$BTC (+0.72%) - A perfect control loop🔄️
What always fascinates me about Bitcoin is the fact that it is a completely self-regulating system that works through a multitude of interlocking control loops. You could say it's a masterpiece of engineering.
This relates to various technical and economic aspects of Bitcoin, which I would like to briefly explain below:
1. mining and difficulty
One of the most fundamental control loops in Bitcoin is mining and the associated difficulty.
-> Bitcoin price rises:
When the price of Bitcoin rises, mining becomes more attractive as the yield in the form of block rewards and transaction fees becomes more valuable.
-> Hashrate increases:
More miners join the network, which leads to an increase in the hashrate (total computing power in the network).
-> Increased level of difficulty:
To ensure that blocks continue to be generated on average every 10 minutes or so, the mining difficulty adjusts to the current hashrate every 2016 blocks (approximately every two weeks). The higher the hashrate, the more difficult it will be to find a valid block.
-> Exit of unprofitable miners:
If the difficulty level becomes too high, the most inefficient/unprofitable miners will have difficulties and will inevitably leave the network at some point.
-> Decreasing hashrate:
This leads to a decrease in the hashrate and a subsequent downward adjustment of the difficulty level, making mining more profitable again for the remaining miners.
This cycle ensures that the network remains stable and blocks are generated consistently, regardless of short-term fluctuations in miner activity.
2. efficiency and renewable energies
This point is actually part of point 1, but is so often misunderstood that I thought I would make it a separate point.
-> Efficient miners:
Only the most efficient miners who use the cheapest electricity can operate profitably in the long term.
-> Cheap electricity:
The cheapest electricity often comes from overproduced electricity from renewable energies such as solar and wind power.
-> Promotion of renewable energies:
The demand for cheap electricity can lead to more investment in renewable energy sources to meet this demand. This leads to the promotion and further development of renewable energies.
Through this mechanism, Bitcoin indirectly contributes to the promotion of renewable energy by additionally monetizing the use of overproduced green electricity and driving efficiency in energy use. As a result, Bitcoin's energy mix is constantly becoming "greener" all by itself, without the need for any regulation from politicians, as can be seen in the following link:
https://woocharts.com/esg-bitcoin-mining-sustainability/
3rd block reward and halving events
Another central control loop is the regular halving of the block reward, the so-called halving events.
-> Block reward:
Miners receive a certain amount of Bitcoin (currently 3.125) as a reward for adding a new block to the blockchain. This reward is halved approximately every four years, more precisely every 210,000 blocks.
-> Less new Bitcoin on the market:
Halving reduces the number of new Bitcoin in circulation, which lowers the inflation rate of Bitcoin.
-> Rising price:
A lower supply with constant or increasing demand tends to lead to a price increase.
-> Media attention:
Halving draws additional media attention to Bitcoin every 4 years, which increases demand.
Interesting side fact: The Bitcoin Halving always takes place every 4 years and, interestingly, always in the US election year. When a new president comes in, there is usually a lot of investment, which means: "We print a lot of money to stimulate the economy". Accordingly, Bitcoin, as an absolutely scarce commodity, always encounters a rising amount of US dollars. (The question I ask myself is whether Satoshi Nakamoto also thought of something like this, or whether Rainer Zufall was at work here🤔)
These halvings are an integral part of the Bitcoin protocol and are the reason for Bitcoin's absolute scarcity of just under 21 million units, which can be mined until the year 2140.
4 Transaction fees and network usage
The dynamic between transaction fees and the use of the Bitcoin network is another important control loop that is always underestimated by many.
-> High transaction volume:
When many transactions take place on the network, transaction fees increase as users are willing to pay more to have their transactions prioritized and thus be included in a block faster.
-> Higher fees:
Miners naturally prioritize transactions with higher fees, which leads to faster confirmations of these transactions.
-> Network utilization:
High network utilization and correspondingly high fees lead to fewer transactions being carried out and people switching to 2nd-layer technologies such as the Lightning Network to save on fees.
-> Fees decrease:
This in turn leads to lower fees on the main layer, which in turn leads to more transactions being carried out on the main layer.
This mechanism helps to use the network efficiently and to control the prioritization of transactions.
5 Ecosystem development and adoption
The technological development and adoption of Bitcoin form a further control loop that promotes the growth and stability of the network.
-> Technological development:
Improvements in the Bitcoin ecosystem and infrastructure (such as better wallets, more secure exchanges and more efficient payment processors) make Bitcoin safer and easier to use.
-> Increasing adoption:
More businesses and individuals are adopting Bitcoin, increasing demand.
-> Price increase:
As demand increases, so does the price of Bitcoin, which in turn attracts more interest and investment.
-> Infrastructure investments:
A higher price and increasing usage leads to more investment in infrastructure, which in turn drives further adoption.
This positive feedback loop ensures that Bitcoin continues to grow and develop.
6 Market psychology and volatility
Market psychology and the volatility of Bitcoin also go hand in hand and form an important control loop. Humans are always driven by fear and greed, which has also been demonstrated time and again in Bitcoin's market movements in the individual cycles.
-> Price increase:
When the price of Bitcoin rises, this often attracts more attention and speculation.
-> Market psychology:
The increased attention and hype leads to FOMO (Fear Of Missing Out), which in turn leads to further price increases. Then the price rises because the price rises.
-> Corrective movements:
Extreme price rises often lead to market overheating, followed by corrections as investors realize gains or panic sell. Greed then turns to fear and people leave the market as quickly as they entered it.
-> Stabilization:
After a correction, the market can stabilize until a new market cycle begins.
7 Regulatory differences and global adjustment
The regulatory differences at a global level are also interesting.
-> Strict regulations:
If a country introduces strict regulations or bans, miners and investors may be forced to move to other, friendlier jurisdictions.
-> New opportunities:
Countries that are open to new technologies take advantage of these opportunities to profit from the migration of miners and investors from restrictive countries. A prominent example is the relocation of Bitcoin mining from China to the USA following the Chinese ban. The miners are no longer computer nerds in the basement - they are professional companies that generate profits and pay taxes.
-> Competitiveness:
Countries with favorable regulatory frameworks and lower energy costs attract miners, which strengthens their economic competitiveness in the technology sector.
-> Promotion of innovation:
This dynamic encourages innovation and investment in countries that support Bitcoin, leading to global competition for the best framework conditions for these technologies.
This feedback loop shows how the global landscape of Bitcoin usage and mining is constantly adapting to regulatory changes, opening up opportunities for economic growth and technological development.
Conclusion
The Bitcoin ecosystem is full of self-regulating loops that contribute to the stability and robustness of the network. These mechanisms ensure that Bitcoin functions and grows not only as a store of value or digital currency, but also as a technological and economic system. By forcing miners to be as efficient as possible and to use cheap, often renewable electricity, Bitcoin also contributes to the promotion of sustainable energy sources. Furthermore, adapting to different regulatory frameworks shows how dynamic and resilient the Bitcoin ecosystem really is.
I would of course be delighted if a few of you read my post and add your two cents.
Feel free to leave a Like👍 if you are interested in such (somewhat longer) posts, then I will post something like this more often or alternatively leave a 🆘 if you are not interested in this content at all and you think to yourself "What was he actually smoking🚬".
Your Burner
(Sorry, I couldn't resist the joke😂)