The bitcoin price fell below the landmark $200 point at 07:24 (GMT) today, putting it back into territory not seen since late 2013.
Within five minutes of crossing that threshold it had plunged further to $185. Less than 15 minutes after that, it fell to $179.13.
The latter price is significant as it lies just below 1,000 Chinese yuan, the currency involved in 65% of bitcoin trades, possibly crossing a lesser-acknowledged psychological barrier.
At press time, the price had rebounded somewhat to $205.54.
The last time the bitcoin price crossed the $200 line was in late October 2013, heading in the opposite direction on its rocket-like rise to the all-time high of over $1,100.
The only time the bitcoin price has been anything like so low since then was within the walled garden of Mt Gox, after the exchange had stopped bitcoin withdrawals in February 2014. In the world outside, the price did not drop below the mid-$500s.
Holders looking to spend their bitcoins can now only dream of such purchasing power returning in the near future as miners produce bitcoins at a rate of 25 coins every 10 minutes and payment processors convert coins instantly to fiat to shield merchants from price uncertainty.
A sub-$200 bitcoin is bound to have an emotional effect not only on bitcoin users and speculators, but also cryptocurrency's opponents in the media, some of whom have been reporting bitcoin's death since 2011 with almost parental finger-wagging.
Although most of the focus over the past 48 hours was on the price of bitcoin, the hash rate has also experienced a massive drop, followed by a fast recovery late Tuesday. According to Blockchain charts, the hash rate went from 358,478,281 GH/s to 229,513,534 GH/s yesterday, before recovering to about 300,000,000 GH/s.
The problem is clear – the combination of a high difficulty level and low prices means mining is simply no longer profitable. The current difficulty level is 43,971,662,056.09 and was adjusted just a couple of days ago. This means that it will be at least two weeks before the network readjusts to a new difficulty rate.
However, it all depends on the time between blocks, which went up to more than 12 minutes last night, dropping to under 11 minutes this morning. If more miners decide to cut their losses and pull the plug, the time will go up again, resulting in an even longer wait for the next difficulty adjustment.
Mining revenue is simply too low to sustain the network at this price point and miners are faced with a tough choice – if they decide to power down, the next difficulty level will be attained later, but if they keep going, they will continue bleeding money. If the price does not recover, both scenarios are damaging to miners and bitcoin in general.
Low prices to remain?
Many of those who decide to keep mining at a loss will be forced to unload their bitcoins as soon as possible, at any price, just to cover part of their expenses. This will increase supply of cheap BTC in the short run, depressing prices even further.
If a significant number of miners decide to halt operations, we could see a substantial drop in the difficulty rate, but not in two weeks – depending on the size of the cut, it could be much longer.
It is a vicious cycle, as the hashing power will still be there and many will be eager to pounce as soon as the difficulty drops. This could in turn increase the next difficulty level and repeat the cycle once again, introducing even more volatility and uncertainty into an already shaken system.
This piece was co-authored by Nermin Hajdarbegovic.