Scarcity creates value, in theory

Published: July 30, 2019 (Medium)

4 minute read

The long held belief in Bitcoin is that block halving events are directly related to the future value of the coins. The actual price not only depends on supply but also demand. Bitcoin’s speculative use case appears to be creating the most demand, due to the fact that at this time — there is not widespread merchant or bank adoption.

Yes, Bitcoin is used for purchases but those factors are somewhat negligible compared to the actual market value from any market pressures derived from the exchange of goods or services; Are nullified as soon as they’re converted back to fiat or other currencies. Those coins used in the sale are not usually held for speculative aspects, just for the capital liquidity and are required for business day to day operations.

For the past decade, the driving force for increasing market demand was to consider the reduction in supply as with a halving event shown above. Shortly after the price increases to cover the costs of mining less coins for the same hash-power due to increased difficulty. Speculative investors are aware that miners would not simply take a loss, so they began to increase their buying pressures prior to halving, knowing with almost 100% certainty they can short-sell and earn a decent profit, this compounds the effects of supply reduction, driving the prices even higher!

An often overlooked flaw in Bitcoin is found in the difficulty re-targeting source code. By allowing excessively fast blocks to be created, difficulty never fully recalculates properly to achievable levels while miners already need to work twice as hard for the same return prior to a block reward halving.

Why doesn’t difficulty halve too?

As with an increased demand for new coins increases, this indirectly pushes up difficulty and as a result the price. Similar to a Ponzi Scheme, long-term large mining farms get more profitable as the small miners are simply shut out of the markets completely, not even able to solve a block at a loss even if they wanted to! If you’re too late, too bad, you lost.

This is not the decentralized peer to peer cash that Satoshi envisioned originally. It has been corrupted by large hardware manufactures, Goliath mining farms and centralized mining pools. To Satoshi’s defense, up until recently there was no solution to prevent this, it was a wildcard issue never solved. The marketplace adopted around it in order to thrive.

The real problem will begin to become apparent, when the speculative nature of Bitcoin begins to fade and mass adoption from merchants enter the marketplace. HODL will become “sell as soon as you get it” (SASAYGI), if you can or you will lose it. To make matters worse; Miners solving blocks with no subsidy and only getting paid in fees will probably go bankrupt or stay offline shortly after the halving event prior to difficulty re-targeting (2016 blocks — two weeks), anticipating a speculative price increase for profitability, this will make block-times longer and in extreme cases; Blocks won’t be solved for hours, days or even weeks! The chain may temporarily slow down or stop!

Some may call this prediction FUD, or untrue but the writing is on the wall. Many alt-coins have suffered “chain-locking” after a 51% attack, difficulty was pushed to extreme levels never before seen with a short-lived spike in hash power. Bitcoin is more vulnerable due to the fact that there’s a limited amount of “spare” hash-power available to recover after miners begin dropping like flies because they can’t afford to mine at a loss and speculate on future profit.

Don’t worry, this article is not all gloom and doom… We still have time to fix this glitch, not much time, but it’s still possible if we can all agree it would be beneficial to consider the outcome if we chose to ignore it.

References:

1- https://medium.com/@stecumm/bitcoin-block-reward-will-halve-in-may-2020-how-will-it-affect-the-price-2543132042bf

2- https://blog.goodaudience.com/blockchain-the-mystery-of-mining-difficulty-and-block-time-f07f0ee64fd0

3- http://radar.oreilly.com/2014/04/bitcoin-what-happens-when-the-miners-pack-up-their-gear.html