Bitcoin has lost more than half its value in less than six months. Shortly after Christmas, it was quoted at over $ 19,000, today it is just over $ 8,000. As expected, investors say that prices can fly at any time. But Bitcoin has since refused to cooperate, remaining stuck below the $ 10,000 mark for at least two months. How can we know when it 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 their 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, Samson Mow, the financial director of Blockstream ensures that the forecasts of Fundstrat based on a controversial economic theory
"Fundstrat, I appreciate your work in general, but the price of Bitcoin is not based on hashrate growth.In general, you support the value of work, in other words, people will pay x for a hole that dug only for the time that 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 Marxist economics, 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 client is willing to pay. , regardless of the effort invested in their production. According to Samson Mow, the price dynamics of Bitcoin depends on subjective evaluation, not on the theory of the value of work.
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, 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 to produce 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 the costs are higher than the benefits. However, this creates a security risk. As the mining group is reduced, there are more and more attempts to take control of the group. 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 go up, and easier when they fall. This helps to stabilize the production rate, with a blockade 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 the hashrate effectively measures the consumption of electricity, which accounts for most of the cost of mining, the break-even point for miners tends to follow the Bitcoin price.
Given the price adjustment established by the break-even point and the price adjustments, the equilibrium price is a reasonable indicator of the future price of Bitcoin. The criticism made by Samson Mow is, therefore, a bit unfair. Fundstrat did not trust the value of the work, although its summary awkwardly implies that the price is based more on the cost of mining than on the adjustments.
Of course, the media is asymmetrical: the price of Bitcoin is compatible from below, but it has no upper limit, and this, because there is no need to counteract the attacks when the group gets bigger. However, nobody seems to have thought that if the balance points increase dramatically, it will be more difficult to enter the group. If the mining market is dominated by a small number of important players, the result will be the same, especially if these players cooperate.
But there is another problem. Bitcoin is marketed as a commodity. In the long term, the market price of goods tends to a marginal cost of production. In other words, the benefits of mining are falling. As we noted earlier, when profits go down, producers stop production.
Although the goods would continue to be commercialized if the mining stopped, in the case of Bitcoin, it would disappear so soon. For the simple reason that the role of minors is not to produce Bitcoin, but to confirm transactions. Without confirmation of verification, Bitcoins can not be bought, sold, spent or earned. If the extraction is stopped, the existing Bitcoins can no longer be moved, and an immobile asset is useless. Then, unlike a commodity, if the mining profits are zero, the value of the existing Bitcoins will also be.
The adjustments artificially preserve profit margins to ensure that a sufficient number continues to undermine. Bitcoins are protected against attacks, 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 visibly decreases and will eventually reach zero. While the adjustments force the profits of mining to not fall in red, the diminishing profit margins must be compensated by increasing the transaction costs. The users of the system will have to increase the salary of the miners so that they continue to undermine in all honesty.
This means that Bitcoin should not be considered as a commodity. The minors provide a service, the confirmation of the transactions, of which the Bitcoin users depend completely. Without this service, Bitcoin would close. But the profits of the miners depend on the transactions of the users. If the rates increase too much, users will stop using Bitcoin to complete the transactions and the Bitcoin will be closed. The perfect balance between transactions and rates is achieved when there are enough users to provide a reasonable number of transactions to confirm and enough minors to perform these controls.
And finally, what determines the value of Bitcoin is the willingness of people to use it to make transactions, including the purchase and sale of Bitcoins, of course, since exchanges are transactions. But will the Bitcoin price continue to rise enough for users to accept paying more and more? Or will we witness a debacle, caused by falling prices as users leave the system en masse, followed by miners, if the collapse of the volume of transactions causes the drop in costs?
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