Bitcoin has lost more than half of its value in less than six months. Shortly after Christmas, it was trading at over $ 19,000, today it is just above $ 8,000. Unsurprisingly, investors insure that prices can fly away at any time. But Bitcoin has since refused to cooperate, staying stuck under the $ 10,000 mark for at least two months. How can we know when or if he will fly again?
Cryptocurrency analysts at Fundstrat believe they have found a way to predict the price of Bitcoin. They use the Bitcoin Mining Cost Breakdown Curve to predict that its price is expected to reach $ 36,000 by the end of 2019.
But this method has been widely criticized by the Bitcoin community. On Twitter, Blockstream's Chief Financial Officer, Samson Mow, says Fundstrat's predictions are based on a controversial economic theory: "Fundstrat, I appreciate your work in general, but the price of Bitcoin is not based on the growth of hashrate. You mostly support the value of the work, in other words, people will pay x for a hole you dug just for the time you spent digging. "
The value of work essentially implies that the price of a product or service is determined by the work required for its production. This theory is popular in the Marxist economy, but other schools of thought have abandoned it in favor of "subjective evaluation" which says that the value of a product or service is what the customer is willing to pay. , no matter the effort invested in its production. According to Samson Mow, the price dynamics of Bitcoin depend on subjective evaluation, not on the theory of the value of labor.
Of course, if the producer gives more value to the effort than the market will want to pay, then it will stop production. When prices fall, then small producers tend to disappear, which reduces supply and has the effect of inflating prices. Producers who have sufficient reserves to operate at a loss can continue production for some time. But more and more producers will disappear until prices rise enough to balance the market.
In the same way, if the price of Bitcoin falls, small miners disappear when costs are higher than profits. However, this generates a security risk. As the mining pool shrinks, there are more and more attempts to take control of the pool. Bitcoin has automatic mechanical adjustments to discourage miners from leaving the pool when prices fall. The algorithmic puzzle that miners must solve becomes more complex when prices rise, and easier when they fall. This helps stabilize the rate of production, with a block every ten minutes or so, while allowing the hashrate (the computing power needed to solve the puzzle) to fluctuate with the price of Bitcoin.
While hashrate effectively measures electricity consumption, which accounts for the largest share of the cost of mining, the break-even point for miners tends to follow the price of Bitcoin.
Given the price adjustment set by the breakeven and price adjustments, the breakeven price is a reasonable indicator of the future price of Bitcoin. The criticism made by Samson Mow is therefore slightly unfair. Fundstrat did not rely on the value of the work, although its summary clumsily implies that the price is based more on the cost of mining than on the adjustments.
Of course, the media are asymmetric: the price of Bitcoin is supported from below, but it has no upper limit, and this, because there is no need to counter attacks when the pool gets bigger . However, no one seems to have thought that if break-even points increase dramatically then it will be harder to get into the pool. If the mining market is dominated by a small number of important players, the result will be the same, especially if these actors cooperate.
But there is another problem. Bitcoin is traded as a commodity. In the long run, the market price of goods tend towards marginal cost of production. In other words, the profits of mining are falling. As we noted earlier, when profits go down, producers stop production.
While the goods would continue to be traded if the mining stopped, in the case of Bitcoin, it would disappear as soon. For the simple reason that the role of minors is not to produce Bitcoin, but to confirm transactions. Without verification confirmation, Bitcoins can not be bought, sold, spent or earned. If the mining stops, the existing Bitcoins can no longer be moved, and an immobile asset is useless. So, unlike a commodity, if the profits from mining are zero, the value of existing Bitcoins will be too.
Adjustments artificially preserve profit margins to ensure that a sufficient number continues to mine. Bitcoins are protected from attack, but this casts doubt on the financial viability of Bitcoin as a means of transaction.
Today, the new Bitcoins are part of the rewards of mining. But the component of the mining reward of the new Bitcoin diminishes visibly, and it will eventually reach zero. While the adjustments force the profits of the mining to not go into the red, the decreasing profit margins must be offset by increasing the transaction costs. Users of the system will have to increase the pay of the miners so that they continue to undermine in all honesty.
This means that Bitcoin should not be considered as a commodity. Minors provide a service, the confirmation of transactions, on which Bitcoin users depend entirely. Without this service, Bitcoin would shut down. But miners' profits depend on user transactions. If fees increase too much, users will stop using Bitcoin to complete transactions, and the Bitcoin will shut down. The perfect balance between transactions and fees is achieved when there are enough users to provide a reasonable number of transactions to be confirmed and enough minors to perform these checks.
And finally, what determines the value of Bitcoin is the willingness of people to use it to make transactions, including buying and selling Bitcoins, of course, since the exchanges are transactions. But will the price of Bitcoin continue to rise enough so that users agree to pay more and more? Or will we witness a debacle, caused by falling prices as users leave the system en masse, followed by the miners, if the collapse of the volume of transactions causes the fall of costs?
