Bitcoin Forum

P.S. This is a honest and serious question and not intended to spread FUD or anything. I just am trying to wrap my wits around this concept and understand if it's workable.
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Is bitcoin price sustainable with mining & electricity costs continually leaving the Bitcoin ecosystem?

I am a firm believer that some day a single bitcoin will be worth over $10,000.

But I can't wrap my wits around the math when it comes to the cost of electricity required to sustain a larger and larger market cap. I say this because the total cost of mining typically grows until it is close to the value of the coins being mined (because it is profitable to do so until they balance out. This is a form of arbitrage).



Some math:

At today's prices of roughly $230 USD per bitcoin, 3600 bitcoins per day are valued at about $828,000 USD. That means it is roughly that much mining/electricity cost per day to mine bitcoins and to secure the network.

To sustain a $230 USD price of bitcoin it will cost $302 Million per year in electricity & mining costs.

To sustain a $1000 USD price of bitcoin it will cost $1.3 Billion per year in electricity & mining costs.

To sustain a $10,000 USD price of bitcoin it will cost $13.1 Billion per year in electricity & mining costs.



The thing that has me concerned is all that money is continually leaving the bitcoin ecosystem!

How can this work with that much money leaving the system constantly?



update: Someone pointed me to this PDF file which seems to ask a similar question: http://www.academia.edu/7666373/An_Order-of-Magnitude_Estimate_of_the_Relative_Sustainability_of_the_Bitcoin_Network_-_3rd_Edition

for leaving the bitcoin ecosystem, you mean that they are dumped for fiat?

wouldn't the miners in this case pay the bills with bitcoin directly? it would be certainly possible when bitcoin will reach 10k and become mainstream as a result

This is offer and demand,is there is high offer and low demand,the price goes down, and that is what's happening,besides the manipulation of the market

I think that mining doesn't affect the bitcoin price so much. It's all about adaption and trading volume that would cause a single bitcoin to be $10k as you say.

You have to remember that it is a temporary situation, once the block reward is halved a couple of times more mining should find a more natural very low cost equilibrium between security and low voluntary TX fees.

AKA free market, which bitcoin always will trade in since it's a decentralized coin. It all depends on demand and supply, if the miners stop mining new coins the supply would  be lowered and ergo the demand would rise.

Yes that's exactly what I mean.


This is currently the only outcome I can think of as well. If some day electricity and mining equipment is payable with bitcoin directly and it isn't sold immediately.

Until that day, it's like we have a hole in our bag? Money leaking out constantly by bitcoins being sold to pay for electricity and mining equipment?

OP, your confusion appears to be not understanding the causality.

Price is caused by supply and demand.  Energy costs
will then rise or fall based on the price as competition
works to mine coins.
 
You are looking at it the opposite way, as if the price is
primarily influenced by how much miners are spending
on it.  This is probably the wrong way to look at it because of
the difficulty adjustment.

IOW, miners do set the prices, true...and if there was
a fixed amount to how much it actually cost to mine
a bitcoin, you would see prices above those levels,
but as we know, the cost can change because difficulty
can change.

As someone mentioned, the block subsidies will
keep halving so the supply will become more and more
fixed.  miners will have to rely on fees.

a better question is how much transaction volume
will be necessary to maintain low fees?

I was trying to square a similar circle when trying to figure out how quickly Bitcoin adoption would start to hinder the profits of banks.  But then realised everyone who buys bitcoins is handing their fiat to the seller, who in turn puts it in their bank.  In a sense, money never "leaves" the fiat system in favour of Bitcoin, so the same technically applies in reverse too.  But obviously there is an effect on the value and market cap when there's less demand.


But would the energy suppliers keep the bitcoins?  Or would they dump to fiat?  All very tricky to foresee.

yeah we have a hole right now, but as long as the price not skyrocket, but will increase slowly, to give the time to bitcoin to reach mainstream status, it will not be a big deal i guess

also remembers that the halving will help this situation strongly, and the second one is coming

Miners dont really set the price, I mean, sure if they are dumping they cause falling prices pressure on the markets but miners follow price. If the price is on a huge downslump, difficulty will curve to match the current rate of btc profitiability for miners. Its been happening this entire past year. The reason why diff has gone from 40% increases to only 5-10% and more than a few times -% is because price has been on a steady decline. The demand for mining hardware decreases, supply of said hardware decreases, miners buy less and diff incriments are very minimal.
WHEREAS if the price stayed above $1000, you can bet yourself there would be at least 10+ other mining ASIC 'suppliers' and we would see constant 20-40% diff increases.

Heck, a perfect example of this was when ASICMiner announced over 2EHASH worth of chips to come into production. This announcement was at one of the higher price points of this bubble and ..what ya know.. that amount of chips never saw the light of day because of the huge price decline.

At current difficulty, for big miners it costs ~40 USD to mine one bitcoin. 230 USD is not the cost. It is the revenue they are making now for each bitcoin out of 40 USD investment. Net profit is around (230-40) = 190 USD, which is used partly to cover their initial investment.

And where have you taken that calculations from?
So,why miners have been turning off machines when the price has fallen down?

Yeah, I highly doubt this. This takes into account what elec rates & initial equipment cost & building cost...etc?

Yes, that's the way things go - basically. Bitcoin's security can only be achieved by having a proof-of-work system that can't be circumvented. Providing that proof has to be inherently expensive, otherwise it would be worthless. We've now pushed margins to such an extent that the limiting factor of Bitcoin mining is the cost of hardware, space, and electricity. I don't see how it can be done differently...

Those numbers are not true at all. Where did you get (make up) those from?

Yeah I guess the electricity and mining cost are the elements that causes there to be security in the end.



Is the block halving really helping though? I mean, the difficulty won't necessarily go down just because the block reward halved. So because the difficulty will stay more or less the same, the amount of electricity required to maintain the network will remain the same too. The value of the bitcoins which are being sold to pay for the electricity will go up, that's all.

From where Do you know ? ithink its all about bitcoin miner :)

If you truly believe this is what is happening right now then you should be buying as many bitcoins as you can.


If this much money is leaving the ecosystem each day and the price is still maintaining its relatively steady state, then next year when the mining reward is halved that would mean that the money leaving the ecosystem that is currently maintaining stability will be cut in half.

That is a lot of money not leaving Bitcoin. Thus it is certain that the price will rise by that much money every day.

So consider these low prices as a great thing. You get to buy more bitcoins between now and the halving.

it have last almost 2 years since winter of 2013, the price over $220, so at this price, it is sustainable.
If the price is continue to rise, it may not sustainable any more, but the market will fix it.

I like your optimistic viewpoint of it. However, If we're going to factor in this halving then I feel that when the halving occurs the price of bitcoins will probably roughly double accordingly (because they are twice as scarce now. It may not be an immediate reaction. Probably a bit delayed, but I feel this will equal out), so while the number of bitcoins being sold to pay for mining and electricity costs will be half as many in quantity, the total value exiting the bitcoin ecosystem will be roughly the same. So, I don't see the halving as a saving grace to my concern of money exiting the bitcoin ecosystem.

I could be missing the bigger picture, or other factors, which make this not something to worry about. And that is what I am seeking by the purpose of this thread.

I think the answer is that it does cost money to secure the network when it is based on a proof of work algorithm which expends energy as the proof that work was executed. If it were free to do the work, then there would be no stopping anyone from doing unlimited "proofs of work". But then it would be worthless.

With that being said, the reason I have a difficult time grappling with the workability of all the bitcoins being sold and the money exiting the system is best explained by doing a comparison: If you all of a sudden stopped mining gold, the value of gold would not go down. It would probably go up in fact (being scarce). But if you all of a sudden stopped mining bitcoin (pretend for sake of argument that the network still continued to confirm transactions so it actually had value to people), then the value of bitcoin would slowly drop lower and lower as the value of the entire network gradually leaves in the form of payments to electricity bills.

Yes, it is true.

But it's been requiring almost a million dollars per day entering the bitcoin ecosystem just to maintain this $220~ value. I agree it has been working like this so far.

But if the money stopped entering the system, the value of bitcoins would actually drop continually until the value was worth closer and closer to $0 because all the money went out toward electricity bills. (again this is hypothetically if no new money was entering the bitcoin ecosystem).

Now contrast that to gold and if no new money was entering the gold ecosystem, does the value of gold go lower? No, it stays the same without some kind of daily cash inflow just to keep it at the same value.

So it seems bitcoin has an upkeep cost and gold does not, when it comes to maintaining the value the same. And if that upkeep cost isn't paid (in bitcoin's case) then you get a gradually eroding price.

And let it be known I own bitcoin and am a complete supporter. But I like to play devil's advocate when trying to understand something, and especially something as dear to me as bitcoin is.

It's really hard to see what value people assign to a Bitcoin. It's value is entirely dependent on what someone else is willing to trade for it, be it merchandise, or some other currency. In that regard, it doesn't seem all that different than the value of a US dollar. It's value clearly isn't derived from the paper and printing. While you can burn dollars for heat, that's pretty much it.

I don't see a cost associated with actually holding Bitcoin. The only cost I see it's volatility. But for the most part Gold has some level of volatility as well, doesn't it? When you put that Gold coin into your safe deposit box it was worth X dollars. When you take it out and try to "spend" it, it might be worth more or less than when it went in. The biggest difference is that Gold (and most precious metals) have alternate uses that put some kind of "floor" under the price, Jewelry, plating, dental work, and so forth have a real value outside of it's monetary exchange value.

Bitcoin has none of that. There is no "alternative use" for a Bitcoin, besides it trade or exchange value.

Eventually we'll see how well it pans out. At the present moment, the big driver of all the mining hardware is the 25BTC "reward" contained within. When that falls to 12.5 and then 6.25, there will be less incentive to have Petahash mining farms sucking down megawatts of electricity. I don't see any way "transaction fees" can support the current huge investment in mining hardware.

The problem is that I think this will take decades, unless Bitcoin collapses in value first.

Bitcoin is meant to be inflationary in its first years. We are going from $0 worth of bitcoins to billions. The initial goal was to try to hit that sweet spot where new money coming into bitcoin matched the mining costs going out.

One example of money coming into Bitcoin is something like bitwage. I am currently converting all of my paychecks to bitcoins every 2 weeks through bitwage. Let's say that I am bringing in 10 bitcoins worth of pay every 2 weeks (it's actually a bit more but we will go with 10 for ease). That is fiat currency being converted to bitcoins. Essentially money flowing into the bitcoin economy.

With 3600 bitcoins being created each day, that is 50400 bitcoins created every 2 week pay period.

If only 5040 people do the same as I do with their pay, then all mined bitcoins leaving the bitcoin ecosystem have an equal amount of bitcoins entering the ecosystem. That one action cancels out the mining costs.

At the current price, there are about $25 million worth of bitcoins "leaving the ecosystem" (if you go with the horrible assumption that bitcoin miners have no interest in bitcoin whatsoever) monthly.

That is peanuts in the world of finance. That amount of VC money flows into Bitcoin companies regularly. I know they are not buying bitcoins but they are investing in the technology which then makes Bitcoin better and encourages even larger amounts of funds to flow into Bitcoin.

And think of all of the people who say that Bitcoin is used just for drugs. The world drug trade is currently over $300 billion per year. If Bitcoin made up just .1% of the world drug trade, all mining costs would be paid for (just from that one industry).

The remittance market made over $600 billion last year. Gold value is in the trillions, e-commerce, currency exchanges, etc. etc...

Worrying about the tiny cost of Bitcoin mining compared to the incoming flow of money is like complaining that the cost of paper for $100 bills is going to tank the dollar.

Will the mining cost prevent Bitcoin from being worth $1 million/BTC any time soon? Sure. That is the built in inflation of about 12% (next year, 6% and 4 years later 3%...). But the money flowing in is why we are not at $1/BTC anymore.

no

I agree. People are talking about at most $25 mil (in reality, i don't think that miners sell more than 50% of mined bitcoin) per month in negative flow, maybe less.
For a planet with 7 bil people this is not just miniscule, but microscopic or, to be specific, less than 0.4 cents per mo per each earth inhabitant.