Bitcoin Stack Exchange is a question and answer site for Bitcoin crypto-currency enthusiasts. It only takes a minute to sign up.
Sign up to join this community
Miners will only mine bitcoins if the reward they get from mining outweighs the cost of mining it.
The network difficulty is adjusted every 2016 blocks (approximately every 2 weeks).
If the price suddenly collapsed by a large percentage such that the new minted bitcoins would be worth less than the electricity it costs to mint them, what would would happen?
The network difficulty rate would be stuck at the unprofitable rate until 2016 blocks are minted before it gets adjusted.
The block reward is composed of two parts, the block subsidy and the transaction fees. While the block subsidy is fixed respective to the height of a block, the transaction fees are a product of the blockspace market. If Bitcoin's exchange rate dropped precipitously, the profitability for miners would drop of course. Since each miner has a different situation, it would not be just one spot at which every operation suddenly becomes unprofitable, but rather a range, though.
As the exchange rate drops, some miners would stop mining. This would reduce the block cadence. Then, as transactions get processed more slowly, we'd see feerates of unconfirmed transactions go up as users vie to be included in the next block. Between the added revenue from transaction fees and the immense hardware investment miners have fronted, hopefully there would be enough incentive for some miners to continue mining. Then with the next difficulty adjustment, the difficulty would drop and mining profitability would increase again, likely causing some of the miners that had paused their operations to return.
Note that it would not take 2016 blocks for the first difficulty adjustment in most cases, as the exchange rate could drop at any point in a difficulty epoch. If the hashrate dropped significantly in the middle of an epoch, the first difficulty adjustment would likely not reflect the full drop, though.
You can see a similar effect around halvings: after the block subsidy dropped from 12.5 BTC to 6.25 BTC on May 12 2020, the difficulty dropped by 6.0% and 9.3% in the two following adjustments.
what would happen if the BTC price collapsed such that the reward for mining cost less than the cost of mining?
Cost of mining is different for everyone and difficult to speculate how will miners react to a sudden decline in price of bitcoin in terms of USD.
Electricity cost and Hardware are main variables when calculating cost to mine bitcoin: https://insights.braiins.com/cost-to-mine
Miners can also be prepared for any change in price of bitcoin in dollars or hashrate with futures market for BTCUSD and hashrate.
Such events (huge drop in price or hashrate) has happened in the past and everything was resolved automatically in few days. Some users may experience issues if block time interval is varying a lot and we don't see any blocks for a long time.
In a world as it was initially (many independent decentralized miners) many miners competed against each other who would solve proof of work first. In that world to bring cost of reward down what was sufficient was just some miners stop mining that currency. That works for many crypto now, miners switch from one to another in response to "market" price.
But for Bitcoin as I understand there is one main pool controlling like 50% miners, such cost reduction way is not very efficient. So as I see in such circumstances cost of each transaction in BTC would go up.
