The danger of a death spiral with Bitcoin BTC

Most of you only look at the BTC price and don't know that there is a danger of a death spiral with Bitcoin BTC.To know what this death spiral is you have to have some technical knowledge. But it's not that complicated and I'll try to explain it to you.

Bitcoin BTC, like Bitcoin Cash BCH, also works on the basis of blockchain technology. I have described how Bitcoin Cash works in more detail here. Blockchain is a chain of blocks with transactions. A block of transactions from the mempool is created by the miner when it has calculated a special number called a nonce. The calculation of the nonce requires a lot of computing power and therefore a lot of electricity and costs a lot of money. A lot of miners have their special devices working around the clock and sometimes one of the miners manages to find the nonce. As a reward, this miner gets 6.25 BTC reward and the transaction fees of all transactions from the block.

Normally, the nonce is found about every 10 minutes, but when the price of BTC rises, mining is very profitable and more miners turn on their devices. When more miners search for the nonce, the hash power increases and so does the probability that a nonce will be found. As a result, the blocks are mined more frequently than every 10 minutes. All 2016 blocks the difficulty is adjusted by the Bitcoin core software. If the blocks were mined more frequently than every 10 minutes on average, the difficulty is increased. If the nonce was found less frequently than every 10 minutes, the difficulty is lowered.

But what happens if the BTC price falls very sharply? Since the difficulty is not immediately adjusted, it remains high. This means that electricity costs remain high. They can exceed the reward for many miners. The mining becomes unprofitable for many miners. These miners will switch off the devices. As a result, all the hash power will fall also sharply and the blocks will be found much less frequently than every 10 minutes. Some miners will stay in business but will have to sell more of their BTC to pay for the power, putting further pressure on the BTC price. The price will fall even lower. Mining becomes unprofitable for even more miners. Even more miners will sell their BTC and stop mining. And so on and so forth. The death spiral is in full swing. As a result, blocks will be mined even less frequently. No longer every 10 minutes, no longer every 20 minutes, but every hour or even less frequently. Mining will become less and less profitable for the remaining miners, who will gradually switch off their equipment. You have to remember that the next difficulty adjustment will happen after 2016 blocks. As the blocks are mined less and less and less miners remain, the hashpower will continue to fall. The remaining few miners will sell all their earned BTC, plus the panic selling will occur in the market, causing the price to crash further.

At some point, the blocks will be mined only once a day or much less frequently, and the 2016 block will still be a long way off. If the price drops low enough, the intervals between blocks will be weeks or even months. BTC will no longer be usable at all by then at the latest, because you will have to wait a month for your transaction to be confirmed, even if you have paid thousands of dollars in fees. BTC will collapse. The last miner will switch off his device or switch to BCH mining and the Bitcoin BTC chain will die. When the chain dies, the coin dies. You can no longer carry out transactions. You can no longer deposit and withdraw your BTC from the exchange. The exchanges would probably stop trading before the chain died. This is the worst case scenario of a death spiral.

Will it come to that? I don't know. Currently it is rather unlikely. The profitability of BTC mining still seems high enough. But it is technically a possible scenario. The price just has to fall very quickly and sharply. If there is panic selling it is not impossible.

But what about Bitcoin Cash BCH, can't Bitcoin Cash also get into such death spiral? No, Bitcoin Cash does not adjust the difficulty after 2016 blocks, but immediately. This means that it is always profitable for miners to mine BCH. Even if the price should fall very sharply, the difficulty will adjust quickly. Those who followed the BCHA hardfork could see it. After the fork, the price of BCHA dropped a lot compared to BCH, it was only about 5% of the BCH price. But the difficulty was identical to BCH at the beginning. This made it very difficult to find the nonce. Most miners left the BCHA chain. Only one miner stayed and BCHA blocks were rarely mined in the beginning. You had to wait several hours for a block. But BCHA uses a similar difficulty adjustment mechanism as Bitcoin Cash. The difficulty adjusts immediately. That's why the intervals between the blocks didn't get longer and longer, as it would be in the case of BTC, but shorter and shorter. After some time, BCHA stabilised, the difficulty dropped sharply and the blocks were mined every 10 minutes again.