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The danger of a death spiral with Bitcoin BTC

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Avatar for Telesfor
Written by   1094
4 weeks ago

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.

Source: Unsplash

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.

Source: Unsplash

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.

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Written by   1094
4 weeks ago
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Comments

WOW,this is interesting,cos I never thought of this nice article sir. Your articles are always full of great informations

$ 0.00
1 week ago

Thank you

$ 0.00
1 week ago

I always read something interesting with your excellent articles on the subject of BCH. I still don't manage to understand many things but little by little I will be adding knowledge through your good contents, thank you. Regards

$ 0.00
1 week ago

I'm glad I can help you understand Bitcoin Cash.

$ 0.00
1 week ago

Hello, my friend,

Thanks for such an enlightening master class on the fundamentals of Bitcoin. It's been a while since I got rid of my few BTCs.

Now, my friend, this is a mining perspective, and in terms of ecosystem development, what are the latent risks?

The miners have the necessary incentive and a consistent model, at least in BCH, but what about the developers? Could there be a development death spiral?

$ 0.07
4 weeks ago

Now, my friend, this is a mining perspective, and in terms of ecosystem development, what are the latent risks?

When the chain is dead, everything is dead. You cannot use the coin. The whole BTC ecosystem collapses.

The miners have the necessary incentive and a consistent model, at least in BCH, but what about the developers? Could there be a development death spiral?

There is no danger of a death spiral in Bitcoin Cash. Bitcoin Cash chain will always work. There is no reason for the BCH developers to fall into a spiral.

$ 0.00
4 weeks ago

Thanks my friend for the reply. Good to hear this, about Bitcoin Cash.

$ 0.00
4 weeks ago

Wouldn't that be the end goal for a store of value? You buy and you never sell. 😜

Just kidding - at least, I'm partially kidding. 😅 The success of BTC really doesn't make any sense to me. I tried so hard to understand why it's the most popular crypto - and I still don't understand it...

Could the death spiral be avoided with a soft fork? Hard forks are a big no no in the BTC cult - if I'm informed correctly. 😅

$ 0.12
4 weeks ago

Wouldn't that be the end goal for a store of value? You buy and you never sell. 😜

That is the best definition of SoV I have ever heard. 🤣🤣🤣

I tried so hard to understand why it's the most popular crypto

Because it is the oldest. Besides, the very high price attracts many. But that will definitely change. I am convinced of it. BTC dominance is falling all the time. So is usage. LN adoption is developing at a snail's pace. Hardly anyone uses it.

Could the death spiral be avoided with a soft fork?

Not with a soft fork. Only with a hard fork. You would then create a second BCH. It makes no sense.

$ 0.11
4 weeks ago

Yeah, when I was new to BCH I thought "BTC could kill BCH if they increased the blocksize", but now I'm certain they would never do that. 👍

(Also they would need to get rid off replace by fee, introduce the emergency difficulty adjustment and probably make some other changes that I am unaware of.)

$ 0.00
4 weeks ago

Bitcoin core devs will never increase the block size. I am sure there will be no consensus on this. Some miners would use the old software, there would be a hash war with a chain split. The consequences for the coin would be the same as for BCH during the BSV and BCHA splits. In both splits, new coins were created and the BCH price fell. BTC would also split into two coins. In such wars there are only losers. Each of the two coins would have less market cap than ETH. BTC would be overtaken by ETH much faster than it will be without such a block size increase.

$ 0.00
4 weeks ago

Actually quite interesting. Helps me to better understand some of the inner workings of what goes on "behind the scenes" as they say. Thanks.

$ 0.01
3 weeks ago

Thank you very much for explaining all this. However, today that seems an unlikely scenario. But the supremacy of BTC in the market could fall. Lighting Network appears to be a kind of fail attempt to give back BTC the usability since not many people use it.

Hopefully, soon we will see the BCH gain ground thanks to its great potential.

$ 0.00
3 weeks ago

I appreciate how miners work, I believe bitcoin is the future of finance. That's why am quick to accumulate more on trusted non-custodial wallet application from https://atomicwallet.io/ on the long term.

$ 0.00
3 weeks ago

Bitcoin will never die, it is the future currency we all gonna use! This days fiat may not be suitable for future use, it will be such a waste, if we create more physical money. The fact that every year hundreds of trees are cut down, so it make sense why crypto is the future currency. It may consume electricity, but at the end of the day we'll have some sort of unlimited energy we can have in the near future.

$ 0.00
3 weeks ago

Yeah I understand how mining work on btc. But I got more knowledge on the aspect of nonce.

Thanks so much for the knowledge shared.

$ 0.00
3 weeks ago

Indeed Death Spiral 🌀 is scary 😧

No one has ever explained this type of vital information in such an understandable manner.

This is my first time to understand how mining ⛏ happens; in a simplified way.

Thanks for the time and wisdom you invested on this article.

I’m happy to have identified with BCH.

$ 0.00
3 weeks ago

You are welcome. Nice to see you in my blog. Thank you for the tip.

$ 0.00
3 weeks ago

Woah. Didn't know that it was this complicated and technical. As someone who just looks at BTC prices, I'm very clueless with this kind of stuff. So thank you for this info. Tried my best to understand the process, but as a newbie I felt a bit of info overload. I should learn more, maybe soon if my interest grew for crypto or trading.

$ 0.00
3 weeks ago

Is this applicable to all coins?

$ 0.00
4 weeks ago

No. As far as I know, only for BTC and LTC, because LTC is a BTC clone.

$ 0.00
4 weeks ago

It's a vital part which we should know.You did a great job for us by writing this article. Is it possible again that BTC price again in 9k or more less??Actually when I first started to learn about crypto then it price was 9k but now it's always more than 40k.That's why my curious mind wants to know it's spiral can come again in 9k?

$ 0.00
4 weeks ago

Everything is possible.

$ 0.00
4 weeks ago

Thank you for this. Very clear explanation of scenarios that may occur. Hoping it won't happen though.🤞

$ 0.00
4 weeks ago

This is technicality at work, you did a great job bringing this vital information to us. I don't know whether you are even a programmer or one of the developers in the bitcoin cash community, you seem to have in-depth knowledge of the technical aspect of cryptocurrency.

$ 0.00
4 weeks ago