What happens if/when Bitcoin stabilizes in price
I've been doing some analysis of the "HODL" movement (which attempts to use social pressure to convince people to hold on to Bitcoin and other holdings, rather than taking the normal profit-taking steps after such a large appreciation.) I believe that HODL goes against what a cryptocurrency is supposed to be about, since to be valuable it has to be useful, and to be useful, people need to be using it, not holding it. I will explore this in another article next week.
HODL is based on a faith that the price of a bitcoin will continue to rise and perhaps never fall. But to be useful it needs to stabilize, or at the least get to a period of fairly modest and predictable appreciation. You can't do smart contracts for more than a few days when the currency is highly volatile.
So what if Bitcoin did stabilize in price? What would it mean? I'm not sure it works.
If the price were stable, the mining capability would also have to stabilize at a level where mining is close to a break even proposition. If it's seriously profitable, then more people will bring up more mining gear until it's just modestly profitable. In addition, as people bring up newer generations of mining gear that are more profitable, the older gear becomes money-losing, and rational miners would shut it off. (This has not been happening for a couple of reasons I explored in other posts.)
Barely profitable mining just isn't a place to park your money. To help, miners sort transactions according to the transaction fees they offer. Right now, there is a serious limit on how many transactions can be included in every block. Only transactions with decent fees will get done right away, or perhaps at all. Lots of effort is underway to increase the number of transactions that can go in a block, possibly some day all the way up to "as many as desired." If this happens, transaction fees become quite low, which is what the world wants. Another option gaining in popularity is the idea of moving most transactions off the main blockchain, using tools like the Lightning Network. This also limits transaction fees.
In a world where mining is barely profitable, the slightly less efficient miners drop off. This pushes all the mining to only the most efficient gear, run in the one place with the cheapest electricity. Today, Bitcoin is too volatile, and the profitability too high because of appreciation. There is never "one place." In a stable coin, there is, after enough time. It could be the place with the cheapest offering of power and cooling. It could be the place with the cheapest price on mining gear. It could be the place with the strongest non-profit-oriented motivation for mining.
That place is China today. China makes the chips, they have the cheap electricity, and most of all they have currency controls which make it very attractive to pay for mining costs with RMB and reap rewards in bitcoins that can be turned directly to dollars. Today, the fast appreciation of bitcoin has made it worth mining in other, less profitable places. In a stable world, that might not be true. All the mining might go to one place, which has serious consequences.
Those consequences get even stronger when a halving arrives. Every 4 years the basic mining reward (today 12.5 bitcoins per block) gets cut in half, suddenly. In a world of stable prices, that will make every miner seriously unprofitable instantly unless there suddenly are large transaction fees. Any individual miner should immediately shut off, and only cooperation will keep the network operating at all. That cooperation would require the offer of fat transaction fees -- which people will offer to keep the network alive. They need to pay them, and pay them forever, or you get an unstable condition where unprofitable miners drop off, and the mining rate drops, which delays the next difficulty recalculation. Once the recalculation is done, more miners are profitable and they rejoin, and blocks come too fast, and so on.
The high fees would push more and more transactions off the blockchain, making it harder and harder for those needing to be on the blockchain to afford the fees. The few transactions still on the chain will end up costing a fortune. (At today's price of $10K, the mining reward is $18M per day. After the next halving, sustaining that would require transaction fees of $9M per day split among only the transactions that can't be moved to another, cheaper method.) If BTC reaches the $100,000 that HODLers dream of, it's $90M per day that must be coughed up to avoid the chaos of massive miner drop-off.
Unless it keeps going up. Massive appreciation hides all these flaws. But nothing can keep going up forever. Doubling every 4 years might not be impossible but it's difficult to imagine -- and if it became dependable, every investor in the world would do nothing but HODL, and nobody would actually do transactions. Something has to give.