What assumptions are people using to justify adding mining rigs?

[fnord123]

I put together my own Google spreadsheet to examine whether it makes sense to add to what I am currently using to mine, and the numbers keep looking bad.  E.g. for a triple 5830 system:

Days to next reset:5.0, based on http://blockexplorer.com/q/eta
Difficulty of next reset: 513600, based on http://blockexplorer.com/q/estimate
Days per difficulty increase after the next one: 8
Difficulty increase factor after the next one: 1.3 (30% average increase)
Watts: 550
$/KWh: 0.12
MHash/Sec: 840 (3 * 280 per 5830)
$/Bitcoin: 10

Running the above numbers, on August 18 the electric cost exceeds the generated bitcoin value. Total income at that point (assuming selling bitcoins at $10 apiece) is $492 - putting together a 3-way 5830 system for $492 is pretty tough (used parts maybe?)

Are other people using more optimistic numbers?

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[Genrobo]

Nope, you're right on.
The only thing people are using to justify investing large amounts of money into this...
Is Bitcoin price speculation.

[Jack of Diamonds]

Your calculation only takes in account the current spot price, just as calculations a month ago were made assuming $4 or lower spot price, and 3 months ago a fraction of that.

I don't deny the profitability is volatile at best if you are starting out just now. I just don't see a likely scenario where the price will suddenly start plummeting or simply stagnating at $9-$10 when mining becomes harder & more users become aware of bitcoin every day.

I started nearly a year ago but I can perfectly see the rationale behind adding more rigs today. It still pays itself back relatively fast, and could even accelerate at an unknown pace.

[Genrobo]

Your calculation only takes in account the current spot price, just as calculations a month ago were made assuming $4 or lower spot price, and 3 months ago a fraction of that.

I don't deny the profitability is volatile at best if you are starting out just now. I just don't see a likely scenario where the price will suddenly start plummeting or simply stagnating at $9-$10 when mining becomes harder & more users become aware of bitcoin every day.

Not been into economics long, eh?

I've seen more bubbles burst than a kid chewing bubble gum.

[Sjalq]

Here are the assumptions I used.

BTC is still in its infancy. If successful it will most likely replace the entire world's currency supply. There is almost not believable way that doesn't sound arrogant or deluded to put the price into perspective once this happens. It might be akin to a land grab in the old west, but with the land values rising to their fair value in a matter of years.

Between now and then one of the following will happen to the price.

1.It will collapse for a while. This drives people out and pushes difficulty down, it has happened before and might very well again. Typical causes might be a negative court ruling in the US or some other jurisdiction. In the long run BTC will probably survive this since not every place on earth is likely to make it illegal and due to its nature, if not every place on earth has it illegal, it will have value everywhere.

So you mine easy for a while and hold the BTC and maybe conduct some of your own business in BTC. Waiting for the value increase to resume.

2. It will stabilize. If this happens only the rigs with high Mhash/Watt are worth investing in. This would have to persist for very long to be a concern. FPGA rigs might become very attractive here and become the norm. This is bad for me, as I'm investing in a GPU miner.

3. It will continue to rise in a relatively uninterrupted fashion and S curve to it's true value, which if it succeeds is a number difficult to wrap one's brain around when compared to $10. In this scenario miners keep piling in, increasing difficulty but are rewarded by increasing prices. This is equivalent to betting that if you can get some number of BTC in the future at the future price AND a machine that will give off bitcoins for some extended period after that point, it is worth more than simply converting all that cash into Bitcoins today.

[fnord123]

I just don't see a likely scenario where the price will suddenly start plummeting or simply stagnating at $9-$10 when mining becomes harder & more users become aware of bitcoin every day.

Here are some scenarios where this can happen:

• The Dwolla/MtGox BTC <--> $$$ link breaks, perhaps due to pressure from bank regulators in response to Paypal or VC/MC lobbyists.
• The speculators who are buying BTC run out of money/the bubble bursts, as Genrobo mentioned
• Someone hacks MtGox or some other key BitCoin participant to steal BTC balances
• Someone identifies a cryptographic fault with the Bitcoin scheme

All of these scenarios would cause a crash in BTC values.  I guess you can argue they are unlikely - at least the first two seen quite plausible to me.

[Jack of Diamonds]

Not been into economics long, eh?

I've seen more bubbles burst than a kid chewing bubble gum.

I'm not saying it will rise indefinitely into the hundreds of thousands or millions. In reality, I don't even care what makes up the price as long as it stays at that, drops lower or rises. I'm saying it still pays off to mine, even a year later. At 8ghps I'm still making way, way more than the cost of electricity and AC.

And that's going to be the same for anyone starting today. At worst, they lose out on the electricity costs and 10-20% resale value of the hardware if everything drops to zero tomorrow. At best, they pay off their initial investment in a month or less and gain profit after that.

Note that I didn't go into the specifics of what makes up BTC value. I'm merely answering OP's question about why some people still invest into new rigs. Of course Paypal/LR/ MTGOX raids etc. are possible. They just seem like a distant possibility at the moment.

[Sjalq]

• The Dwolla/MtGox BTC <--> $$$ link breaks, perhaps due to pressure from bank regulators in response to Paypal or VC/MC lobbyists.

All of these scenarios would cause a crash in BTC values.  I guess you can argue they are unlikely - at least the first two seen quite plausible to me.

True, but if this happens quadruple your mining equipment as fast as you can. Some other jurisdiction will pick it up.

[Jack of Diamonds]

Someone identifies a cryptographic fault with the Bitcoin scheme

Well, I'd actually argue that this one is the most likely, especially given a large enough botnet and financial interest (more profit in using the botnet to forge transactions than participating in block discovery).

Even Satoshi agrees that BTC is "practically" impossible to forge, but it's technically feasible by a large enough attacker. I don't know how well the creators have prepared for an attack of this scale.

Yes, real currency can be forged as well convincibly (some might argue much easier than bitcoins) but at least it's backed by brute force of the issuing state. The only consequence of dumping illegitimate cash into a market is small scale inflation. Dumping forged bitcoins into the market will ruin BTC's reputation.

[Sjalq]

Of what scale?

The bitcoin network now employs about 50% of the combined capacity of the TOP 500 supercomputers on earth?

[fnord123]

• The Dwolla/MtGox BTC <--> $$$ link breaks, perhaps due to pressure from bank regulators in response to Paypal or VC/MC lobbyists.

All of these scenarios would cause a crash in BTC values.  I guess you can argue they are unlikely - at least the first two seen quite plausible to me.

True, but if this happens quadruple your mining equipment as fast as you can. Some other jurisdiction will pick it up.

If it is no longer convenient to exchange bitcoins for USD you will see a major portion of the bitcoin economy go away. This is true until the bitcoin network becomes self sufficient (i.e. one can efficiently exchange bitcoins for a significant portion of the things one needs).  If a major chunk of the bitcoin economy goes away, the bitcoin economy shrinks and the bitcoins become worth less.

I'll bet you a bitcoin that if the Dwolla/MtGox link goes down, bitcoin exchange rates will drop in pretty much every other currency the following week.  If you don't like that bet, propose an alternative bet and put your money where your mouth is

[Sjalq]

• The Dwolla/MtGox BTC <--> $$$ link breaks, perhaps due to pressure from bank regulators in response to Paypal or VC/MC lobbyists.

All of these scenarios would cause a crash in BTC values.  I guess you can argue they are unlikely - at least the first two seen quite plausible to me.

True, but if this happens quadruple your mining equipment as fast as you can. Some other jurisdiction will pick it up.

If it is no longer convenient to exchange bitcoins for USD you will see a major portion of the bitcoin economy go away. This is true until the bitcoin network becomes self sufficient (i.e. one can efficiently exchange bitcoins for a significant portion of the things one needs).  If a major chunk of the bitcoin economy goes away, the bitcoin economy shrinks and the bitcoins become worth less.

I'll bet you a bitcoin that if the Dwolla/MtGox link goes down, bitcoin exchange rates will drop in pretty much every other currency the following week.  If you don't like that bet, propose an alternative bet and put your money where your mouth is

Almost everyone who owns Bitcoins today, will still own them if the US declares it illegal or closes MtGox. They will not want their investment to become worthless, even if they are in the US. They will now effectively have a secret offshore bank account. There will be massive incentive to set up a functional exchange someplace more free, like Switzerland, Lichtenstein, Hong Kong, Singapore, Chile, you name it. Amir Taaki is involved in setting up opensource exchanges to make it easy for countries to get going changing local currency for BTC.

I agree that for a while (a short while) you will not be able to price BTC. After that business will resume, perhaps with the initial exclusion of new clients from the US, but at the same exponential rate as it is now.

Specify the bet a bit more and I'll consider it

[fnord123]

Specify the bet a bit more and I'll consider it

Ok, how about this:

• On some date X, the MtGox/Dwolla BTC <--> USD link may go down
• If on that date X, there is no other equivalent link that allows BTC to be efficiently converted to a USD bank account (i.e. ACH transfer), and
• Exactly one month from that date (X+1M), there is still no such link, and
• As of (X+1M), the BTC : $ exchange rate has gone down on Mt.Gox or whatever other BTC exchange is most prominent, then
  
• Sjalq will send Fnord123 1.0 bitcoins at address 1qTmELHiwZ8M5HXnQU5bbZ4z7Qva57ZwD, otherwise
• If the exchange rate has gone up, Fnord123 will send one bitcoin to Sjalq at address (you fill it in)
• Within 24 hours of agreeing on the best, each of Fnord123 and Sjalq will place 1.0 bitcoin in the address they post and leave it the bet conditions are met or until we cancel the bet
  
• Either can cancel it until the first event (Mtg Gox/Dwolla link goes down) by posting here. No cancelling after that.

How's that for specifying it a bit more?

Only caveat I would add is that it has to be legal to do so in both our jurisdictions (I am in the USA) - if the USA (or where you live, if elsewhere) makes it illegal to pay/receive bitcoins, the bet is off.

[Sjalq]

The replacement exchange will need to some time to recover from the loss of the US market.

Can I modify? If the price on whatever the prominent exchange is, is not prominently trending up within 2 months of losing the USD link then I lose. I do however win if it falls to 0 first but recovers to a readable, upwards trending price within the 2month period.
Can we define upwards trend as higher than 2 weeks before the end of the 2 months?

On payment, are you suggesting that because you are law abiding or because you fear you will get caught?

[Sjalq]

PS to my knowledge wagers are only legal in Arizona in the USA. So you are already breaking the law by betting aren't you?

[Hawkix]

Currently, there are about 5-6 pools who mine around 75% of the whole Bitcoins. If you target those pools with DDoS attacks, you can make them unstable, failing, etc. The result would be 4 times slower Bitcoin network.

Sure, new pools may show up. It will take some time, though. And they can be targeted, too.

Actually, I think that the above is already being performed by SOMEONE.

[xenon481]

I just don't see a likely scenario where the price will suddenly start plummeting or simply stagnating at $9-$10 when mining becomes harder & more users become aware of bitcoin every day.

Here are some scenarios where this can happen:

• The Dwolla/MtGox BTC <--> $$$ link breaks, perhaps due to pressure from bank regulators in response to Paypal or VC/MC lobbyists.
• The speculators who are buying BTC run out of money/the bubble bursts, as Genrobo mentioned
• Someone hacks MtGox or some other key BitCoin participant to steal BTC balances
• Someone identifies a cryptographic fault with the Bitcoin scheme

All of these scenarios would cause a crash in BTC values.  I guess you can argue they are unlikely - at least the first two seen quite plausible to me.

I think the absolutely most probable situation is that somebody writes some malware that spreads easily and steals wallet.dat files.

There have been a small number of cases of this so far, but none of them have spread. But the reward for such a thing goes up exponentially as Bitcoin is more widely used.

[Sjalq]

Currently, there are about 5-6 pools who mine around 75% of the whole Bitcoins. If you target those pools with DDoS attacks, you can make them unstable, failing, etc. The result would be 4 times slower Bitcoin network.

Sure, new pools may show up. It will take some time, though. And they can be targeted, too.

Actually, I think that the above is already being performed by SOMEONE.

So how does that affect the safety or security of BTC?

[xenon481]

Currently, there are about 5-6 pools who mine around 75% of the whole Bitcoins. If you target those pools with DDoS attacks, you can make them unstable, failing, etc. The result would be 4 times slower Bitcoin network.

Sure, new pools may show up. It will take some time, though. And they can be targeted, too.

Actually, I think that the above is already being performed by SOMEONE.

So how does that affect the safety or security of BTC?

During the time that 75% of the network hashing power isn't processing, a malicious group only needs to overcome the remaining hashing power to double-spend.

[Sjalq]

Well we would know who they are, they are already on this list http://www.top500.org/

Sorry to sound sarcastic but even if they knock down the 2 biggest groups they would not practically be able to overcome the remainder of the network.