Even a 75% reduction in hashing power wouldn't be fatal to Bitcoin. The adjustment period would be 8 weeks which is punitive and average block time would be 40 minutes. Most likely for many transactions people would start accepting just two confirmations (80 minutes). It would be a hit but nothing like a sustained 51% attack.
I think you're too optimistic. If the average block time was 40 minutes, this would be a huge disincentive for miners. They would earn only a fourth of what they should earn, which might cause many of them to quit mining, which in turn would make the situation even worse.
The time between blocks won't matter to the miner. The miners probability of finding a block in a given amount of time (and therefor their profitability) will be exactly the same as it was before the reduction in hash power. If that probability was an issue for the miner, they already would have shut down their mining rig before the reduction in hash power. If they are still mining when the reduction happens, they have already accepted mining at the current difficulty.
Good point, you're absolutely right. It's better to look at the individual miner than the network as a whole. But consider that other factors (e.g., a drop in exchange rates) may still make miners quit during that period. They might accept the difficulty at the first instant but change their minds later. They won't accept a difficulty level forever, even if it was initially reasonable to do so. Hence, if hashpower and exchange rates fall at the same time and if things go quickly enough, bitcoin may possibly enter into such a downward spiral of evermore leaving miners. Miners would need an immediate incentive to continue or start mining at times when hashpower drops. But bitcoin simply lacks such a feature.
If they are still mining when the reduction happens, they have already accepted mining at the current difficulty.
Or you can put it also like this: If miners consider a new difficulty level too high, they (or at least some of them) won't accept it and will immediately quit mining.
But this makes bitcoin susceptible to the
difficulty pump attack described above. The attacker (with immense hashpower) joins mining for a period of 2016 blocks. All other miners will be absolutely happy during that period as they will earn just the same amount of bitcoins which they would have earned if the attacker hadn't even been there. However, the network as a whole will run a lot faster during that period, so the next difficulty level will be accordingly higher. After the adjustment, miners will have to decide if they continue mining. At this point in time, the network already runs somewhat slower (> 10 minutes / block) since the attacker has left the network and it will run even slower with each miner who leaves.
Furthermore, seeing the reduction in hash power, the miners will know that profitability is about to increase with the next difficulty change. This could act as an incentive to leave mining rigs running so as to take advantage of the difficulty drop the moment it occurs.
There is no incentive to leave the mining rigs running when you don't earn an appropriate amount of coins for doing the work. A miner could just as well decide to switch the rigs off and wait out the difficulty drop. Why should a single miner decide to do the work for others? The only reason I see is that a miner wants to keep the network going as he is heavily invested into bitcoins.
