I'd like to put the a question to the community regarding the inherent stability/instability of Bitcoin. I hope it's not off-topic since it's more a economics-type question. So, here's the scenario in question that I think might lead to an instability:
As we know Bitcoin mining is a race, whoever finds a new block first publishes that block and, if there is a fork, hopes that consensus is reached in favour of his block. The costliness of this race is the key feature of the game-theoretic aspect that makes Bitcoin safe. Now suppose that
- mining capacity is concentrated in the hands of a few big miners and
- using debt they invest heavily in order to add capacity faster
- and they eventually generate Bitcoin faster than the market demands.
If supply vastly outstrips demand the buying power of Bitcoin should fall considerably. If the miners' investment is based on debt the depreciation is violent enough the 'supply side' will see several, if not all of the miners go bust. Then Bitcoin will appreciate, and the cycle will repeat.
This type of cycle is typical for the commodity markets, e.g. gold and oil. So here's the
Question: Is Bitcoin susceptible to the same instability?
The assumptions are not too outlandish and the overall logic is sound, I think. We do see a concentration of mining power. The growth of global mining capacity is not so obvious, but there are reports of a "mining capacity glut". Whether the big miners have a sound balance sheet is not known, as far as I can tell. But it's plausible that they borrow money to expand. So, potentially, all the ingredients are there to make Bitcoin intrinsically just as volatile as gold, silver, oil, etc.