Over the past month, many reports about the materialization of a potential “death spiral” on the Bitcoin network were released, leading investors to be concerned about the short-term trend of the dominant cryptocurrency.
According to a security expert and cryptocurrency researcher Andreas Antonopoulos, a death spiral is unlikely to happen in Bitcoin.
What is a Death Spiral and Why it Likely Won’t Happen
On the Bitcoin network, miners find a block filled with transactions every ten minutes. After 2016 blocks are mined, the network automatically readjusts the difficulty of mining Bitcoin so that if there is less hash power on the network, miners can mine Bitcoin with lower difficulty, and if there is more hash power on the network, miners can mine the asset with higher difficulty.
A death spiral on Bitcoin refers to a situation in which the difficulty of the network fails to readjusts after 2016 blocks because the hash power of the network continues to fall at a rapid rate triggered by existing miners in the ecosystem that leave the space due to a decline in profitability.
“Some people assume that if [death spiral] happens, then a lot of miners will say ‘okay, I’m not making enough profits anymore because the hash rate has dropped 50 percent, so I’m going to turn off my mining’ which then causes to drop even further, which causes it to get even slower, which causes to drop even further, drop slower, death spiral, difficulty never adjusts,” Antonopoulos explained.
However, this phenomenon is unlikely to be materialized on the Bitcoin protocol because miners in the ecosystem operate mining facilities with a long-term strategy.
Most major mining centers and facilities obtain electricity and equipment that can be used for years; miners do not depend on grid operators to meet their demands on a weekly basis. Especially in regions like China where many mining centers operate in due to cheap electricity and cold climate, mining centers have to secure a long-term supply of electricity to maintain their facilities.
As such, miners naturally seek for mid to long-term results and profits rather than short-term. So, if the hash power of Bitcoin drops and it becomes less profitable to mine the asset as its price falls, miners are likely to continue to operate their facilities until the asset recovers in value and mining becomes profitable once again.
“Part of the reason that’s unlikely to happen is that miners have a much more long-term perspective, meaning that they have existing investments in equipment and they usually purchase electricity on long-term plans, they don’t pay it by the week. And therefore, if they have to wait to become profitable another three months and they have the equipment in place, they’re not turning it off.”
A death spiral could occur on a public blockchain network, and it has occurred on small cryptocurrencies in the past. But, if the hash power of the Bitcoin network is considered, a death spiral is highly unlikely.
Over the past two months, the hash rate of Bitcoin has dropped from around 50 exahash to 37 exahash. However, since January of 2018, the hash rate of the blockchain network increased from 12 exahash to 37 exahash, and on a yearly basis, the hash power of the network has increased more than three-fold.
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Author: Joseph Young