters is the price.

The Lightning Network was a proposed solution but instead, it was acting as a deception since it also required a block size increase to succeed.

What everyone is telling you about Bitcoin so far, has been more or less a lie.

The Price Will Bring The Downfall
In 2021, miners were forced to relocate out of China. A 50% decline in hash rate was immediately noticed and generated issues with transactions taking longer time to confirm. Yet, this was an incident the miners had been expecting for years, not a black swan event that could generate a torrent of catastrophic events.
To trigger a death spiral, it would take a severe and decisive blow, a chain reaction that will rapidly bring the network to a halt.
To slow down block production to one block per day from 144 on average, the hash-rate would have to decrease by approximately 99%.
Such a decline seems impossible, but for the BTC network to enter a death spiral, we should assume it will take less than that.

A price collapse of 80% can trigger an analogous decrease in hash rate, which will lead to a block time of 30 minutes.
At the beginning of the death spiral, the prolonged confirmation times and financial losses can lead to further miner attrition, potentially reaching a tipping point where the remaining miners find it unsustainable to continue operating. A total loss of confidence will ensue, as participants will realize how the true free market actually works.
In such circumstances, most miners will halt mining to avoid further financial losses, and there won't be any going back to business as usual.

Fees will increase at this stage, and they will provide an extra incentive for miners to operate their machines, but in case the scenario BTC encounters is a repeat of the Chinese ban from more top economies, then miners won't be able to operate at all.

Certainly, some will attempt to move their businesses to other regions where electricity is cheap. Such regions exist, but would miners risk moving to Iran in case the top superpowers like the US and Russia decide to ban mining?

A drop in hash-rate by 80% will also delay the difficulty adjustment to approximately 67 days instead of just two weeks.

Within days, and as miners have no viable solution, hash could drop even more as even more machines will turn off. During that intermediate stage, the death spiral will get out of control.

As the block production time continues to increase the price of BTC will keep collapsing. In the meantime, exchanges will halt trading due to issues with deposits and withdrawals not functioning.

Whether miners can sustain such conditions will depend on various factors, but above all the expectations on the trajectory Bitcoin's price will take if things turn back to normal.

Yet, their expectations will not be optimistic. The price will most likely crash further despite a possible centralized intervention.

Miners will prefer a brisk centralized intervention instead of wasting hundreds of millions of dollars to assist in the survival of a failing network suffering from a wide loss of confidence.

Most likely, in such a scenario, the proposal that will prevail would be to hard fork and re-org the chain right before the previous epoch's end, to reduce the difficulty to an attainable number.

The end stage of a death spiral will be a manual adjustment of difficulty at way lower levels than previously and a network reset.

Regardless, a centralized solution won't fix the loss of confidence but would only enable the further deterioration of trust in the Bitcoin developers' abilities and choices.

Either way, such an occurrence will have terrible implications for the price of Bitcoin.

Any such black swan event will have lasting consequences and will be accompanied by a long-term decline in mining and price.

The Market Will Be Ruthless

Reduced revenues, stressed loans, and the risk of a complete collapse of mining operations entail some of the fundamentals in this adverse scenario.

Under certain conditions, a sharp decline of 80% is possible, and we have historically witnessed the price collapsing at similar rates. However, for the price to be the catalyst for a death spiral, a few more conditions are necessary, like a higher difficulty and a block distance from the next adjustment.

A death spiral scenario will be more conceivable in the future, perhaps right after the fifth halving in 2027.

Participants unanimously understand the need for Bitcoin's price to keep increasing exponentially, but this fact could also be Bitcoin's downfall. Market forces have been manipulating the price for too long, and we are left with a network incapable of achieving any kind of meaningful adoption but a different narrative that limited Bitcoin's disruptive potential.

As new technologies continue to emerge, Bitcoin may begin to appear outdated and lacking in innovation, potentially reducing its perceived value and relevance.

Ultimately, the market will speak, and manipulators will face a harsh reckoning.

Some suggest that Bitcoin holders would voluntarily sustain the network by transacting with significantly higher fees, an approach that will enable miners to return.

However, this is not exactly what game theory suggests, as participants will not keep bleeding money indefinitely without any prospect of recovery.

Game Theory!

Meanwhile, the death spiral suggests that miners should not expect profitability, as with each halving their rewards are diminished.

And since BTC is all about the price, the price will be its vulnerability.
Without a doubt, the death spiral requires specific and rare events to combine, but we also have to highlight the fact that it is a potential risk that should be acknowledged.

We also have to consider that the effect of the halvings on the price has almost vanished since already more than 19 million coins are in circulation out of the 21 million.

If miners lose confidence in the ability of Bitcoin's price to increase, they will not waste resources to sustain an exit from the death spiral.

The miners are not planning to go bankrupt by attempting to resurrect what is damaged beyond repair. Instead of mining at a loss, they will immediately switch to other SHA256 networks, presumably BCH which adjusts the difficulty on each block, therefore containing no such potential vulnerability.

The bailout will be to take the network down and fix it manually.

A centralized intervention that Bitcoiners suggest as the last resort, just in case they got everything about game theory wrong.

The arguments about the price eternally rising and game theory saving the Bitcoin network from a death spiral are equally disturbing as the fact that BTC's security budget will rely solely on high transaction fees.

Probably, way higher than the $50 we often witness since 2017.

While Bitcoin's design does incorporate game theory principles, extreme events such as a 90% price drop at the beginning of a new epoch may have the power to challenge the system's resilience.

Conclusion

In the short term, the likelihood of a death spiral scenario is low, since it requires multiple circumstances to occur simultaneously.

However, the most crucial aspect is the transaction fees.

The current community is attempting to replace the block rewards from newly mined Bitcoins not with fees coming from millions of daily transactions, but from the higher cost of these fees.

Therefore, perhaps the Bitcoin community should visit the core of the issue, and question the odds of succeeding with this strategy.

Maybe a death spiral will never occur.

What we need to ask is who will be using Bitcoin ten years from now?

Because it certainly won't be the people.

In its current form, BTC is not suitable for use in commerce, payments, or internet microtransactions.

Can the use case of an industrial-scale service justify high fees, and how will Bitcoin achieve this use case?

We often encounter posts on social media and discussions about BTC evolving into a type of settlement layer that governments and Central Banks will utilize.

Yet, even if we take such an argument seriously, we immediately hit a brick wall.
Central Banks are already launching CBDCs. They will never use anything not under their control.

When unfounded and unfinished ideas like this one gain traction, they only raise suspicions about their true motives.

This leads us to the usual deceptive strategies and the new narrative of BTC that does not differentiate it too much from a Ponzi scheme.

Every discussion revolves around the price.

A valid criticism or argument is often met with hostility and extreme reaction by an aggressive mob of maximalists, and instead of addressing the issue at hand, they resort to personal attacks, propaganda, distractions, and other deceptive and manipulative practices.

You can check the comments of this video once it gains more views on YouTube and figure it out too.

The possibility of a death spiral remains a topic of increasing concern and debate. As time passes and the crypto landscape continues to evolve, discussions surrounding the potential for a death spiral will become more frequent and nuanced.

While the BTC maximalists dismiss the Bitcoin Death Spiral as mere speculation, others see it as a warning sign of deeper flaws in Bitcoin's current trajectory and reliance on market forces.

Today, Bitcoin is at the mercy of Wall Street with a community in favor of regulations, financial restrictions, censorship, and the re-introduction of trusted third parties. Unlike its revolutionary past, BTC is now mainstream, and as almost everything else has reached the mainstream, it has been corrupted.

Whether it is due to greed, speculation, or incompetence, the likelihood of a Death Spiral remains a sobering reminder of the volatility and uncertainty inherent in the world of cryptocurrency.

As the debate rages on, one thing is clear: the future of Bitcoin hangs in the balance.