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.
Continuing his bearish forecast, Sarin said that gold’s status as a universal store of value is a “historical accident,” one that cryptocurrency cannot supplant since most newer investors are largely driven by greed, not belief in the technology or its applications:
“Unlike gold, which, probably due to a historical accident, is universally accepted as a store of value, bitcoin is a digital commodity with no such universal acceptance as a store of value. While the original buyers and miners of bitcoin were true believers in the paradigm shift they thought it promised, and were willing to make the necessary investments for future gains, the more recent buyers and miners have been run-of-the-mill, greed-driven investors.”
To Sarin’s point, the state of the crypto market does seem dire -- at least to someone whose familiarity with bitcoin’s price movements began around October 2017. However, as many crypto analysts have pointed out, cryptocurrencies have regularly endured peak-to-trough declines of greater than 80 percent in the decade since the Genesis block was mined.
His retort is that the nature of the market is fundamentally different than in past boom-bust cycles, with the “losers” being profit-driven investors rather than “true believers” and futures markets enabling miner to hedge their profits by shorting cryptocurrency prices.
Luckily, unlike other bitcoin bears -- who hedge their forecasts with the stipulation that BTC could see further run-ups before its inevitable demise -- Sarin predicts that the crypto market's death will be "swift." Thus, with an eye on the bitcoin price and an eye on the calendar, grizzled investors can offer a brief reply: "We'll see."
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