In a MarketWatch column I wrote last April, I explained what it would take for bitcoin to become worthless. Bitcoin is getting close to that point. As I argued, once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral.
That is, without the mining activities supporting the ledger that maintains the records of who owns what — bitcoin is, after all, a set of encrypted numbers that cannot establish the ownership of anything — bitcoin will become worthless.
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If the price continues to drop and the cost of mining does not fall correspondingly (the cost of mining will algorithmically decrease, but not necessarily to same extent as the decline in prices), bitcoin will quickly go to zero.
Bitcoin proponents will argue that bitcoin’s price has dropped by large percentages before. Except this most recent decline is different in three significant ways.
First, the magnitude of the recent decline dwarfs the magnitudes of past declines. Second, the losers in the recent decline are new investors who will likely retreat until there is more clarity around bitcoin’s use cases. Third, the futures markets have changed the game, enabling miners to estimate their mining losses and profits at the outset — if you can buy in a futures market at a price below my mining costs, why mine for a sure loss?
