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Bitcoin survived the halving, but “Death Spiral” believers still believe that BTC is doomed to fail

May 23, 2020

Bitcoin (BTC) halves are a little creepy, much like Witch Time, and One of the prophecies that was whispered last week was about a “death spiral” or death spiral of the Bitcoin network. This idea, which isn’t really new, requires a massive exodus of BTC miners who are working on creating new parts of the blockchain due to the reduction in their rewards.

As last stated by Zach Resnick, managing partner of the venture capital firm Unbounded Capital and prominent supporter of Bitcoin SV (BSV), and summarized by Cointelegraph:

“”If the block reward is halved, many miners will leave the network. As the network hash rate decreases, the block generation time increases, the network becomes overloaded. This in turn makes Bitcoin less attractive because participants don’t want to wait forever to process their transactions. This leads to a drop in Bitcoin prices, pushing more miners out of the network. This process is repeated until the network dies. “

On May 11th and 12th, he halved the miners’ reward from 12.5 BTC to 6.25 BTC and of course went in and out without misfortune. However, some of Resnick’s predictions about market behavior – falling hash rates, increasing transaction rates, extended blocking times and an overloaded mempool – were still evident a week after the event. Perhaps the “spiral of death” hypothesis was correct?

They’re just business … As always

Bitcoin survived the halving, but “Death Spiral” believers still believe that BTC is doomed to fail
Bitcoin survived the halving, but “Death Spiral” believers still believe that BTC is doomed to fail

Christopher Bendiksen, head of research at Coinshares, told Cointelegraph: “Lower hash rates, longer block generation times, the lack of an immediate exogenous drop in transaction demand, and increased commission pressure are known effects of falling mining rewards.“”

In addition, this happened “to a significant extent” before Black Thursday, March 12, 2020, when, for example, the price of BTC fell dramatically, fueled by fears of the corona virus. Miners are paid in Bitcoin; So if the BTC market price drops 50%, your block reward will also decrease. “Another good example is November 2018” – when Bitcoin fell below $ 4,000 after losing almost a third of its value in a week. There were no death coils in either case.

Are the miners in trouble?

Resnick is not the first to predict a death spiral. Santa Clara University finance professor Atulya Sarin wrote in December 2018, shortly after the sudden drop in BTC in November. The miners’ work in registering and confirming new operations in the distributed public database – the blockchain – is vital. Sarin said: “After all, Bitcoin is a series of encrypted numbers that cannot make anything – Bitcoin has no value“”

“Miners are an important part of the Bitcoin puzzle,” Sarin told Cointelegraph this week. “”And halving the hash rate has bankrupted many of them – the income they get from mining bitcoins and transaction fees is less than trading costs for them.“”

However, this argument has not gone unanswered. Gerald Dwyer, a professor at Clemson University and an academician at BBT, argued that he had not appropriately offset Bitcoin’s transaction fees – the second reward for miners in addition to the block reward. When asked about this commission supplement, Sarin said to Cointelegraph:

“”While it is true that increasing transaction costs can be an additional source of income, as Professor Dwyer suggests, there is a limit to which transaction costs can be increased beyond which they are not economically viable. Have bitcoin transactions“”

In other words, BTC users could flee the network if the rates are too high. And indeed the average BTC transaction rate increased from $ 2.52 to $ 6.65 from May 11-21, although Mati Greenspan of Quantum Economics, for example, downplayed the importance of it in her May 18 newsletter:

“Anyone who thinks that a $ 3.75 commission is a valid reason to leave the ship or switch to another digital money standard will not even worry about most people transferring Bitcoin at least three dozen cryptocurrencies that are cheaper and faster but have none of them the security, digital scarcity, immutability or liquidity that BTC has“”

Bendiksen also rejected the idea that transaction fees are a negative element for the Bitcoin network. “They are not,” he said to Cointelegraph, adding:

“In fact, the increase in fees increases the mining reward, which increases the hash rate and directly counteracts the” death spiral “. Last week [que termina el 20 de mayo]The rates added an average of an additional 1.22 BTC to the block reward, making them almost 7.5 BTC instead of 6.25 BTC. Commissions are absolutely necessary to secure the blockchain, as the following halving brings the coinbase to zero. The fact that commissions already make up 15% of the block reward is extremely encouraging“”

Another weakness in the spiral of death believers, Bendiksen believes, is that they often “do not know the difficulty adjustment algorithm” that occurs approximately every two weeks. As he recently wrote in a Coinshares research report: “The difficulty adjustment ensures that no added amount of hash can execute bitcoins faster than required“. The opposite is also true”.

A major net effect of Bitcoin’s bi-weekly difficulty, he added: “is that the cost of mining is always tending towards the Bitcoi market pricen. “This makes miners less likely to give up BTC mining in bulk due to the death spiral scenario. Resnick, in turn, told Cointelegraph that he did not say a death spiral was likely, and said:

“Until halved, I believed that a large drop in price or spiral of death was unlikely, but that the price of BTC and especially BTC options would not adequately assess these significant risks to the network. Since the hash rate has not dropped significantly, this risk remains“”

Before the halving on May 11, the hash rate was 137,571EH / s, according to BitInfoCharts.com, ie the average hash rate per day in hash / seconds. The rate fell 30% in the first three days after halving. Eight days after halving, but before adjusting the level of difficulty, the hash rate on May 19 was 98,555 EH / s. The day after the difficulty adjustment, May 20, it was even lower at 86,996 EH / s.

Comparison of the hash rate of the Bitcoin network, the mempool and the average transaction fee since halving

In the meantime, the total number of unconfirmed transactions in the mempool seemed to improve – a measure of network congestion that indicates how long a BTC user may have to wait to complete a transaction. The seven-day average has dropped and daily gross amounts decreased by around 10,000 unconfirmed transactions between May 18 and 20.

The mempool average of seven days

Survive the week after halving

The fact that Bitcoin’s mining network survived the week is a good sign, according to Resnick, who produced it for Cointelegraph: “The most likely time for a coordinated hash rate decrease was immediately after the halving. Since this has not happened, the likelihood of a death spiral directly related to halving is much less.“”

So a dodged bullet? Nothing so serious, says Bendiksen. The network was developed to deal with precisely these situations. A death spiral is a theoretical possibility that at best “does not really occur in real life,” as he wrote in his March research report. Resnick replied, “We will see. Like all bubbles, they usually burst violently and quickly“”

Related: As the landscape clears for Bitcoin, the network is waking up to a new and expensive reality

Kevin Dowd, professor of finance and economics at Durham University in the UK and pessimistic about Bitcoin, told Cointelegraph when asked about his own assessment of a death spiral of the Sarin version over the next five years:

“One possibility would be that mining would become increasingly difficult due to bitcoin halving, which would increase transaction fees to maintain the profitability of mining and thereby undermine the attractiveness of BTC as means of payment, which in the long run would lead to a loss of confidence in the system would lead. Another would be if people diverge from superior competitors, with the same end result, ie loss of trust in the system and breakdown“”

Dowd’s own opinion is that the Bitcoin mining model has one fundamental flaw, namely a natural monopoly. Whether through monopoly or miners getting out of the market, “the breakdown itself will happen because the system is inherently fragile.” Resnick added: “Whether this death comes specifically from a death spiral like the one I described or is simply the product of a dramatic drop in price and relevance“The likelihood of a breakdown over the next five years is pretty high – well over 50%.” Sarin from the SCU added: “The death spiral is not a question of whether, but when.”

For his part, Clemsons Dwyer rejected Sarin and Dowd’s arguments. “There is no reason to believe that cryptocurrencies will disappear.” Bendiksen added, however, that the death spiral is nothing more than “a not very well-considered hypothesis and continues to be rejected by actual observations”. After all, this was the third halving. “and we had a whole bunch of price cuts that were 50% or moreBut there is still no evidence of a network death spiral, let alone sightings. When asked about the likelihood of a Bitcoin network death spiral occurring in the next five years, Bendiksen replied: “Zero,” adding:

“”I don’t think the hash rate ever goes to zero due to a vicious cycle that is said to be inherent in the design of Bitcoin. It could only go to zero if every current and future miner on the planet were firmly convinced that the long-term value of Bitcoin is zero. “

Bitcoin’s brilliant reward mechanism survived last week’s event, but it is only a matter of time before BTC miners flock to the exit in large numbers, believers of the “Death Spiral” say. To be taken seriously Proponents that this event will occur have yet to provide some evidence to support the Bitcoin theory of network weakness.