Is this scenario possible? [sudden drop of hashing power in far future]

[bitcoinator]

Sorry if this has been discussed. I'd like to know your opinion about the following scenario:

1. Bitcoin price increases up to 1M USD
2. Heavy investments in Bitcoin mining stabilize the mining profitability at ~11% per year or ~0.03% per day.
3. Professional miners with big efficient mining farms control 99% of hashing power.
4. Let's say median miner spends 1 000 000 USD daily to mine 1 030 000 USD in BTC and to receive a profit of 30 000 USD every day.
5. Suddenly Bitcoin price crashes from 1M USD downto 100K USD and stays there for a while.
6. Now median miner spends 1 000 000 USD daily to mine 103 000 USD in BTC and receives a daily loss of 897 000 USD.
7. Miners won't tolerate such losses for a long time. They will shut down their mining farms and sell them for cheap (if they can).
8. Bitcoin network will loose 90% of its mining power. It will take 100 minutes in average to generate new block. And it will take months to adjust the difficulty.
9. Moreover somebody can easily do a 51% (...90%) attack using the hardware bought from big miners.

Does it sound like a possible scenario that could happen naturally or provoked intentionally?

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[oleganza]

1. Bitcoin price approaches 1M USD.
2. Value of USD quickly goes to zero. Everything is accounted in BTC.

[bitcoinator]

1. Bitcoin price approaches 1M USD.
2. Value of USD quickly goes to zero. Everything is accounted in BTC.

It doesn't solve the problem. If for some reason big miners spend on electricity + hardware much more than they get from mining, they will quit business. And it doesn't matter if they pay it in BTC, USD or any other currency. In that case Bitcoin network will be paralyzed and possibly compromised, i. e. dead. Why is it impossible?

[joris]

1. Regarding the mining problem in your scenario:

There's a globally a great variance on out of pocket expenses on electricity prices ($ 0.00 .. $ 0.40), of which near zero could consist of wind / solar / hydro installations.  Also the environment (tropics vs. nordic) will add to expenses or savings on cooling, not speaking vast differences of management, housing and financing costs. Hardware prices won't matter in this case, since the hardware is already up and running in your scenario.

Next to these marginal costs, there's a large range of power efficiencies of mining gear, together with dynamically power saving settings like undervolting it.

Imho, these two factor mitigate the pace of decreasing hashrate to a great extent and smoothen it out.

Also, 'old' mining companies go in stasis till better times or go bankrupt. Other, better situated and more efficient companies buy up their gear for their operations at an appropriate market value. The zero sum game mining is, will deliver more BTC to the remaining companies, which compensates them for the lower market value of BTC. Lots of negative feedback loops to decreasing computing power in the network.


2. Regarding the plummet of the exchange value against the USD:

If BTC reaches those height, many real economy and financial contracts will also be stated in BTC, so there's also some guaranteed exchange and buffered value.

When block times increase, trading is slowed down, new supply of BTC from miners decreases and most humans are anxious anyway to take any loss. Demand could plummet, but so will the supply to the market.

[vane91]

this is not possible, this already happened to Terracoin, just release new update, fork to lower difficulty, and done.

Also miners from china or india will continue mining and just buy more bitcoins like they did this month, ramping up the price.

[bitcoinator]

1. Regarding the mining problem in your scenario:

There's a globally a great variance on out of pocket expenses on electricity prices ($ 0.00 .. $ 0.40), of which near zero could consist of wind / solar / hydro installations.  Also the environment (tropics vs. nordic) will add to expenses or savings on cooling, not speaking vast differences of management, housing and financing costs. Hardware prices won't matter in this case, since the hardware is already up and running in your scenario.

Next to these marginal costs, there's a large range of power efficiencies of mining gear, together with dynamically power saving settings like undervolting it.

Imho, these two factor mitigate the pace of decreasing hashrate to a great extent and smoothen it out.

Also, 'old' mining companies go in stasis till better times or go bankrupt. Other, better situated and more efficient companies buy up their gear for their operations at an appropriate market value. The zero sum game mining is, will deliver more BTC to the remaining companies, which compensates them for the lower market value of BTC. Lots of negative feedback loops to decreasing computing power in the network.

You are describing the current situation of emerging bitcoin market. But I am talking about the future. As I said in the original post,

2. Heavy investments in Bitcoin mining stabilize the mining profitability at ~11% per year or ~0.03% per day.
3. Professional miners with big efficient mining farms control 99% of hashing power.

Companies that have higher costs will leave the market well before we reach such rates of annual mining profitability. Competition will equalize the costs, there will be no significant variance. Only efficient miners will survive. The costs will be high. Really high. Since they only depend on bitcoin price.

2. Regarding the plummet of the exchange value against the USD:

If BTC reaches those height, many real economy and financial contracts will also be stated in BTC, so there's also some guaranteed exchange and buffered value.

When block times increase, trading is slowed down, new supply of BTC from miners decreases and most humans are anxious anyway to take any loss. Demand could plummet, but so will the supply to the market.

I am not sure buffered value will be enough to stabilize the currency in case of some economic crisis, FUD & price manipulation. Even established currencies that are regulated to be stable can loose or gain much of their value in matter of days. If Bitcoin looses its value, efficient miners (who control 99% of the network and work for a small profit) will quite mining immediately and sell their hardware to cover the losses.

And it will potentially cause 2 major problems that can kill Bitcoin:
1. Unacceptable confirmation time (16 hours instead of 10 minutes in average)
2. Compromise of the network (by the ones who bought the hardware from miners)

[Phrenico]

One benefit of ASICs (and any specialized mining hardware) is that they decrease the threat of this problem. The marginal revenue for an ASIC miner is far higher than the marginal cost--most of the cost is upfront. ASIC miners won't turn their hardware off even if their profit falls precipitously.

On the other hand, anybody mining with a CPU, with marginal revenue close to marginal cost, will shut off the program as soon as revenue falls. This increases susceptibility to this failure as well as other attacks, especially by a 'terrorist' who begins mining at a loss in order to force all of the other miners into negative profit so he can monopolize the network.

[bitcoinator]

One benefit of ASICs (and any specialized mining hardware) is that they decrease the threat of this problem. The marginal revenue for an ASIC miner is far higher than the marginal cost--most of the cost is upfront. ASIC miners won't turn their hardware off even if their profit falls precipitously.

On the other hand, anybody mining with a CPU, with marginal revenue close to marginal cost, will shut off the program as soon as revenue falls. This increases susceptibility to this failure as well as other attacks, especially by a 'terrorist' who begins mining at a loss in order to force all of the other miners into negative profit so he can monopolize the network.

I disagree with you. Forget about CPU/GPU mining. Marginal revenue will be very small for ASIC miners in future due to competition. But cost of mining will be very high since Bitcoin will be very expensive. Thus even small decline of bitcoin price could incur significant losses to miners and paralyze the network. Most miners won't be able to tolerate significant decline of price. Please see again my calculations in the original post.

[Jeffrey]

I think it also highly depends on how big BTC is outside the mining community.
Right now, almost everything is calculated as USD/BTC.
When BTC becomes REALLY BIG and let's say you can do your daily shopping with BTC, it's a whole different ballgame.

[DeathAndTaxes]

One benefit of ASICs (and any specialized mining hardware) is that they decrease the threat of this problem. The marginal revenue for an ASIC miner is far higher than the marginal cost--most of the cost is upfront. ASIC miners won't turn their hardware off even if their profit falls precipitously.

On the other hand, anybody mining with a CPU, with marginal revenue close to marginal cost, will shut off the program as soon as revenue falls. This increases susceptibility to this failure as well as other attacks, especially by a 'terrorist' who begins mining at a loss in order to force all of the other miners into negative profit so he can monopolize the network.

I disagree with you. Forget about CPU/GPU mining. Marginal revenue will be very small for ASIC miners in future due to competition. But cost of mining will be very high since Bitcoin will be very expensive. Thus even small decline of bitcoin price could incur significant losses to miners and paralyze the network. Most miners won't be able to tolerate significant decline of price. Please see again my calculations in the original post.

Words like marginal revenue make no sense in that context.

LIFETIME Margins are likely to be very low but lifetime margins include CAPITAL COSTS + OPERATING COSTS. Operating margin (mined value vs operating cost) is likely to be very high otherwise hardware will never be deployed to begin with.  The operating margin has to accommodate the amortized lifetime hardware costs.  The Capital cost is a sunk cost, it has already been paid for.  The only way to get a return on it is to keep mining.  Now operating margins might be squezed from time to time but if you stop mining then you turn that sunk cost into a realized loss.

Still even if a miner wanted to quit the probability that all miners will all have the exact same operating costs and simultaneously all stop mining at the exact same time is essentially zero.  If that happen then Bitcoin will likely be hard forked with a different difficulty adjustment algorithm.

You also need to consider that some miners will simply be unable to stop.  The lowest priced power is available to industrial users and in massive amounts (think >200 KW continual load).  The power grid can't react to massive changes in these large loads so most industrial power contracts have penalty clauses.  If a massive mining farm uses 200 KW (at the lowest possible energy rates) and then shut it down THEY STILL PAY.  Their monthly bill for the next 3 to 6 months is HIGHER at 0 KW then at 200 KW.  Simple version is that shutting down overnight = even higher costs then operating and revenue goes to zero.   There is no scenario which would result in a greater loss for the miner.