Miners are exiting and bitcoin will become worthless, say economist

Summary

Santa Clara University economist Atulya Sarin predicts Bitcoin's imminent collapse due to its mining costs exceeding its value, potentially leading to a "death spiral" where miners exit, further undermining the cryptocurrency's viability.

Abstract

Economist Atulya Sarin from Santa Clara University argues that Bitcoin is on the verge of becoming worthless as its price falls below the cost of mining, which is estimated to be around $5,000 per coin. Sarin posits that this economic reality will discourage miners from continuing their operations, leading to a decrease in mining difficulty and a potential "death spiral" for Bitcoin. Despite a recent 15.1% reduction in mining difficulty, the second-largest in Bitcoin's history, Sarin and other analysts, including those from Bloomberg, suggest that this adjustment may not be enough to prevent a significant number of miners from shutting down. Reports indicate that at least 100,000 individual miners and 1.4 million servers have been unplugged since early September. The current situation raises concerns about the centralization of mining operations and the increased risk of 51% attacks, which could compromise the stability of the Bitcoin network. However, Sarin's skepticism about Bitcoin does not extend to blockchain technology or other cryptocurrencies, as he believes in the inevitability of a blockchain-based economy.

Opinions

Atulya Sarin believes that Bitcoin's value is at risk of dropping to zero if it cannot maintain a price above its mining cost.
Sarin suggests that as miners exit due to unprofitability, Bitcoin will enter a "death spiral" where the network's security and viability are threatened.
Bloomberg analysts concur that most miners are unprofitable when Bitcoin trades below $4,500, leading to a significant number of miners shutting down.
The reduction in mining difficulty is seen as a self-correcting mechanism but may not be sufficient to counteract the falling price of Bitcoin.
The potential centralization of mining operations could lead to a fewer number of entities controlling the Bitcoin network, increasing the risk of 51% attacks.
Despite his bearish outlook on Bitcoin, Sarin is optimistic about the future of blockchain technology and the possibility of other cryptocurrencies or government-issued digital currencies becoming prevalent in daily transactions.

Miners are exiting and bitcoin will become worthless, say economist

Santa Clara University economist Atulya Sarin is persuaded that “Bitcoin is close to becoming worthless.”

Sarin is a Professor of Finance in the Leavey School of Business at Santa Clara University. His thesis is that, once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, “thrusting bitcoin into a death spiral.”

In April, Sarin warned that miners exit (stop mining) when the price of bitcoin falls.

On the one hand, this makes mining easier because there are fewer other miners to compete with, thus providing a new incentive to miners.

But on the other hand, according to Sarin, this doesn’t compensate for the miners who choose to exit, and the number of miners cannot fall below a certain level, because “without the miners providing the computing power to maintain the ledger, the bitcoin blockchain will not remain viable.”

“If the price of bitcoin falls below its cost of mining, it will quickly go to zero.”

This is, according to the Santa Clara economist, what is bound to happen now, since the price of bitcoin is below its cost of mining:

“While there are many estimates of bitcoin’s cost of mining, most suggest it is close to $5,000 per coin… So, it appears bitcoin is now entering a death spiral: If the price continues to drop and the cost of mining does not fall correspondingly (the cost of mining will algorithmically decrease, but not necessarily to same extent as the decline in prices), bitcoin will quickly go to zero.”

The difficulty of mining bitcoin has fallen by 15.1 percent, the second largest downward correction in the cryptocurrency’s lifetime, as a result of the self-correcting mechanism of the bitcoin network. But, Sarin warns, this might not be sufficient.

“Most miners are only profitable when Bitcoin trades above $4,500. It hasn’t closed above that level since Nov. 19… Only a select few can afford to stay in the game: miners with scale, very specific business models and extremely low electricity costs.”

Bloomberg reports that at least 100,000 individual miners have shut down, according to Autonomous Research LLP. Fundstrat Global Advisors LLC estimates that about 1.4 million servers have been unplugged since early September., and warns that “the BTC price would need to re-accelerate substantially for mining to once again become self-funding, as it has been for most of Bitcoin’s history.”

A mining operator consulted by Bloomberg said that we are entering in a phase when there’s a flushing out of the market. “There will be relatively few operations that come out the other side,” he said. A scenario with only a few large operations in control of bitcoin mining would threaten the stability of the bitcoin network and potentially expose it to 51% attacks.

It’s worth noting that Sarin’s skepticism of Bitcoin doesn't necessarily extend to other cryptocurrencies. On the contrary, he is persuaded that the blockchain economy is imminent, in one form or another.

“Little doubt remains that we will eventually move toward a world in which most of our transactions will be processed on the blockchain, and we will, over time, use cryptocurrency for our daily transactions. What remains to be seen is whether bitcoin or a competitor will be that cryptocurrency.”

Sarin concludes that “an improved coin might evolve, or governments might start issuing cryptocurrencies.”

Picture from Wikimedia Commons.