relationship of bitcoin prices and mining price

[odolvlobo]

Price totally gets affected of mining. There was one research made by Adam Hayes, i was listening on one of Bitcointalk podcast.

I just went to check and saw he posted all here: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2372041

He is mistaken. Anybody can write a flawed paper.

There is no mechanism by which the cost of mining drives the price of bitcoin. Mostly people that believe that just confuse correlation with causation, and make bad assumptions.

[techgeek]

I feel the price of bitcoin has no or little effect from mining, since its based on a # of factors.

Like whales, and fraud, and other things that add in the price on the daily. Huge sell offs, like KNC moving bitcoin so its not just mining at all since its a small portion based on people views with only the mining difficulty is wrong.

[expert4knowledge]

I spoke with the CEO of BTCS, which has launched a mining farm down in the Carolinas (if I remember correctly). Based on the current hash rate and their price of electricity, they are still making a profit even with where the price of BTC is currently. And then there are chips that are coming out this summer that argue that their efficiency and hashing power will enable miners to remain profitable even if bitcoin were to drop underneath $100/BTC.

So we may expect to falling price below 150$ and it is not good for BTC investors, is it true?

[expert4knowledge]

-snip-
When block reward halve, we can expect big increase of price

You can also expect some of miners just shut down their miners due to high electricity cost. At first halving , there was another expectation. ASICS race. Since there were more energy efficient miners came to the market , BTC price just went crazy due to this. However this time it will be a mistery. I still think there will be some increase at price but not too much.

But still, we have an opportunity about this halving by watching LTC first halving.

or you can expect the miners to remain the same and the price too, because the first will have a better technology that can sustain the price halving, because their electricity will halve too, so instead of having 80%(100-20 form electricity) they will have 40% (50-10)

Is it possible that someone describes halving for me?
Thanks

[expert4knowledge]

Price totally gets affected of mining. There was one research made by Adam Hayes, i was listening on one of Bitcointalk podcast.

I just went to check and saw he posted all here: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2372041

He is mistaken. Anybody can write a flawed paper.

There is no mechanism by which the cost of mining that drives the price of bitcoin. Mostly people that believe that just confuse correlation with causation, and make bad assumptions.

Thanks if you are correct I think I get my response but others have different viewpoints.

[Amph]

-snip-
When block reward halve, we can expect big increase of price

You can also expect some of miners just shut down their miners due to high electricity cost. At first halving , there was another expectation. ASICS race. Since there were more energy efficient miners came to the market , BTC price just went crazy due to this. However this time it will be a mistery. I still think there will be some increase at price but not too much.

But still, we have an opportunity about this halving by watching LTC first halving.

or you can expect the miners to remain the same and the price too, because the first will have a better technology that can sustain the price halving, because their electricity will halve too, so instead of having 80%(100-20 form electricity) they will have 40% (50-10)

Is it possible that someone describes halving for me?
Thanks

in which sense? instead of 25 coin miners will mine just 12.5, and instead of 3600 con per day(actually they are a bit more, like 3800 some times) they will mine only 1800-1900

but if they are spending 20% of their profit in electricity, with the next asic, it is legit to assume that they will spend much less, let's say 50% less, so only 10% will be reduced from their profit, which also will be halved, because of the block reward

so in the end less profit overall for them, but it will be still profitable to mine

[hazenyc]

Price totally gets affected of mining. There was one research made by Adam Hayes, i was listening on one of Bitcointalk podcast.

I just went to check and saw he posted all here: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2372041

He is mistaken. Anybody can write a flawed paper.

There is no mechanism by which the cost of mining drives the price of bitcoin. Mostly people that believe that just confuse correlation with causation, and make bad assumptions.

of course cost determines price. in a market where a large number of producers compete to sell their product, they will undercut each other driving price down to cost of production. what goes for a barrel of oil, or any other produced commodity goes for bitcoin too. electricity goes in, bitcoin comes out. The one unique difference is that bitcoin has a fixed rate of supply (1 block each 10 minutes) so the elasticity of supply manifests itself in the difficulty instead of changing the rate of supply to meet changes in demand.

so what happens if mining hardware becomes twice as energy efficient? holding difficulty constant, miners will be able to sell each bitcoin at a lower and lower price until it again approaches this new (lower) cost of production. If difficulty increases, this will serve to increase the cost of production (the same hashrate will now find effectively less BTC per day than before the difficulty increased) so it acts as a bit of a stabilizer -- so the question is what will progress faster? The network size (which raises difficulty and cost of production) or technological progress?

[hazenyc]

I feel the price of bitcoin has no or little effect from mining, since its based on a # of factors.

Like whales, and fraud, and other things that add in the price on the daily. Huge sell offs, like KNC moving bitcoin so its not just mining at all since its a small portion based on people views with only the mining difficulty is wrong.

don't confuse market price with expected value. The expected value of a share of stock for some company may be arrived at with some complex and accurate model by a big time investment bank. But the market price will fluctuate with variations in supply and demand at any given moment, and in fact it may never converge to the theoretical value, or deviate from it for prolonged periods of time.  The analysis says mining difficulty is just one of a number of factors and it is certainly not the only factor, although it is influential.

[hazenyc]

Hello all, I want to know what relationships exist between mining prices and bitcoin prices and more clearly now bitcoin extraction is about 400 bucks so is it possible that bitcoin price goes more than 1000

in a competitive market, economic theory says that price = marginal cost = marginal product.

If you take the margin to be say a day, the marginal cost is the cost per day to mine = (price per kWh∙ 24 hr/day ∙ W per GH/s)(GH / 1,000)
where GH is your mining hardware's hashing power in gigahashes, W per GH/s is the mining efficiency per gigahash/second (equivalently Joules per gigahash). Take a moment to compute your marginal cost.

Good. now here's how you calculate your marginal product (how many BTC you'd expect to find per day):
 = [(block reward ∙ GH)/(difficulty ∙ 2^32)/3600 sec/hr] ∙ 24 hr/day
where block reward = 25, GH is your hashrate in gigahashes and difficulty is the mining difficulty right now for bitcoin. Go calculate that.

since cost is in units of $/day/hashpower and product is in units of BTC/day/hashpower -- and since they are theoretical equivalence (for why, read an intermediate microeconomics textbook) we can divide one by the other to get 1. But since the units are different if we divide marginal cost/marginal product the value will be scaled up for the dimension $/BTC or dollars per bitcoin.. in other words you'll get the price of bitcoin which is a breakeven level for you individually.

Now if you do the same exercise using the prevailing averages for the whole bitcoin mining network, you'll get the theoretical fair value of one bitcoin in dollars.

-------------
Let's play for fun using some estimates for those network averages and using an arbitrary 1000 GH, or 1 TH miner (it will work with any hashrate you choose so long as you compute both the cost and product using the same chosen hashrate).

Average global cost of electricity per kWh = 13.5 cents, and the average mining efficiency is 0.75 W/GH/s.

(yes I know some people mine for very low cost in Iceland or whatever and some people have underclocked S5's at .4 W/GH/s.  It is important to be referring to AVERAGES and not the best out there nor the worst. It's also true that the average network efficiency is trending towards lower watts per gh/s over time).

Ok so the network cost per day = .135 x 24 x .75 x (1000/1000) = $2.43 per day per terahash. Got it.

Let's do the same for average marginal product for our hypothetical 1000 GH. The difficulty today is 49692386354.8938,
 [(25 x 1000)/(49692386354.8938 x 2^32)/3600] x 24 = 0.010173175 BTC per day per terahash.  Fantastic.

divide cost by product: ($2.43/day/TH)/(0.010173175 BTC/day/TH) = $238.86 per BTC.
The current observable market price is $244 per BTC, or something like 2% off from the prediction.

-------------
So what happens when the block reward is halved? Well the marginal product is cut in half while the cost remains the same, or in other words the cost to produce a bitcoin goes up. That means that your personal breakeven market price has just doubled. If the network average also reacts similarly, the market price should also double.
If, on the other hand, the network average has really efficient hardware, it may be the case that while you are priced out of mining anymore because your personal cost has doubled, the market cost may only increase by a little because the average network energy efficiency may be lower next summer than it is now.

You can tinker with what happens when the other variables change such as the mining difficulty and cost per kWh.

[odolvlobo]

of course cost determines price. in a market where a large number of producers compete to sell their product, they will undercut each other driving price down to cost of production. ... The one unique difference is that bitcoin has a fixed rate of supply (1 block each 10 minutes) so the elasticity of supply manifests itself in the difficulty instead of changing the rate of supply to meet changes in demand.

so what happens if mining hardware becomes twice as energy efficient? holding difficulty constant, miners will be able to sell each bitcoin at a lower and lower price until it again approaches this new (lower) cost of production. If difficulty increases, this will serve to increase the cost of production (the same hashrate will now find effectively less BTC per day than before the difficulty increased) so it acts as a bit of a stabilizer -- so the question is what will progress faster? The network size (which raises difficulty and cost of production) or technological progress?

You cannot assume that difficulty is constant. If miners can produce bitcoins for less than their value, then they will increase their capacity and the difficulty will increase until the cost of mining reaches the value of the mined bitcoins. I suppose there might be shocks that shift the supply curve temporarily, but otherwise, value drives cost and not the other way around.

So what happens when the block reward is halved? Well the marginal product is cut in half while the cost remains the same, or in other words the cost to produce a bitcoin goes up. That means that your personal breakeven market price has just doubled. If the network average also reacts similarly, the market price should also double.

Miners are not the only traders. Newly mined coins are only a small part of the market. Miners have only a small influence, if any.

The result of the halving will be that enough miners stop mining that the difficulty and cost adjust to a point where mining is profitable for the rest. There is no mechanism by which mining cost affects the value.

[Amph]

bears in mind that miners don't need to wait for the price to rise, to increase their hashrate, they can do it indirectly by enhancing their miners technology, which will consume less

one good thing is that the progress of this should not be so fast in comparison to the halving, at best 1:2 ratio(every two years they tech will evolve vs 4 years for the halving)

i think satoshi did calcute this in the equation, this could be another reason why he choose 4 years and not two, to permit some earning for miners, without the need that the price increases

[hazenyc]

You cannot assume that difficulty is constant. If miners can produce bitcoins for less than their value, then they will increase their capacity and the difficulty will increase until the cost of mining reaches the value of the mined bitcoins. I suppose there might be shocks that shift the supply curve temporarily, but otherwise, value drives cost and not the other way around.

No kidding you can't, but in scientific inquiry being able to see how things change by holding all else constant gives insight into how the world works!
Also cost of production influences price in nearly every market for produced goods, not only commodities. There is a ton of research on this subject in economics. Look up "cost plus pricing" to get an intro.

As for miners vs. traders all you need is enough miners to sell close to cost for this to work, you don't need each one to. In fact, many miners hoard or speculate on price. On the other hand, those in the business of mining are producers who sell as soon as they are made. Especially the Chinese mining farms. -- Take the analogy with the oil market. There are many more non-producers involved in the oil market - whether it is traders, consumers etc. and yet the price of oil usually trades around its cost of production (extraction + refinery & transport)

Incidentally, Satoshi Nakamoto knew this. In a quote from 2010 when he still posted on this forum:

The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price. In later years, when new coin generation is a small percentage of the existing supply, market price will dictate the cost of production more than the other way around.

I know it may hurt your brain that cost influences value, but just how the sun does not revolve around the earth and that black holes do in fact exist, many truths across many disciplines work counter to what the human brain intuits.

[odolvlobo]

You cannot assume that difficulty is constant. If miners can produce bitcoins for less than their value, then they will increase their capacity and the difficulty will increase until the cost of mining reaches the value of the mined bitcoins. I suppose there might be shocks that shift the supply curve temporarily, but otherwise, value drives cost and not the other way around.

No kidding you can't, but in scientific inquiry being able to see how things change by holding all else constant gives insight into how the world works!
Also cost of production influences price in nearly every market for produced goods, not only commodities. There is a ton of research on this subject in economics. Look up "cost plus pricing" to get an intro.

As for miners vs. traders all you need is enough miners to sell close to cost for this to work, you don't need each one to. In fact, many miners hoard or speculate on price. On the other hand, those in the business of mining are producers who sell as soon as they are made. Especially the Chinese mining farms. -- Take the analogy with the oil market. There are many more non-producers involved in the oil market - whether it is traders, consumers etc. and yet the price of oil usually trades around its cost of production (extraction + refinery & transport)

The critical difference is that bitcoins are not consumed. That changes everything. Your oil, commodity, and produced goods analogies are all not applicable to the Bitcoin market. In the Bitcoin market, producers have little influence on the supply of bitcoins, so they little influence on the price.

[BillyBones]

Hello all, I want to know what relationships exist between mining prices and bitcoin prices and more clearly now bitcoin extraction is about 400 bucks so is it possible that bitcoin price goes more than 1000

It will reach more than that, Bitcoin has real value, it has bright future,  Bitcoin is the revoulutionary technology, that enables a new way to send payment over the internet, you can think of it as an open accounting system. An accounting system which has real value, security and legitimate transparency.

[Erdogan]

You cannot assume that difficulty is constant. If miners can produce bitcoins for less than their value, then they will increase their capacity and the difficulty will increase until the cost of mining reaches the value of the mined bitcoins. I suppose there might be shocks that shift the supply curve temporarily, but otherwise, value drives cost and not the other way around.

No kidding you can't, but in scientific inquiry being able to see how things change by holding all else constant gives insight into how the world works!
Also cost of production influences price in nearly every market for produced goods, not only commodities. There is a ton of research on this subject in economics. Look up "cost plus pricing" to get an intro.

As for miners vs. traders all you need is enough miners to sell close to cost for this to work, you don't need each one to. In fact, many miners hoard or speculate on price. On the other hand, those in the business of mining are producers who sell as soon as they are made. Especially the Chinese mining farms. -- Take the analogy with the oil market. There are many more non-producers involved in the oil market - whether it is traders, consumers etc. and yet the price of oil usually trades around its cost of production (extraction + refinery & transport)

Incidentally, Satoshi Nakamoto knew this. In a quote from 2010 when he still posted on this forum:

The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price. In later years, when new coin generation is a small percentage of the existing supply, market price will dictate the cost of production more than the other way around.

I know it may hurt your brain that cost influences value, but just how the sun does not revolve around the earth and that black holes do in fact exist, many truths across many disciplines work counter to what the human brain intuits.

It seems our god was wrong on this, or just had a bad moment, or was falsely cited.

The correct is that In the free market, the cost of any commodity tends to gravitate to the price. The mechanics is adjustment of volume - with too low price the production capacity is reduced by closing the least effective producers, until price rises to meet lowered marginal cost, the cost of the least effective remaining producer.  I thought he knew this well, because he designed mining regulation accordingly. (In bitcoin and gold, it is the closing of mines thus reducing difficulty (bitcoin) or increasing the marginal productivity (gold) that is most important, the small number of new coins does not change the potential supply that much)

The effect is appearant in all commodities, but it is obscured somewhat by the extended time it takes to reduce or increase production. Increase of gold production takes about 10 years, reduction of oil production takes 20 years, hereof 10 years to moan and yell and complain about the low prices.

The free market is necessary, and if some socialist tries to forcibly sell a commodity to the current cost, you know what happens, the cost rises and people end up with something expensive they have not asked for. Edit: Or (what they do now with oil) if they use subsidies including low interest rate to prolong the ineffective production, the price may go lower than cost.

What you describe is the labour (or cost)  theory of value, which has been debunked for a hundred years. By Mises (he again).

Basically: The value is in the heads of the market actors, it is subjective, and if they don't think it is worth the money, they won't do the exchange. What it cost to produce is of no importance. Try to sell a five wheeled car for just 25% more than a four wheeled car.

[ifightformerkel]

the bitcoin prices and mining price has nothing to do with each other imo.
The bitcoin price rice only trought supply and demand.

When a lot more people accept bitcoin the price will rice very fast or when a big company allow to pay with bitcoins like amazon.

[Erdogan]

It could be useful to know this if you need to sell a house in a declining market: The buyers decide what it is worth. What you bought it for, or what the building cost was, means nothing. If you don't sell, you reduce the supply, to the advantage of other sellers.

[hazenyc]

It could be useful to know this if you need to sell a house in a declining market: The buyers decide what it is worth. What you bought it for, or what the building cost was, means nothing. If you don't sell, you reduce the supply, to the advantage of other sellers.

A house is a unique item, so is a piece of jewelry or artwork etc. Bitcoin, like oil is a reproducible commodity. You can't compare a reproducible commodity (where one bitcoin is just like every other) with something like a house.

Supply and demand always determine the market price, cost of production is indicative of a theoretical value - and the market price may deviate for long periods of time from that or perhaps never even converge with it. If there are more speculative buyers than miners selling, well the price will go up and miners will make more profit because there cost is the same --- BUT the high price will induce more to miner which will increase the difficulty and increase the cost of production in a negative feedback loop.

What are shares of Microsoft worth? Supply and demand right now is the market price. But there is a value based on fundamental and technical analysis with various pricing models that will indicate a theoretical value that it should be. For bitcoin, cost of production is that theoretical value only.

Also, I am not invoking labor theory of value a la Marx or Smith. Austrian economics has a lot to say about cost of production (cost plus pricing) in its theory of the firm. Look it up.

As for whether or not bitcoins are consumed is another story... if you spend money you consume it - although it persists you no longer own it once spent. Gold and other metals also are produced commodities which persist.

[countryfree]

Let me add than the cost of mining is not fixed. Just like the price of BTC. Price of processing power constantly goes down. Price of electricity is different between night and day, and it varies a lot between countries. Somehow, I guess the 2 are related, but it's a very distant relation, like the cost of producing an iPhone in China, and its retail price in a flashy London store.

[Erdogan]

Cost of production is not indicative, rather it is the result of the price after the free market has adjusted the capital structure according to the price.

Many do not understand this, therefore refuse to sell that lovely house that they built for a sum, since it will cost the same to build another house just like it. Maybe to their disadvantage.