Excerpt
I address the question of whether Bitcoin could fail if mining companies go bankrupt. I examine the high investment and strong competition in Bitcoin mining, and explain how miners use crucial long-term strategies to navigate price drops during bear markets. I describe how Bitcoin’s mining difficulty adjustment ensures its resilience, making it unlikely for the network to fail. Discover why Bitcoin is designed to survive challenges.
Transcript
The question is: “Could Bitcoin fail because the mining companies go bankrupt? Thanks a million.”
Okay, so well, Bitcoin mining, if you start that, it’s actually a high investment that you need to purchase a lot of mining machines, and it’s also a very competitive space. Miners often need to wait for months to be able to purchase new miners, as the production of them is limited because of economical reasons. The manufacturers of mining machines are only producing what people are buying. They don’t have large numbers of miners waiting on shelves for buyers.
Long-Term Strategy for Mining Operators
So mining operators have to play a long term game. They have to calculate their operations so that they can sustain a depreciation of bitcoin values. As we have seen, several years of bear markets where the value of bitcoin has dropped significantly. So they need to have enough reserves to have this perspective that they know that the value of bitcoin will go up again. Also, they have long term contracts with electricity providers to be able to pay the least amount possible for the electricity they need.
Risk of Bankruptcy
Here and there, of course, mining companies are going bankrupt. That’s true. But in general, the chances that all of them fail at the same time are very, very low. And even if many of them go out of the market at the same time, Bitcoin has a way to mitigate this. And that is the so-called mining difficulty.
Mining Difficulty Adjustment
The mining difficulty is adjusted every 2016 blocks, which is usually about every 14 days. The network is constantly calculating the hashing power, which is the sum of all mining machines together. So all the mining machines together have a certain hashing power. And that is summarized. And the mining difficulty is calculated from that. And if the hash rate in the system, in the network goes up, because new miners are coming into the game, they add to the hash rate, hash power, then, after 2016 blocks in that calculation, also, the mining difficulty is increased to maintain this equilibrium of finding a new block every ten minutes.
What Happens When Hash Rate Drops
If the hash rate goes down when miners, for instance, go bankrupt, the mining difficulty is decreased, too, which gives those miners who stay longer in the game more profits, because it’s easier to mine, and there are less participants in the mining. And so the chances are higher that they find a block.
Explaining Mining Difficulty with a Dice Analogy
And what is this hash rate difficulty, mining difficulty, hashing power? Why is it needed, and what is getting more difficult and how?
So, in the process of mining a new block and adding it into the blockchain, the mining machines need to find a certain number. And that is a random process. It’s like a random game. The miner who finds the number the fastest is allowed to add this one block to the chain and receives the block reward, the new created bitcoin, at the moment, 6.25 per block.
And it’s like if you are throwing dice. Imagine someone says, if you manage to throw two dice and both fall on number six at the same time, you win that game. So now let’s increase the difficulty. You now get eight dice and you need to throw a six with all of them at the same time. This is, of course, much more difficult than in doing it with two dice. So that’s a little bit what’s happening in Bitcoin mining when the mining difficulty is raised or lowered.
Final Answer
So, to answer that question: No, I don’t believe that if miners go bankrupt, Bitcoin will fail. Because even in the face of if the biggest part of the miners are dropping out, there is the possibility that all participants of the network will agree to make changes to the proof-of-work mechanism so that Bitcoin can survive. I’m pretty sure that a consensus will be found in such a case.
So, no, I don’t believe that this is going to happen.
