Bitcoin Forum

In a reply to a post I made before, franky1 mentioned about "mining cost" and that got me curious. So lately, I've been reading some articles about mining and how it affects the price of bitcoin. Before I continue with the topic, know that I am not a miner, if it's not obvious yet, and I don't completely understand how bitcoin mining works. If I say something inaccurate, please point it out.

Here's what I understand for now:

Miners set the mining cost as a "base price" for Bitcoin. The mining cost is also known as the cost required to produce bitcoin and it basically consists of hardware cost + electricity. If we are going to compare this to a private manufacturing company, they also have what they call as "manufacturing cost", which consists of materials + labor + overhead, for every product they produce. A private company would never allow the price of the product go below its manufacturing cost and, I think, the same can also be said to miners. Collectively, they will never allow the price go below the mining cost.

If miners can set a base price or better understood as "bottom" by some at a particular period, how do you think this affects the reputation of Bitcoin as an investment asset? I've always believed that nobody completely controls the price but it can be swayed up or down by different parties based on good or bad news and rumors.



P.S.

If you notice, I did not discuss the mining technical details like hash rates and difficulty since I don't completely understand it yet as I said before. If you want to discuss it in the comments, feel free to do so.

Well, miners don't set the price.

Bitcoin price is just supply and demand (and manipulation). If a miner can no longer mine while remaining profitable, he can:

• Stop mining, sell his hardware
• Stop mining, keep his hardware in case the price goes up or the diff goes down
• Keep mining at a loss, hodl the mined BTC
• Keep mining at a loss, sell the mined BTC

There is no way to know what the actual mining cost is... Some miners in China have big "factories" and pay pennies per Kwh, have a direct link with the ASIC manufacturer (without customs charges or big shipping costs) and pay their workers only a fraction of what a western worker would cost. For them, the actual "cost" of one bitcoin is pretty low.

Compare this with a miner in my country, where the power costs 0.27€/kwh, where you have to pay big bucks to get an ASIC into the country, where the minimum wage is >1500€/month. For this miner, the actual "cost" is pretty high. It's only when the diff falls really low, and the odds of a 51% attack rises, the price can actually be influenced by miners. Offcourse, miners do have some indirect effect on the price: whenever they start a mining war, or decide not to mine 0 fee transactions, they push down the price due to the negative press.


So, it's basically the other way around: the market dictates the price, the miner decides if he can mine at the current price, or if he has to shut down his operation.

The effects of miners are mostly just:

1. Hashrate: increased security, higher mining difficulty
2. Selling pressure: it's safe to assume that most miners(especially the mining businesses) need to sell the bitcoin they mine, for them to be able to pay for hardware and electricity(and probably taxes and stuff) and to remain a profitable business(or gig, for the smaller miners).

Mostly, it's just point #2. While prices are NEVER guaranteed to increase(because it's still completely depends on supply and demand regardless of supply distribution), this is the reason why a lot of people are assuming that the mining difficulty approximately a month and a half from now is going to pump bitcoin's price because the selling pressure from miners is going to be cut in half because the bitcoin that's going to be "minted" rewarded per block to miners is going to be halved(hence why it's called the "halving").

For more information about the halving: https://www.bitcoinblockhalf.com/

Miners don't set the price. They follow it. They're slaves, not masters. They don't control a 'base price', the market does. The miners have to suck up what the market forces on them and adapt accordingly.

The market doesn't give a shit about mining cost, or whether miners go out of business. It's not its problem. It's theirs. No one else needs to care. There'll always be someone out there willing to mine and who can do it for a profit.

The only area where miners have any influence over price is the coins they mine and own and what they do with them which makes them just another market participant.

It would give, if the mining cost will become non profit for all mining facilities, than there will be no confirmed transactions, so the value of the miner is for me always in front of all

You are aware there's a handy algorithm that always makes sure mining adjusts to costs, right? That forever deals with profitability. There will never be a scenario where it's not profitable for anyone.

Saying never? I would like that this can be true, but, it always can be a 1% of chance for the opposite scenario

unless you can find a logical explanation (based on your theory of course) about why price fell down from $20000 to $3200 (-84%) in 2018 or from $1200 to $150 (-87.5%) in 2014 or all the other ridiculously big drops that we had in the past, you don't have a "theory".
in all of these "cycles" the cost of mining was a lot higher than the bottom of the price that we reached but it still got there. of course the cost was never near the peak but it was at least 70% of the peak but price fell a lot lower than that.

so how do you explain that?

and here is another thing to think about, if "the bottom is set by miners" then why so many of them leave each time price drops?

you can't have a rule if it has a lot of exceptions, that is no longer a rule it is a coincidence.

Miners are too small in number to control the price. Bitcoin market is much bigger than the number of miners. There are thousands of traders who are holding and trading much larger sum of bitcoins than miners. So the price of Bitcoin is controlled by the free forces of market i.e. demand and supply.

So can the mining cost exceed the profit from mining? Well yes! If we measure in terms of fiat currency, mining may not be profitable some times. But in such condition, an important characteristic of perfect competition market i.e. 'Free Entry and Exit of Firms' will operate. Since bitcoin market is close substitute of perfect market due to large number of buyers and sellers, this characteristic will exist in Bitcoin too. During low profitability, some miners may leave mining, which will decrease the mining difficulty which in turn reduce the mining cost. So in long run, mining will always return to equilibrium and will be profitable.

Everything that is traded on open markets and has high enough liquidity will have it's price decided by the market (supply and demand). Any producer, including miners, can't just "set" the price and expect people to buy at that price, they either sell at the market price or wait for a better price.

Theoretically the price can be affected by hashpower, since it translates directly to security, but on practice there's a huge room variance, we've seen Bitcoin's hashrate both rise and fall by big percentages without any effects on the price.

The miners these days currently do not dictate how bitcoin prices move due to the limited number of coins they are mining every single day. If some of them were able to keep their coins years before, however, that could be a different thing. Nowadays, what miners do is keep the coins they are mining and letting go of some for maintenance and operating costs. The volume of their sells does not amount to something substantial in today's terms, but still considerable since imagine how many blocks are getting mined per day, and it's not as if they are liquidating their coins every single day.

Bottomline is, it's still supply and demand sans the active participation of miners. They just mint fresh coins and move transactions around nowadays, but they are no longer a huge part of the trading scene as some of them are just doing mining for the profit and to not waste their investment.

I am always compelled to respond to this topic because I feel there are so many myths and misunderstandings.


Explain how a miner can prevent the price from going below their cost. How does a miner stop everyone else from selling their bitcoins below her cost? How does a miner force buyers to pay more than her cost?

Also, the idea that nobody will ever sell an investment at a loss is ridiculous. People sell things at a loss all the time. I recently sold a bunch of stocks a loss, and I was happy to do it because not only will it reduce my taxes, but I will buy it all back later this year after the price has dropped even more.


I agree but note that it doesn't make sense to keep mining at a loss (if you don't have to) because you can buy the bitcoins for a lower cost.


That is a very common misconception. The supply of bitcoins continues to increase toward 21 million despite the halving. Furthermore, as the supply of bitcoin increases, miner "selling pressure" (if that is really even a thing), as a portion of the entire market, continuously drops. These days, the influence of miners as a group on the market is tiny. Compare the total daily market volume to the 1800 BTC that miners sell.

i can only think fo two ways it might be possible for mining to unprofitable for everyone:

• The price drops enough to cause the difficulty to drop to 1. If the price is low enough such that even mining with a difficulty of 1 is not profitable, then nobody can mine profitably (in general). Note that this was the case when Bitcoin first started.
• There is enough unprofitable hash power (for whatever reason) that the difficulty is high enough to make it unprofitable of the rest of the miners. Note that this is one way for someone with a lot of money to take over Bitcoin -- cause enough miners to drop out that your share rises to 51%

you are confusing two different things: 1) affecting the price 2) setting the base price (ie. controlling it).

the first one is possible and the second is not. anybody can affect the price, even you. if you buy or sell bitcoin you are affecting the price. the degree of that effect is different though. miners do affect the price as they are also a part of the market and they do sell the coins they "earn" on the market whether on exchanges or elsewhere. but they are not a big enough part of the market to be able to control the price and dictate what the base price is.
in fact nowadays thanks to the bigger size of the market and distribution of the volume among multiple exchanges (as oppose to one exchange having >85% of the volume back in 2013) it is not possible to dictate anything although manipulation is still possible.

There is (yet) another reason why people would keep on mining even when it's unprofitable as long as they BELIEVE the price is going to rise again (or the diff is going to drop).

If you own a big mining farm in a western country (>1000 ASIC's) you most likely need a staff of 3 or 4 people (guys that have crypto backgrounds, guys that have technical backgrounds, security,...). Next to this you're renting a serverroom.

Your fixed costs each month include (guesstimations):
A writeoff of your ASIC's (€60.000/month for the ASIC's since i estimate they need to be replaced at least once every 4 years, and they cost > $1000/piece)
A writeoff of other equipment
A fixed wage of your employees (4 employees @ €5000/month = €20.000/month)
A fixed cost for your serverroom (€100/U/month. 4U/ASIC=  €400.000/month)
The fixed cost is almost €500.000/month in this fictional example. This cost remains the same whether the owner is mining or not...

Offcourse, at these costs nobody could ever run a mining farm anymore... Most mining farms probably have less employees, or use crappy serverrooms instead of professional. The main point still remains tough: even with few employees and a crappy serverroom, you'll have fixed costs (the writeoff of the ASIC's for example)

These are fixed costs. The premise of this excercise is a western mining room owner that is currently mining at a loss, but believes it's only a small dip. If he turns off the machines, he might get some discount from the serverroom owner since he's no longer using power... But he'll still have to pay for the writeoff of the ASIC's, the writeoff of the other equipment, the employees and PART of the cost of the serverroom.
If the income he gets from mining is bigger than the discount he gets from the serverroom owner, it's better to keep on mining at a loss, since the net loss will be smaller than stopping altogether.
And it doesn't matter if i grossly overestimated the costs, if it's a one man operation,... There are always fixed costs and variable costs. The variable costs decrease when you turn off your ASIC's, the fixed cost remains. As long as you mine more than the variable costs, it's a good idear to keep mining.

Do realise that this situation can only exist if the owner of the farm believes it's a temporary dip in price, and if he has reserves or can get a loan. I know there are also countries with almost no protection for the employees so it's easyer to fire them over there...

I mean, I never said that the supply isn't going to increase. I just said that the rewards are going to be cut in half hence potentially half the selling pressure from miners. Not sure which part of what I said you're referring to specifically?

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EDIT: oh ok. I think I see the problem. Bad choice of words and being not too specific actually changed the meaning of my previous statement. Whoops.

What do you mean by "selling pressure"? Don't you mean supply?  Also, bitcoins are not consumed. Bitcoins sold by miners yesterday are still available to sell today, so the supply is always increasing regardless of who owns it.

I completely agree with you.Miners do not dictate the price to the market.Basically, this is done by people who have a large number of bitcoins on their hands.If you analyze this question more deeply it becomes clear that .almost no one is engaged in bitcoin mining at home.This is done by large companies that still make a profit using various tools.

I do support that majority of BTC related ppl think so

What I specifically meant by lower selling pressure: Miners' rewards per block are halved, hence fewer mined bitcoins could be dumped into the markets by the miners. Because some(or most?) miners needs to sell their coins to pay for electricity and stuff.

Not sure which parts of my statements looked like I was saying that bitcoins are being consumed. I think we're misunderstanding each other here lol.

I'll try to make my point clear.

Miner selling pressure today is still selling pressure tomorrow (but not by miners) because bitcoins sold by miners today are available to sell by someone else tomorrow. So, in other words, the total selling pressure is always increasing. The halving may reduce the selling pressure by miners but it does nothing to reduce the continuously increasing total selling pressure.

I hope that was clear and to the point.

Now, in the end, if you want to say the the halving causes the price to rise, you must also include a caveat that you assume that demand is always increasing faster than the supply. The problem with that assumption is that it isn't. In fact, since the supply is predetermined, it is really the demand that affects the price, and not so much the supply.

I apologize for the pain felt by the economics purists caused by my conflation of supply with aggregate supply and money supply, and demand with aggregate demand.

Well, true. I was specifically talking about decreased selling pressure from miners in the first place so I agree. My point was just that there's going to be decreased selling pressure from miners; to what extent? We don't know.

And I agree. I'm pretty sure I made that clear in my statement that price increase due to the halving was never guaranteed:

I have observed that upon believing about miners setting the higher price of Bitcoin over time, especially when bitcoin halving is about to happen, people especially those who are new to the market are the one's who are selling and taking advantage of this hype to make sure that bitcoin's price will pump very soon. Meaning, over time, bitcoin does really increase of its price and whether we believe it or not, miners does actually have an influence to the market price of bitcoin even if they aren't directly selling their BTC.

Thank you everyone for taking the time to discuss and share your knowledge. I assume that most of you are miners or have experienced mining before.

My thoughts after reading your comments
- It seems I have over estimated the capacity of miners in affecting and dictating the market price of Bitcoin. While writing my post, I did assume that there's a group of miners that are similar to what we know as "whales" which can set a base price. That may be true before but that's not the case today apparently.
- The influx of new investors over the years decreased the influence of miners and made this more of a free market.

That's it for now. 


P.S.

What's with all that "dirt" in the comments and names? It looks cool but it's a bit annoying when reading.

It's an April fools gag. For a "discussion" concerning it: https://bitcointalk.org/index.php?topic=5236946

When they say that Bitcoin cannot be controlled, I don't think they are referring to the price of bitcoin, it's Bitcoin itself; what I'm trying to say is that no one can shut down Bitcoin or give any orders on how things should be done, but as for the price, there are lots of factors that will always affect the price of Bitcoin. But, we all believe that demand and supply is the main thing when it comes to what plays the main role on the price of Bitcoin.

Just like you have mentioned the news as one of the things that controls the price of Bitcoin - bad news can affect the price of Bitcoin creating panic which will then make investors to sell their coins and cause a decrease in the demand of Bitcoin. So when you break down everything, it's all still demand and supply.

As an economic the only way miners affects bitcoin pricing is still through the force of demand and supply. The miner mine bitcoin and almost majority of them dump it in exchange with the views of funding their mining farm. I strongly accept the fact that after halving bitcoin will be better in pricing because few coins will be mine par day.

I've found myself over-estimating some miners and supposedly long-time holders too, since 2017 I've heard quite a number of them give up when I thought they surely of all people know how the cycles come and go. But then again, I haven't met anyone close to being a whale. Greater minnows and dolphins or whatever lies in between whales and minnows, but I suspect the true whales are either anonymous or known only to whales themselves, who don't necessarily even partake in these forum discussions.