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Bitcoin slid even further downhill this weekend, as the crypto market shed a total $17bn in market capitalization. But the problems might be just the beginning, as further drops threaten to cause a domino effect in the incentives that keep mining networks running.
The danger was first suggested in a tweet by Colin LeMahieu, Nano’s lead developer:
“It’s not a fatal flaw though it is a bad user experience,” LeMahieu told Crypto Briefing in an email. “The issue comes when there are large swings in price.” When prices drop suddenly, he explained, transactions get slower.
The most severe consequences of these downward pressures have yet to be felt, as mining is still profitable in countries with cheaper energy. However, that may change if prices continue to fall—and miners start to worry about their power bills.
The Mining SpiralHere’s how falling prices could affect the fundamentals of the Bitcoin network.
Although block mining is often regarded as a cryptographic “puzzle,” it might be better regarded as a game of darts, with each miner throwing blindly until someone hits a bullseye and claims the prize. Every two weeks, the Bitcoin network makes the target larger or smaller, to ensure that someone scores about every ten minutes.
These consensus changes work fairly smoothly in the long run, but they run into trouble when there are sudden changes in the number of players—or the value of the prize. A sudden drop in the value of block rewards might cause some Norwegian or Chinese dart-throwers to drop out of the game, leaving only a handful of players aiming at the same tiny target until the next difficulty adjustment.
But a drop in miners can compound problems further, since it now takes fourteen or fifteen minutes to mine a ten-minute block. Since the interval between difficulty adjustments is measured in block times, that two-week period could become three weeks or even longer.
Then prices drop even further, as Bitcoin users and merchants give up on a currency which has inconsistent and unpredictable transaction times—causing further price drops, and more miners to quit, thereby making transaction times take even longer.
These problems aren’t just theoretical. The initial fork of Bitcoin Cash was marred by several hundred-minute blocks as the new network struggled under the previous high difficulty levels.
$3,000: Bitcoin’s Event HorizonDespite the most recent sell-off, mining is still (barely) profitable in some wholesale energy markets. But even those profits are starting to thin, with reports of some mining installations selling their ASIC equipment “by the kilo.”
The sell-offs are likely to continue if Bitcoin prices sink past $3,000 USD – the average price of producing one bitcoin in China, where 74% of all mining occurs.
Hashrates have been slumping since October, and block times consistently exceeded ten minutes over the past month – even after a difficulty reduction on November 17th.
What Next?It’s not quite clear how far the downward cascade could bring the price of Bitcoin. In the long run, of course, hashing power and difficulty levels would both sink until they reached an equilibrium, with rewards just high enough to sustain the remaining miners.
But in the short term it would likely deepen and protract the ongoing crypto recession, as the problems in the transaction network highlight the uncertainties of cryptocurrency transactions. For those paid in cryptocurrency–or who rely on it for cross-border remittances– it might become more attractive to go with Western Union after all.
That wouldn’t be the end of crypto, or even of Bitcoin. But it would cause quite a bit of hodler’s remorse, and justify some of the skepticism against cryptocurrency’s ability to survive as an economic system.
It would also throw a wrench into the fundamentals of the network, which has only started to assert its viability as a payment system. Depending on how big the wrench is, the engine might take a long time to fix.
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7. Conclusion. The Chinese Bitcoin market was quick to adopt cryptocurrencies. By 2017, most of the mining power came from China in actual hashrate and mining hardware alike. Unfortunately, the massive amount of government limitations have led the ecosystem to a halt. In 2020, China remains the king of Bitcoin mining and this isn’t likely to change any time soon. That is, unless major changes to the price of energy occurs or China decides to crack down even harder on Bitcoin mining (though this looks fairly unlikely). Thankfully, the amount of hashing power coming out of China is decreasing somewhat steadily in the last couple of years, and more and more ... Um Bitcoin Mining zu betreiben, müssen Sie einem Miningpool beitreten, was zusätzliche Kosten verursacht. Für das Mining benötigen Sie entsprechende Hardware. Auch hier kommen Kosten auf Sie zu. Je nachdem, wie leistungsfähig Ihr Bitcoin Miner sein soll, zahlen Sie bis zu 2.000 Euro. Es ist nicht bekannt, ob sich Mining auch in Zukunft noch lohnen wird. Wenn Sie nicht genau wissen, was ... Um es vorab zu sagen: Nicht nur Bitcoin Mining will man in China den Riegel vorschieben. Andere Coins würden ebenfalls betroffen sein. Bald überhaupt kein chinesisches Mining mehr? Chinas Regierung will nun scheinbar härtere Geschütze auffahren. Während Bitcoin und all die anderen digitalen Währungen bei vielen Bürgern zunehmend Fans findet, sind Kryptowährungen der politischen ... China, das Paradies für Bitcoin Mining. Einer der wichtigsten Faktoren für erfolgreiches Bitcoin Mining ist die günstige Stromversorgung. Außerdem ist ein kühles Klima von großem Vorteil, denn je kälter die Außenluft, desto weniger müssen die Mining Geräte extern gekühlt werden. Die Kühlung ist oft auch sehr energieintensiv und so ein weiterer Kostenpunkt. Beide der genannten ...
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"Bitcoin Mining is Banned in China" - this was the headline that ran on Western media. This is far from the truth! Mining is well and alive in china, and various ASICS (Bitmain Antminer s9, L3 ... Bitcoin mines like this makeshift operation located in Northeast China are what keep the bitcoin network up and running. Motherboard will visit the secretive... In China, savvy entrepreneurs are making millions a year by mining bitcoin. Danny Vincent visited one of the worldÕs biggest facilities of its kind to film the activity and people within. Coolest Bitcoin Mining Miner ... 6:51. Bitcoin millionaire from China Cryptocurrency dips blips and predictions - Duration: 10:10. Asia Crypto Today 10,192 views. 10:10. Bitcoin Mining Explained ... How Bitcoin in China Is Subverting the System - Duration: 22:17. China Uncensored Recommended for you. 22:17. Mining Bitcoin dapat 5 jt per bulan - Duration: 2:26. ALT 50,797 views. 2:26.