Bitcoin Forum

I was trying to estimate the value of the hardware that has been purchased by BTC Miners so far.  By doing some back-of-the-enveloppe calculations, I came up with some interesting figures:

1.  If we assume that cost of GPU is about $2000/Gh/s ($400 for 200 Mh/s) which was the norm until early 2013 - up to network speed of 33 TH/s
2.  If we assume that cost of ASIC was about $200 / GH/s between March 2013 to Dec 2013 (up to network speed of 2400 TH/s)
3.  If we assume that cost of ASIC is now about $20 / GH/s (up to 19 000 TH/s)
4.  If we assume that cost of ASIC will be about $3 / GH/s (ref new 1 TH/s Cointerra rigs).

Then the cost of the current installed hardware to mine Bitcoins would have been (33 000 GH x $2000) + (2 400 000 x $200) + (19 000 000 x $20) = $926M for 12M coins, about $77 per coin. If we add the electricity cost and some PCs in there, we could reach the $100 value that BTC was going for, in the most part of 2013.

Just in January, 10 PH/s was added to the network, to produce an additional 110k BTC.  At $10-20 per GH, that is $100M-200M for 110k coins - or $909-1800 per coins.

The next generation will allow about $3 per GH - but at one TH/s per machine added to the network - the network speed will increase by another 100 fold by October (ref TheGenesisBlock).  So, another 2 000 000 000 GH/s at $3 ($6B), for an additional 1M coins - $6 000 per coin...  

Therefore, it is very conceivable that BTC will be worth $5 000 to $10 000 by the end of 2014.  Just by the value of the hardware added to the network. In addition, that "investment" in hardware will probably be THE reason why the bitcoin network will not die anytime soon.

EDIT:  This adds another dimension to Bitcoin - we have estimated that there has been about $1B spent already on this "experiment".  That is very close to the birth of an industry - it is hardware, software, electricity production, new ventures, etc.  Another $6B in expenditure is expected for 2014.  For the politicians out there, Bitcoin is more than just a "bubble" - Bitcoin creates jobs ! - talk to the ButterflyLabs, Cointerra, KNC of this world!  Even AMD never sold so many high-end Graphic cards in history!

EDIT2: New graph!

The red line is the Bitcoin Hashrate over the last 4 years (on a log scale - values are on the left of the graph).  The hash rate can also translate in $$$ injected in the Bitcoin economy.

The blue line is the Bitcoin market price over the last 4 years (also on a log scale - values are on the right of the graph).  

Which one is leading which?

Data courtesy of Blockchain.info.


https://i.imgur.com/20KcPEb.png

My opinion?  I believe the hash rate knows where it is going (miners) - the market follows, or tries to keep up with the pace, and gets distracted along the way by good/bad news, by market manipulation attempts, heist on websites, government acceptance/rejects, silk road, etc.  But eventually, gets back on track!

The cost of mining has very little (if any) effect on the price of Bitcoins. Instead, the price determines the cost of mining (except these days when people seem to be happy to mine at a loss).

The cost to mine doesn't create the price of bitcoin, that's the market's job.

If it was the mining cost that decided the price of bitcoin, bitcoin would be over $1000 now because most miners are losing money.

10K is very hard to even imagine. I mean,come on,people are gonna lose BTC the second it reaches 2k or something. You saw the sell-walls at the 1k mark a few weeks ago.

Last summer was last summer. That is a million years ago in bitcoinland. The bitcoin price was increasing crazily. There wasn't much hash rate. You have to live in the present, not last year.

I totally disagree! The model you are talking about works for fiat currency. It's not going to work with cryptos. Cryptos are the exact oposite of fiat so you have to reverse your thinking aproach.

I think Robert Shiller is wrong. I dont think he understands the algorythm behind bitcoin. He just uses technical analysis for bitcoin market price which in fact looks like a bubble.

I think you are right and i came up with same conclusion couple of days ago. Its the scaresity that drives it price not the present market usefullness (which is great by the way).

This has nothing to do with how currencies work. It is basic microeconomics. Price affects mining because if the price drops, then fewer people mine because it is no longer profitable for them. The difficulty drops and the costs go down. If the price rises, then more people mine because they can now make a profit. The difficulty goes up and the cost goes up. In the end, the cost of mining is around the value of the bitcoins mined (in theory).

Now, please explain the mechanism behind how the cost of mining affects the price. Keep in mind that the amount of newly mined coins is only a small fraction of the trading volume on the exchanges.

I don't understand why people continue to cling to your belief. Perhaps it is because the miners that are currently mining at a loss (which is most of them right now) pray that their mining will cause the price to rise so they don't feel so bad about it.


Scarcity is a factor, but you have to be careful because demand is an equal factor. If there were only a single bitcoin it would be extremely scarce, but if nobody wanted it, its value would be 0 despite its scarcity.

Well if there would be a single bitcoin mined at the cost of 100000000000000000000000000000$ it would be worth exactly that. For example one gram of a moon dust is worth aproximately 5mln dollars... not because everyone wants to have it but because it's scarce!!! Get it? :)

Bitcoin is a finite resource and the harder there is to obtain some, the bigger it's price will be. Nobody with any common sense to business would buy a miner for 40k$ just to mine 20k$ worth BTC and sell it for this price. The price drop after the 10 fold increase is just because the fact that miners were waiting to sell their ore. When ore reaches a certain level they sell driving the price down. If none of them would sell and just kept their BTC price would grow expotentialy to infinity because Bitcoin is finite resource! They actualy destabilize it's value by selling BTC on a peak. But it's totally OK to do so because they are going to use newly gained $ to buy a better miner (that will drive price up again in the future).

Call me crazy man but if i could buy a 40k$ miner right now just to harvest 20k$ worth BTC i would buy it right now (unfortunatly i dont have 40k$).

If nobody wanted that bitcoin, then it might be worth 100...000$ to you, but it would be worth 0$ to everyone else.


If miners stopped selling mined bitcoins, there would still be 12 million bitcoins. The price would not go to infinity. Are you claiming that when the last bitcoin is mined, the price will go to infinity or zero?


A sane person would use 40k$ to buy 40k$ worth of bitcoins instead of buying something that will mine only 20k$ worth of bitcoins.

just... wrong thinking there... Moondust is so damn expensive because it requires a space mission to obtain some.



True however the price would be driven by the increase of hashing power - difficulty to obtain bitcoin. Price will go to infinity only theoreticaly when last bitcoin is mined. Sum of all bitcoins price will be just equal to energy and resources that were required to produce all of those. And since the closer we get to the mining last one of them the more resources and energy are required to produce them. You cannot look at cryptos like you look at ordinary fiat money or gold. In 20 years i can imagine someone buying a miner that will have like 5godzillionhash/sec for 50 bilion dollar just to mine 1 bitcoin which will be worth perhaps 25billion.

Not exactly because you not only mine 20k$ worth bitcoins but you also increase the hashspeed of the pool that will eventualy drive the price up so your bitcoin will be worth more than 20k$ eventualy. Also you have a miner that you can sell for some amount of $ even though it wont mine much but with the new BTC price this "not much" maybe just enough for someone else to profit as the BTC price increases :)

I totally appreciate miners and without them bitcoin would not exist in its present form.

The price can't go to infinity because then I could buy everything in the world with a single satoshi ... and so could everyone else.


My 40k$ worth of purchased bitcoins will always be worth double your 20k$ worth of mined bitcoins regardless of what happens to the difficulty. Spending 40k$ to buy 20k$ worth of newly mined bitcoins makes no sense when you can buy 40k$ worth of previously mined bitcoins.

FINALLY, someone who is not brain dead on this forum and is able to clearly see the relationship between miners and price. See my last posts, i've basically came to the exact same conclusion. Well done buddy you have some brain cells. Price does not regulate miners, but the other way around, through hoarding after miners realise they can't get ROI on their initial investment on the hardware. Best well disguised pyramid 21st century.

So, just because something is scarce, it puts a gun to the head of a potential bitcoin purchaser, drives them to log on to create an account on an exchange, and purchase bitcoin at ever increasingly-higher amounts?

Increased network hashrate does not fuel a demand for bitcoin.

Because miners create the artificial scarcity when they wre not prepared to sell at a loss

FTFY

Miners have no significant effect on exchange rates. Newly mined bitcoins are only a small fraction of total exchange volume. Furthermore, you have no evidence that miners act the way you say they do, which by the way is irrational.

+1, odolvlobo.

Well said.

Any large buyer or holder can affect the exchange rate. Miners as a group are a large holder over the long term and can affect the exchange rate if they act as a group. But there is no evidence that a significant portion of miners act as others describe -- holding bitcoins until the price rises to the point where they can sell mined bitcoins at a profit.

Furthermore, that behavior depends on miners acting irrationally -- the cost of mining is a sunk cost and should have no bearing on when a miners sells, and mining at a loss defeats the purpose of mining (assuming the miner intends to make a profit). Right now, miners are currently mining at a loss and most people don't understand sunk costs, so irrationality is a weak argument. But in general we should expect most miners to be mostly rational.

It doesn't matter if there is one person mining, 100, 1,000,000, or 10,000,000. The same amount of bitcoins are "supplied;" 25 bitcoins every ten minutes (with the obvious caveat of the rising difficulty bumping that number slightly higher than the block target, etc.). Somebody gets them.

The cost of mining equipment in total doesn't really matter. If there is an increasing amount of miners such that the difficulty continues to rise, it encourages hoarding - that much we already know. This aids indirectly in scarcity. But the amount of hardware invested into mining equipment does not drive the price of bitcoin up.


The minute that speculators stop buying bitcoin on the exchanges at the current price is the minute bitcoin's price declines. And when bitcoin's price declines, the prospective new buyer's cash doesn't flow into the buy side of the market. Because afterall, nobody wants bitcoin if bitcoin can't prove itself as a competent store of value.

New cash flowing into the exchanges is what will drive bitcoin's trading value up. Not the increasing sum total of the value of mining hardware.

 
But the elephant in the room is, why the f*** would someone trade fiat for bitcoin (which incurs an exchange fee) merely to turn around and spend it on a good? It's rhetorical - you just wouldn't do this. It's not even a one-for-one transaction; it's a loss for that consumer because of the exchange fee. Someone will surely chime in about lower transaction fees lowering the cost of goods in a world where bitcoin merchant adoption is widespread. But that just isn't a tenable argument, because it's not enough of a reason for the average person to exchange his trusty fiat for bitcoin. It probably is for us, because we get it. But the average person just won't.

The only reason *for the average person* to buy bitcoin at present is speculation that it will prove itself as a good store of value; aka, be an investment. Whether that is measured against fiat, or buying power, it doesn't matter.


It's the epitome of a bubble.

WRONG.  Nearly ALL miners have lost money.  Many ASICs were BTC-only pre-orders only do you think the HASHFAST guys are psych'd that it cost them 50BTC per rig and they *may* recover 5BTC of that?  Even Avalon Batch3 was 100 BTC for rigs that returned 50 BTC.  Lets not even get started on BFL if you had paid in BTC 13 months before they delivered...

The only actual "profitable" BTC ASIC was Avalon Batch1, all other gains were due simply to the price increase.  

If the mining equipment will never produce more bitcoin then it costs to purchase and operate (in bitcoin), then it is better to just buy (or hold) bitcoin instead. Your profit/loss from mining should always be calculated in bitcoins as you do not know what will happen to the price in the future.

Just because you profited in fiat from bitcoins appreciating, doesn't mean that the mining generated a profit.

Yeah because the Genesis block has been soo accurate before  :P  When moving up generations that have 100X more power (CPU>GPU or GPU>ASIC) the growth is insane for a bit but it HAS to slow down eventually as power isn't free  ;)  

Think about it this way.  I used to spend 4KW to generate 3GH back in the day with GPUs.  Today I spend 6KW to get 3TH (55nm).  The new 28nm chips are still 2KW for 1.6TH (cointerra) - we are beginning to hit that curve where the power draw improvements are starting to taper off...

I don't think we will hit 100 times faster than we are today this year - maybe next year  ;)

But yes $5K to 10K coins is believable.  Why?  Because its been growing by a factor of 10 every year.  $1, $10, $100, $1000 whats next?   The bigger question in my mind is the adoption curve, and where might we be on that?

No need to guess, you can make a poll, or look at my signature. I did those polls long time ago, basically majority of miners /traders will never sell more than 10% of their holdings each year. And based on that poll, I calculated daily fresh coin supply on market is around 5000 coins, forever

The exchange volume is not really useful, since a trading bot can sell and buy one coin 1 million times in a day and generate 1 million volume, that does not mean anything

Mining cost set a ceiling for the exchange rate, so it never rise much higher than mining cost. Because you can always mine at a lower cost if the exchange rate is too high,  no matter how much more money are waiting to be invested in bitcoin, the exchange rate will never rise above the mining cost too much

When the exchange rate falls, mining become more expensive than buying, so many investors will give up mining and go to exchanges to buy. However, existing machines won't be shut down, since their only use is to mine bitcoins, their owner now no longer be able to acquire enough coin through mining, they will also go to exchanges to buy (Suppose that miners are the main driver for bitcoin economy, they will buy as much as they can)

So the mining cost act as a mean point of price fluctuation

A very important contribution of mining is to guard the security of the network. Since it is a international decentralized network, there is no centralized authority to protect it, the only way to protect itself is through hash power. Those money invested in mining infrastructure might not see a return, but they are helping to build up the safety of bitcoin network

And, I still don't understand why people are giving up a currency with limited supply for a currency with unlimited supply, this has nothing to do with price, since a currency with unlimited supply means it should worth 0

You guys act like the price effect from this relationship would only happen for one day? Once again with that linear and horrible problem solving thought process. What about 7 days? what about 1 month? What about 6 months?

That's a bunch of nonsense.

1. Correlation is not the same as causation. Having written that, ...
2. It is obvious from the graph that price is leading hash rate. However, ...
3. You can manipulate the visual relationship by adjusting the graphs vertically. If you lower the the hash rate graph it is obvious that price is leading hash rate. If you raise the hash rate graph then it will appear that the hash rate is leading the price.

The first major price jump was shortly after the reward halving.
Second major price jump was when the difficulty went up x100.

"Those who can't do, teach..."

He is winner of Nobel Memorial Prize in Economic Sciences in Memory of Alfred Nobel established by Sweden national bank ...Alfred Nobel has nothing to do with this, as by the will he established Nobel Prizes in 1895...Swedish national bank established memorial prize in economics in 1968...thus, i don't really care much what he says...he has some opinion, sure, but he has no crystal ball to claim like its 100%, when nobody really knows yet...he can be totally wrong or totally right...we'll see in few years...maybe you have not Yale university, but if you invested in BTC, for me you are much smarter than all the educators in the world...

But adoption is wedded to new people buying bitcoin on the exchanges, because we can't all mine. As we're seeing, merchants adopting bitcoin is actually the easy part, contrary to what many people believed previously. Getting new people to trade their fiat for bitcoin is the hard part.

Buying bitcoin = adoption. And more people buying bitcoin = a price increase in bitcoin.

That's why I think that when we "sell" the idea of bitcoin to noobs, we need to sell it as an investment and not just a revolutionary technology/currency.

I think it's important to note that the Bitcoin price is not controlled by the amount of hash or network difficulty but the free market.

Those selling BTC in the exchanges does not necessarily have to be miners they can be anyone maybe some business who accepts BTC at their store and want to convert into USD etc. Most of those buying BTC, speculators, believers etc don't look at the network hash or network difficulty. They look at a variety of different things ,including speculative events, future adoption etc.

However, to say that mining has no effect on the price would be wrong. As the cost of ASIC's etc and the investment made by miners increases the prices they are willing to sell at are higher. E.g. in the mind of the miner he has just invested $1000 USD in ASIC's and he does not want to sell at a cheap price as his costs of production are higher, Not to mention that his new ASIC is now generating even less BTC because of the high network difficulty. In effect, two psychological reasons why he would want to sell at a higher. Of-course, their are more psychological effects of a miner e.g. Price crashes he wants to sell in fear of the price crashing further etc.

So really, Bitcoin price is not controlled by the hash and network difficulty but miners do have an effect on the price because undoubtedly they are a considerable % of the supply within the exchange market. 

Compare like to like. Compare buying and holding coins with fiat vs. buying mining gear with fiat, mining coins and holding those coins. Which is more profitable? Please do the math and tell us if you would have made more money if you had just gone out and bought bitcoins with your fiat.

OT: This quote by Satoshi is relevant:


In fact that whole thread is worth reading.