Santa Clara University Professor of finance: Bitcoin is close to becoming worthless. No professor, you are wrong

Marketwatch published an op-ed by Atulya Sarin, a professor of finance at Santa Clara University. In this biased and error-packed piece, professor Sarin bases his bitcoin is soon to be dead assumption on the decreased mining profitability.

As we can see from the reports of mining tracking websites, bitcoin hash power has dropped significantly in November.

Several reports and videos out of China over Thanksgiving weekend have shown large-scale shutdowns of bitcoin mining equipment, as the falling price of bitcoin made mining unprofitable. This prompted bitcoin objectors to pounce on this opportunity and to declare yet another bitcoin death.

Sarin writes:

As I argued, once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral. That is, without the mining activities supporting the ledger that maintains the records of who owns what — bitcoin is, after all, a set of encrypted numbers that cannot establish the ownership of anything — bitcoin will become worthless.

What professor Sarin obviously is not familiar with is one ingenious feature Satoshi Nakamoto built into the bitcoin mining design. And that feature is difficulty adjustment. Thanks to this stroke of genius baked into its fundamental design, every time a mining rig is shut down, the bitcoin protocol increases the incentive for other miners to stay online.

Yet the cost of mining bitcoin is not a fixed-dollar amount. There is a feedback mechanism in mining any commodity that applies to bitcoin: as the price of bitcoin increases, new miners enter the market, increasing the effort required to mine a bitcoin, as its reward will be shared among a larger group of miners. Similarly, when the price of bitcoin falls and miners exit, the cost of mining decreases. However, 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.

Again, incorrect. If the price of bitcoin fell so hard as this professor wishes and predicts, professional miners would jump ship making way for ordinary users and small pools of enthusiasts to spin up their (old) rigs and start mining bitcoin again, liked they used to do back in the early days of bitcoin. This would actually make bitcoin more secure and stable since more small miners would mean more real decentralization.

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.

Bitcoin proponents will argue that bitcoin’s price has dropped by large percentages before. Except this most recent decline is different in three significant ways. First, the magnitude of the recent decline dwarfs the magnitudes of past declines. Second, the losers in the recent decline are new investors who will likely retreat until there is more clarity around bitcoin’s use cases. Third, the futures markets have changed the game, enabling miners to estimate their mining losses and profits at the outset — if you can buy in a futures market at a price below my mining costs, why mine for a sure loss?

Another round of wishful thinking of a traditional bookworm professor with glaring lack of knowledge about how bitcoin works. There was enough people to mine bitcoin when it was worth $0 (kudos Satoshi and Hal) and there is certainly enough people when 1 BTC costs $3k+.

As breakermag aptly puts it:

“but it (difficulty adjustment) is the reason that bitcoin is nearly immune to true destruction, whether by state regulation or market fluctuations. It’s the reason bitcoin is superior to a centralized digital currency system like eGold, even if bitcoin is more expensive to run in aggregate. It’s what makes blockchains more persistently “real” than mere data saved to a hard drive, or even, arguably, to a Google cloud server farm.”

coinmama
 
CaptainAltcoin's writers and guest post authors may or may not have a vested interest in any of the mentioned projects and businesses. None of the content on CaptainAltcoin is investment advice nor is it a replacement for advice from a certified financial planner. The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of CaptainAltcoin.com

Sarah Wurfel works as a social media editor for CaptainAltcoin and specializes in the production of videos and video reports. She studied media and communication informatics. Sarah has been a big fan of the revolutionary potential of crypto currencies for years and accordingly also concentrated on the areas of IT security and cryptography in her studies.

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