BitDeer Lu Haiyi: Is Bitcoin “spiraling up” in a “death spiral”?

introduction

After the National Day holiday is over, you will face an overwhelming workload when you return to work. I wonder if you feel the same as I do when you step into the office. This feeling is like falling into a death spiral at work, that is, a cycle of anxiety-not wanting to work-procrastination-decline in work efficiency-anxiety (post-holiday syndrome) . Everyone needs to go through a fierce ideological struggle to get out of this "death spiral" before they can go against the trend. First of all, I wish you all good work in the last few months of 2019!

On September 21, before the National Day, online media reported that the computing power of the entire network suddenly dropped sharply (34%). On the 25th, the price of BTC fell to $8,000. These two events together made people feel the chill in advance, and also reminded people of the bear market in the last few months of 2018 when both computing power and coin prices fell. For a while, everyone discussed how low the coin price would fall, what the price would be when the mining machines were shut down, and whether the mining road would enter a death spiral of Bitcoin as American finance professor Atulya Sarin said?

1. What is a death spiral?

1.1 Death spiral

In short, the "death spiral" is a vicious cycle leading to death and destruction. The "death spiral" theory is applicable to all aspects of life and has corresponding theoretical explanations in different fields such as biology, economics, and finance.

For the national economy, the "death spiral" means that the debt continues to rise, but the economy cannot grow, and the economy collapses in a vicious cycle. For enterprises, overcapacity, corporate layoffs, and insufficient social purchasing power will lead to the risk of bankruptcy. For ordinary investors, the "death spiral" corresponds to the multiple risks caused by the financial attributes of the corresponding investment products, including laws, technology, policies, and own debts. If one link is out of control, it will lead to the continuous outbreak of multiple problems until bankruptcy.

In fact, there is no harm in this pessimistic way of thinking. It can often warn us of the risks we may encounter and prompt us to take some preventive and protective measures. The same applies to work and the industry we are in.

1.2 The fall of Venezuela

As the richest country in Latin America, Venezuela is now caught in the nightmare of hyperinflation, with an inflation rate of more than 1,000,000%. It is hard to imagine that a lot of money can only buy a roll of toilet paper or a few carrots. This country is not unfamiliar to the cryptocurrency community, because when it comes to the worst consequences of inflation, this country is it. So what is the cause of all this?

What is the main reason for the collapse of Venezuela's economy? That is the country's most dependent resource "oil". Oil is the reason for its success and failure. The oil price plummeted, the income of oil-producing countries plummeted, and then the economy declined. In addition to the reason that the country's main income is "oil", the corresponding reason is the government's interference in the market and the high welfare expenditure on the people. For example, in Venezuela, gasoline is almost free, but with the plummeting oil prices, government revenue has plummeted. In order to make up for the fiscal deficit, the Venezuelan Central Bank has to start the printing press. The flood of paper money issuance naturally caused inflation to soar. The currency is depreciating sharply, people's income has dropped sharply, the unemployment rate has continued to rise, a large amount of capital has accelerated its flight, and Venezuela's small foreign exchange reserves are quickly close to being exhausted, which further exacerbates the depreciation of the currency. In this process, the country fell into a death spiral. When the pillar industries are in trouble, foreign capital does not come in, domestic debts are not repaid, and the government has no good solution, it will continue to print money, leading to hyperinflation. The economic crisis is getting worse, turning into a social crisis and eventually leading to destruction.

1.3 The Origin of the Cryptocurrency Death Spiral Theory

From the Venezuela example above, we can see that if there are fatal systemic problems as a whole, if the problem is not solved fundamentally but the loss is stopped by drinking poison to quench thirst, the problem will explode in succession and eventually fall into the trap of death spiral. It is very helpful to estimate the entire system in advance and use this kind of thinking to check for loopholes in the system, and the same is true for Bitcoin.

Atulya Sarin, an American financial expert and professor of finance at Santa Clara University, published an article at the end of last year, which caused widespread heated discussion in the currency circle. The core point of the article was that "Bitcoin is entering a death spiral and is about to become worthless." At that time, the price of the currency fell to US$3,000 and the computing power was also at a relatively low level. This pessimistic argument naturally continued to add to the panic in the market.

The most critical part of the "death spiral" theory for Bitcoin is "mining". The professor gave such a theory: the loss of miners due to the decline in Bitcoin prices leads to a decrease in mining computing power. At the same time, the difficulty of Bitcoin mining also decreases, and the mining cost will also decrease. Finally, the reduction in mining costs will cause its price to fall again. If the price of the currency continues to fall and exceeds the adjustment range of mining costs, it will be a fatal blow to Bitcoin, and miners will gradually disappear.

2. Spiral Upward

2.1 . Will Bitcoin enter a death spiral?

The key assumption of the death spiral theory is that the price of Bitcoin depends on the cost of mining. If the price of Bitcoin falls below the mining cost, miners will exit the market directly. Is this assumption correct?

First, if the price of the currency drops sharply and the difficulty of mining has not been adjusted, the hash rate will drop sharply. Under the condition of loss, miners will shut down or choose other profitable currencies to mine under strict execution. This situation will definitely not happen today when the mining industry is becoming more and more mature, because for some mining practitioners, the cost of mining may actually be much lower than the research results on the market, and the purchase and renewal period of mining equipment also determine that the mine cannot be shut down directly. If the cold winter really comes, when the computing power and currency price are both low, it will cause some mining industry companies to gather together for warmth and persist, and gain more competitive advantages.

Secondly , is the price of the currency determined by the mining cost and computing power? In fact, it is not. The main reason affecting the price of the currency is the supply and demand relationship . For computing power, when the price of the currency rises, the profit of miners increases, and they will buy more mining machines. The new mining machines have high computing power and the more they are, the higher the overall computing power of Bitcoin will be. For mining costs, when the computing power of Bitcoin decreases, the difficulty of the block will be adjusted after producing 2016 blocks, so that the incentive for miners will be enhanced, and the price and sales volume of mining machines will decrease. Although some miners will withdraw, when the mining effect of a single mining machine reaches the lowest point, the adjustment of the entire cycle will be realized, ushering in the next wave of increases. From the price cost of mining machine manufacturing-sales-mine establishment-obtaining high-quality electricity-computing difficulty-mining effect, except for electricity costs, all others are in a dynamic balance corresponding to the price of the currency. Bitcoin has always been in a benign dynamic balance adjustment, so it will not fall into the vortex of the death spiral.

2.2 BTC spiral economic cycle

If we extend the economic cycle, we can divide it into four stages: recession-depression-recovery-prosperity, and we can integrate these four stages throughout the entire economic development process. The market is always born in despair, grows in doubt, matures in optimism, and dies in excitement. This famous saying perfectly combines human nature and economic cycles, explaining the law of development of things moving forward in waves and spiraling upwards.

Looking back at the changes in the price and computing power of Bitcoin since its birth, we can find a more interesting phenomenon, that is, this process is not a downward spiral into a vicious cycle, but an upward spiral. Although the price of BTC is very volatile, the development and recognition of a new thing will inevitably be doubted, restricted, and banned. If this thing can really contribute to the existing social system and improve certain aspects, then it will definitely get rid of resistance and be gradually accepted by the public, and continue to evolve in the process of self-examination and modification.

(Source: bitcoinwisdom)

If we extend the timeline, the changes in Bitcoin's hash rate and mining difficulty can show the spiral upward pace. The most recent one is the decline at the end of last year and the rise since the beginning of this year. Of course, there will be a day in the future when we cannot reach the top of the mountain, but in terms of the current volume and public acceptance of Bitcoin, there is still a lot of room for growth and a long way to go.

2.3 . BitDeer emerged from the "death spiral" against the trend

In fact, I am very impressed by the pessimistic theory of "death spiral". Why? BitDeer was born in this "death spiral" (December 12, 2018). In the eyes of the outside world and many peers, the cryptocurrency circle at the end of last year was like the winter in the three northeastern provinces. The market temperature dropped to the lowest. From exchanges to the mining industry, there was a pessimistic mood. It seemed that the deer was sentenced to death when it was born.

But even in the difficult environment, according to the "spiral rise" mentioned above and my research on Bitcoin since its birth, I firmly believe that the future prospects of Bitcoin are still very broad. For "mining", especially at the user level, it is found that ordinary users actually know little about the "mining" industry. The fundamental reason is that the threshold of the mining industry is indeed high. If individual investors want to mine, they need to undertake a series of analyses such as technology and initial investment. So we started from the pain points of this industry and made it a convenient, safe, transparent, and everyone-involved mining method, which can enable more ordinary users to easily mine. Combined with our team's previous work experience, we put serving users and solving user needs first, and Xiaolu was born. Thank you to all Xiaolu users. So far, Xiaolu has grown very fast, from a skinny little deer in the ice and snow to a reliable deer that accompanies the majority of users. I hope to continue to accompany you through the bull and bear markets in the future. To da moon!