Starting on Friday morning, Bitcoin’s price suffered yet another huge drop while it’s offshoot, Bitcoin Cash, soared up to at one point close to 50%, causing many to raise concerns about a potential Bitcoin death spiral.
The Bitcoin Cash rally was so substantial that on Sunday, it briefly surpassed the second largest cryptocurrency, Ethereum, with its total market value at $29.9 billion.
Bitcoin’s price at its lowest this weekend saw a 29% drop but the most concerning figure calculated was its hash rate which fell at close to 50 percent. A hash rate is the amount of computational power committed to mining each digital coin.
A steep and drawn-out drop in the Bitcoin hash rate has the capability of setting off a much-feared “chain death spiral” that could leave the bitcoin network entirely useless.
This specific metric is vital for a coin like bitcoin, particularly when its reason for dropping is directly correlated with a competitor taking its spotlight.
Bitcoin Cash reached record-breaking highs at almost $2,400 and it also depleted a lot of hash power from Bitcoin simultaneously.
Blockchain Death Spiral
How exactly does this death spiral work?
The current Bitcoin network adds a new bundle of transactions, known as a “block,” at a rough estimate of every 10 minutes, or so. This exact time is measured by how long it takes for a miner to process this block of transactions. This, in its proper sequence, is then set by something called the “difficulty” on the bitcoin network. The difficulty automatically adjusts itself to match the hash rate so that the transactions won’t take too long to process.
The difficulty is only adjusting every two weeks. If the hash rate unexpectedly plummets this difficulty could be interpreted too high for the quantity of processing power of the network.
If this occurs, it could mean major delays in the completion of Bitcoin transactions.
Over the weekend, the spiral was mentioned throughout the cryptocurrency community with it on the edge of a disastrous failure.
Said spiral starts when transactions are delayed and the network’s utility gets reduced. Its investors decide to stop “dumping” coins causing a sharp price drop. Miners, then begin mining other coins due to the network delay and the lower price of the cryptocurrency, which makes mining less profitable.
The cycle would continue, with both miners and investors completely abandoning the coin, creating long delays in transactions times and preventing the “difficulty” adjustment from occurring to “break” the vicious cycle.
Peter Kim, a co-founder of a developer tool named Nitrous described the cycle as, “Transactions get backlogged to a point where the coin becomes basically useless.”
Think that this scenario seems a bit far-fetched? Over the weekend, it came extremely close to happening. As everyone’s eyes were glued to the price of Bitcoin, they weren’t looking at the bigger picture.
Over a two day period, Bitcoin’s hash rate fell 50 percent as miners switched from Bitcoin to Bitcoin Cash because of the profit, as shown in the graph above.
This drop indicated that the transaction times on the bitcoin network doubled, from 10 minutes to about 20 minutes or more.
A Bitcoin Analyst, Jimmy Song, explained why Bitcoin Cash suddenly became so attractive to miners. He said, “Bitcoin Cash was up to 100 percent more profitable to mine because of the price run-up. When it’s more profitable to mine Bitcoin Cash, miners will go there. When it’s more profitable to mine Bitcoin like right now, miners will go there.”
Bitcoin crisis avoided
Bitcoin Cash’s own mining difficulty increases ironically saved Bitcoin and halted the death spiral. The algorithm governing its adjustments generated the rise in its difficulty, making Bitcoin Cash less profitable to mine.
Bitcoin Cash’s developers didn’t want volatile hash rates within their cryptocurrency, so they adjusted their difficulty adjustment rules on November 13th by way of a hard fork, but it was too late. By the time they initiated the upgrades, many of the miners had already switched back to bitcoin.
According to fork.lol and the graph above, Bitcoin has gained about 20 percentage points from where it was at before the drop and the death spiral has been avoided.
Featured Image: theatlantic.com