No Kevin, Bitcoin will NOT bite the dust - Part 2
Yesterday I wrote about an article written by economist/financial expert Kevin Dowd. It discusses why Bitcoin will become worth nothing. I disagreed, but I did not say why he was wrong. Now I am doing just that.
I have finished formulating my counter-arguments, but in true Bit Brain style, they are longer than expected. Thus I am further subdividing this post into two - I will discuss his two main arguments in one sub-post each.
For this post to make any sense, you first have to read: https://mentormarket.io/bitbrain/no-kevin-bitcoin-will-not-bite-the-dust/ for the background information.
From www.pexels.com
Why Kevin is wrong:
First Argument: Bitcoin mining is a natural monopoly
Bitcoin is well thought out. It's incredibly well thought out. I continue to be amazed by the genius of Satoshi Nakamoto when I look at the Bitcoin system. I am particularly impressed by how holistic his solution is - and how well it handles various eventualities.
To debunk his argument I will use the technique where I assume that Kevin is right. Let's run the scenario from the perspective that one mining group is large enough to be approaching monopoly status and see what happens:
Scenario:
Miner Group A is the dominant force in the Bitcoin world. It has 80% of all mining hashpower and is growing still thanks to its economies of scale.
Thankfully for us, there is more to this equation than just “economies of scale”.
The first thing that will happen is that investors will become wary of Bitcoin. Centralisation does not sit well with those who know cryptocurrencies. This will cause investors to move their money elsewhere: Litecoin, Bitcoin Cash, Ethereum - wherever they need to go until the storm blows over. The beauty of cryptocurrencies is that there are other options, albeit temporary ones.
At this stage it may seem as if I am arguing for Kevins second argument - that Bitcoin will be usurped by better tech - but it won’t. Watch and see:
The move out of Bitcoin will cause a price crash. Not only this; as fewer people are now using Bitcoin the transaction fees will drop, leaving Miner Group A largely dependant on block rewards. The design of Bitcoin is such that block rewards diminish over time and that miners will become increasingly dependant on transaction fees. This is another fail-safe built into Bitcoin Core that prevents monopolies from taking over. Block rewards halve roughly every four years.
Suddenly Miner Group A has a problem. It’s sitting with billions of dollars of computer hardware that is no longer generating a profit. This is an unsustainable situation. What can it do?
Sure it can take mining units offline and save electricity costs - but that immediately eats into its market share. Its 80% will start to fall and Bitcoin will start becoming decentralised again.
Mining Group A could fire workers to save further costs, but this becomes problematic when it wants to ramp up production later on and the competition is now sitting with its old staff.
Miner Group A is therefore forced to absorb losses. Even if it could find a way around the electricity and the salaries problem, it is still paying rent or property rates on the massive warehouses that it will need to host all this mining equipment. (Realise that for Miner Group A to be properly centralised it will have to own its own mining hardware - it is not just a regular mining pool comprised of many miners.) But there is worse to come...
Joe’s Mining Consortium opens up running out of someone's garage. It immediately takes 0.5% of the mining power and starts to grow. How did it do this? Well Joe’s uses the brand new ASIC II hardware that has just been released, much faster and more efficient hardware than what was available before. Slowly the other remaining mining groups also switch to the new ASIC IIs. Mining Group A - still running all its hardware at full speed, starts to lose its 80% mining power. It faces a dilemma: the economies of scale still work, but now it sits with billions of dollars of obsolete hardware. It needs to upgrade, but due to the size of its operation, the upgrade is not economically viable. This is especially true if Bitcoin dips in price, because the older, more inefficient hardware will become unprofitable to run first.
(Note: ASIC IIs are fictional devices of my own creation; but increasingly efficient Bitcoin mining hardware will inevitably be developed, regardless of what it will be named.)
Mining Group A could keep running the old hardware, but it is not nearly as efficient as the new ASIC IIs and profitability will wane. Alternatively they can take a massive hit economically and attempt to upgrade their hardware.
True, they don’t have to upgrade it all at once; but the less they upgrade and the longer they take to do so - the more inefficient they will become as a whole and the lower their mining profits will be.
At the end of the day it comes down to this: small companies can change with the times far faster and more cheaply than large ones. Competitors will always remain because economies of scale only exist up to a tipping point. After that point, diminishing returns set in and a very large mining group faces the risk of going out of business during a price dip - a price dip which it will inevitably cause if it makes Bitcoin more centralised.
After any type of crash, Bitcoin will bounce back as new opportunists seek to fill the gaps left by those who have left the mining game. Bitcoin mining difficulty adjusts automatically to the amount of hashpower at hand, so even if 90% of the mining power leaves Bitcoin today, the 10% that remains will be able to mine Bitcoin at the same rate as before without any problems. As soon as the difficulty adjusts downwards to accommodate the reduction in mining power, new miners will be attracted to the now lucrative market, and decentralisation is assured once again.
Because of this I declare Kevin’s statement that “Bitcoin is a natural monopoly” to be demonstrably false.
In Part 3 in will debunk Kevin's second argument: "An inferior product cannot survive" - specifically how it pertains to Bitcoin. Stay tuned for that. I've already written it, so I can assure you that it is good. 😉
Yours in less dusty crypto
Bit Brain
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Interesting rebuttal... I'm afraid that I'm not an economist by training nor do I have any economics background, so I take a very dim view of economic "arguments and proof". You make a decent case (as does the original author that you are rebutting), but for me, it is hard to seperate out what makes the better "story" as I'm used to more sold proof and concrete evidence.
However, I'm keen to see how it all plays out! This is an interesting experiment!
Ha ha! Good luck trying to apply the scientific method to economics! 😀
Perhaps if you DO look at it from that perspective - you can see that his argument lacks the sort of concrete proof that would give one the "warm fuzzy feeling". After I poke it full of holes it looks even worse. In the scientific community I believe that's what's called a "bad theory" - one which does not explain all the observed phenomena, one which does not make accurate predictions about the future and one which fails when independently tested.
Haha... yes I know.. it's a lost cause! Too many contributing factors and no ability to run real experiments to weed out the factors! It really does become an exercise in story telling with post-event justifications!
Ha ha! Sounds like politics!
Lol! Probably why politicians love to talk economics!
😂
I think we are already starting to see your scenario play out with the large miners like Bitmain despite they never even having more than 50% of the hash. The distribution is already happening so his case immediately fails.
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True.