BTC on a collision course with disaster

As SegWitCoin (BTC) continues to hover around the $10,000 mark and investors demand more utility from the cryptocurrency, miners are piling on hash rate to meet demand. What many are choosing to ignore though is that a crisis point for miners is coming, one that could crash the entire BTC market.

As Cointelegraph recently reported, BTC hash rates have topped 94 quintillion hashes per second, and will quickly approaching a milestone figure of 100 quintillion. This means that more mining power is being applied to the BTC blockchain, and the climb in hash rate has coincided nicely with the steady climb of BTC in 2019. A higher price in BTC is attracting miners, seeking profits from block rewards.

If you believe the promoters of BTC, this is all good news, and signifies a shift from fiat to BTC.

This celebration of the “good times” in BTC is blind to a fairly obvious dead-end that is coming in just a few months: Because BTC can’t scale, the expected May 2020 halving of block rewards will destroy miner incentives.

Currently, 12.5 BTC is the reward for successfully mining a block. After the halving, that reduces to 6.25 BTC. Although many people could hype you into believing different, halving has nothing to do with the price of the coin. This has been proven repeatedly in the past; the halving is simply baked into the price.

Even at the current reward rate, miners found it difficult to make a profit until BTC prices recovered to near where it’s currently at. When that price is halved, their rewards won’t cover their costs.

Of course, scaling solves this problem, as Bitcoin SV (BSV) is proving. With massive blocks, more transactions can fit in each block, and transaction fees are supplanting block rewards as the economic incentive of miners. Even with the next halving, transaction fees will make it worthwhile for miners to continue working on the BSV chain.

Making things worse, the BTC community will be caught in a terrible choice. If mining power drops off and hash rate declines, the network will remain congested, expensive and slow, providing no utility at all to its users. The price will decline as users find even basic use of BTC futile.

But if mining power continues at its current rate and difficulty continues to increase, the existing mining hardware of many operations will be incapable of mining new blocks, forcing them to pay for costly upgrades to continue mining a reduced reward. Then they can potentially continue mining at a loss after a costly upgrade.

This is all a consequence of BTC development continuing without a thought for mining incentives. As block rewards have been seen as enough, the entire network has been dependent on market prices, rather than any real utility.

BSV has already solved this problem by keeping miners at the top of mind. Increasing block sizes will mean more transaction fees, which will continue to incentivize miners for long to come.

Dr. Craig Wright: Understanding the message of Bitcoin halvings

The reward model of mining Bitcoin was designed not just for a purpose, but to also send a message. That’s the lesson from Dr. Craig Wright’s latest article, Zeno’s Paradoxes and Bitcoin, where he not only explains what that message is, but clarifies what it means for Bitcoin’s future, now being found in Bitcoin SV (BSV).

The Zeno Paradox Wright specifically refers to is the Dichotemy paradox, which states:

That which is in locomotion must arrive at the half-way stage before it arrives at the goal.

– Aristotle, Physics VI:9

In the context of Bitcoin, this refers to the halving of mining rewards over time. In Zeno’s context, the paradox was that an infinite number of halvings sets up an infinite number of tasks, preventing the goal from ever being achieved.

“If we take 100 as an arbitrary amount because percentages are linked to 100, we can now transform the values in a way that has meaning,” Wright notes. “You will notice the block reward in the first four years to have been at 50 bitcoin per block for the subsidy. It then drops to 25, then 12.5; and so on. And I have written them as 50/100, 25/100, et cetera for a reason.”

Wright comments that he set up halving to work this way to specifically signal exactly how much Bitcoin was already mined, and how much remained. “When the block subsidy halved to 25 bitcoin, miners knew at a glance that 50% of the bitcoin that would ever exist had been put out to market and that 25% would be remaining after the current block-subsidy period,” he writes.

What is the message meant to say? Not that halvings should create bumps in value, but rather than they won’t. It’s a signal that mining for block rewards has a lifespan, and that another motivation should take over in the long run.

Unfortunately, those who seek to keep Bitcoin as nothing more than a store of value, specifically the SegWitCoin (BTC) promoters, have flipped the meaning of halvings. “Instead of a Zeno’s paradox, some promoting bitcoin in a Ponzi-like manner arguing that the price will double every halving are subject to the Persian chessboard or the rice and chessboard problem,” he notes.

Specifically, BTC halvings have been pushed as a reason for the price to jump. On the surface, that sounds great for investors and miners alike, as a higher price would mean rewards would be worth more, assuming the price kept climbing with adoption. In practice though, as rewards will eventually halve to the point of worthlessness, without a better business model, miners will drop off, making the blockchain worthless.

The solution to this, as Wright has always envisioned, is in transaction fees. In a massively scaling model, now pursued by BSV, countless transactions take over as a new profit motive for miners, replacing block rewards entirely in the future. “Luckily, we have managed to demonstrate blocks the size of 2 GB on the Scaling Test Network (STN) and will be increasing the capacity further at a level that applications and other development teams can keep up with,” he writes. “In the coming years, we will be running blocks that are in the order of tens of terabytes in size. We will do so at a rate and cost that allow us to subsume all other transactions on the globe. We will do it more securely and inexpensively than PayPal, than Visa, than Mastercard, or than cash.”

As a final note to those who continue to push BTC as the government-averse option, Wright notes that they are totally missing the point. “Bitcoin’s value did not ever lie in subverting government or banks, it lies in Bitcoin’s efficiency,” he concludes.