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Bitcoin has entered a “death spiral,” and it’s “close to becoming worthless”

Earlier this year, with the bitcoin price trading around $7,000, Santa Clara University Professor of Finance Atulya Sarin published an opinion piece arguing that the rising cost of crypto mining, coupled with the ability for bearish investors to short bitcoin in the futures markets, could spell doom for the flagship cryptocurrency. Now, following a further ~45 percent decline, Sarin is calling it: bitcoin has entered a “death spiral,” and it’s “close to becoming worthless.”

Writing in an op-ed published in MarketWatch, Sarin alleged that the bitcoin has embarked on a “swift and painful drop to zero” now that its price has dropped below the estimated cost of mining, which has begun to drive miners out of the market. As the cost of mining decreases, he alleges, so will the bitcoin price.

“Mining at a cost higher than the cost at which you can sell in the futures market destroys value. So, any rational investor — even one who strongly believes the price of bitcoin will rebound — has no incentive to mine if the cost of mining is higher than the future price and is better off buying in the futures market. And unlike gold, which can retain its value even if mining activity stops, bitcoin can have no value absent the mining activity that maintains the ledger of who owns it. Absent the mining activity, bitcoin is a just a set of encrypted numbers with no value.”

Of course, Bitcoin and other Proof-of-Work (PoW) cryptocurrencies adjust mining difficulty dynamically to maintain a consistent issuance rate amid fluctuating hash rates, so while it is true that miners at the margins have begun switching off their machines, it is also true that the hash rate will eventually reach equilibrium with the bitcoin price.

Bitcoin has entered a “death spiral,” and it’s “close to becoming worthless”, CCN, Dec 04

Source: FxPro

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