Bitcoin Miner Power Efficiency -- Why should I care?

[Dalkore]

Here is the latest article I have written, this is about Bitcoin miner power efficiency and how it impacts mining today and my predictions for the future.  Please post any questions or comments here after reading the article.   Happy Friday, enjoy your weekend.


Link:
http://bitcoinasichosting.com/blog/categories/mining-roundtable/item/262-bitcoin-miner-power-efficiency-why-should-i-care

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[Agaguk24]

Very interesting article, congrats! There is also the impact of future reward halvings of BTC mining that has to be factored in, which effect I am unsure of.

So far every coin's reward halving (e.g. Litecoin) has paradoxically been met with a dropping price, which is counterintuitive because of the reduced offer.

[Dalkore]

Very interesting article, congrats! There is also the impact of future reward halvings of BTC mining that has to be factored in, which effect I am unsure of.

So far every coin's reward halving (e.g. Litecoin) has paradoxically been met with a dropping price, which is counterintuitive because of the reduced offer.

I think that may be that the profit of mining is such a small margin for most miners that they are always selling Bitcoins to covering their hosting expenses. That would put constant selling pressure in the form of newly minted Bitcoins always being for sale.  The the reward halves we will see either a rise in prices to bring it back into marginal profitability or the difficulty will drop because of more miners dropping out that can not mine Bitcoins at that reward level. 

I glad you enjoyed the article.  I am constantly thinking about things to write about, more to come, working on my next piece already. 

[alh]

A minor editorial correction: I think you meant 400 Petahash rather than 40 at the end of the first paragraph.

I am also curious about why "retail sales" would be excluded. I get that Bitmain didn't want to rely on retail sales to cover the costs associated with developing and producing the S7 (as an example). I expect they figured that their internal mining operation would cover it no matter what, and that retail sales probably have enough additional margin that it only enhances their finances. They sell however many hundreds or thousands, and they have transferred almost all the risk to the customer. Seems like a win for them.

Granted they may charge such a huge price that retail sales decline, but it seems that for a while anyway they aren't hurt by retail sales at all.

[Agaguk24]

  The the reward halves we will see either a rise in prices to bring it back into marginal profitability or the difficulty will drop because of more miners dropping out that can not mine Bitcoins at that reward level.  

Thats the paradox, in my opinion: we think price should rise and be happy about upcoming reward halving, but - see what happened to Litecoin when reward halved: price tanked. Same thing happened to many altcoins when reward halved, it seems to make the coin less interesting so price goes down, not up. Scarcity makes a coin less attractive it seems: maybe a more detailed study can be made regarding this.

[alh]

I have no idea what drives the price of Bitcoin. Yes, I hear "Supply and demand", but I have zero idea, nor have I heard a good explanation of what drives Bitcoin demand. While I am general believer that "difficulty follows price", that doesn't really help much.

[nagatraju]

I have no idea what drives the price of Bitcoin. Yes, I hear "Supply and demand", but I have zero idea, nor have I heard a good explanation of what drives Bitcoin demand. While I am general believer that "difficulty follows price", that doesn't really help much.

As my knowledge, Bitcoin price is based on Mining Equipment Investment and Profitability.

[Dalkore]

  The the reward halves we will see either a rise in prices to bring it back into marginal profitability or the difficulty will drop because of more miners dropping out that can not mine Bitcoins at that reward level.  

Thats the paradox, in my opinion: we think price should rise and be happy about upcoming reward halving, but - see what happened to Litecoin when reward halved: price tanked. Same thing happened to many altcoins when reward halved, it seems to make the coin less interesting so price goes down, not up. Scarcity makes a coin less attractive it seems: maybe a more detailed study can be made regarding this.

Altcoins and Bitcoin are completely different in this one single important fact.  Somehow, Bitcoin has gained the status the not many items gains, it has human confidence in it.  Like real confidence that Bitcoin has value and no matter what will continue to have value.  At what price?   Anyone's guess, but a price none the less.    This means Bitcoin can operate outside of just hard data.   At any moment this could cease and what I am saying would be incorrect.   Remember halving to Bitcoin means we are getting closer to the end of the fixed supply and in that is where Bitcoin is different than any other currency in existence.  As long as no one increases that amount to be issued, that special feature will continue to buoy the currency.  We will have to either see one of two things happen when we see the next halving, price just about doubles if it is at current levels or difficulty will lower to get back in balance which would mean a drop by as much as 50%.   One or the other will happen, maybe not right away but you will see a trend in one of those directions. 

[Dalkore]

A minor editorial correction: I think you meant 400 Petahash rather than 40 at the end of the first paragraph.

I am also curious about why "retail sales" would be excluded. I get that Bitmain didn't want to rely on retail sales to cover the costs associated with developing and producing the S7 (as an example). I expect they figured that their internal mining operation would cover it no matter what, and that retail sales probably have enough additional margin that it only enhances their finances. They sell however many hundreds or thousands, and they have transferred almost all the risk to the customer. Seems like a win for them.

Granted they may charge such a huge price that retail sales decline, but it seems that for a while anyway they aren't hurt by retail sales at all.

Thank you, I didn't hit the zero enough times.  Fixed.


Bitmain will do this for this generation and maybe even their 14nm-16nm offering but nothing more.  Too much money would be at stake and the market for it would be much smaller in size but each customer would be larger.  That is why you will see only private invite only sales for any large amount of capacity.  Maybe we see some crumbs come to the public but I think that will be the extent of it.  Mining is consolidating and this is intensifying.   We you are looking at a minimum $10 million dollar bill for the next ASIC chip on a small die, you really need to make sure you are covered or there will be hell to pay.   I wish I could think that the public will be able to support this development but in the end, the incentive just isn't there for small miners to cough up the cash needed to cover that.  Only pre-arranged sales or 100% private mining will do it. 

[tonycamp]

i mean you do the mining get the hardware calculate the roi to be one year and after one year you get the money back and a deprecated miner to sell like 1 dollar per 10Ghs power and a 10TH miner sells like 1000 dollars into 2016 soo you get 3 dollars per day into what you invested and if watts not too expencive... i mean its a surveilance every day for just 3 dollars of a 4000 dollars investment its feeble.

[Dalkore]

i mean you do the mining get the hardware calculate the ROI to be one year and after one year you get the money back and a deprecated miner to sell like 1 dollar per 10Ghs power and a 10TH miner sells like 1000 dollars into 2016 so you get 3 dollars per day into what you invested and if watts not too expensive... i mean its a surveillance every day for just 3 dollars of a 4000 dollars investment its feeble.

Pretty broken English but I think I understand the nature of your question Tony.   Yes your ROI horizon needs to be at least 6 months to 1 year.   And yes, you are speculating on the future price of Bitcoin for the most part or you are selling most your coins to covers the expense (hosting) of mining.   If you don't believe Bitcoin's price will be higher in the future then you should only be mining based on reasonable short term ROI numbers.    The mining herd is being thinned right now and this process really started when the first FPGA and ASIC chips hit the market.

[GermanGiant]

I have no idea what drives the price of Bitcoin. Yes, I hear "Supply and demand", but I have zero idea, nor have I heard a good explanation of what drives Bitcoin demand. While I am general believer that "difficulty follows price", that doesn't really help much.

As my knowledge, Bitcoin price is based on Mining Equipment Investment and Profitability.

Not at all. Then price would not have reached 1000+ in 2013 and fall below 200 in 2014. Like any other free market asset, Bitcoin price is dependent on complex trading functions like future, shorting etc.

[Dalkore]

I have no idea what drives the price of Bitcoin. Yes, I hear "Supply and demand", but I have zero idea, nor have I heard a good explanation of what drives Bitcoin demand. While I am general believer that "difficulty follows price", that doesn't really help much.

As my knowledge, Bitcoin price is based on Mining Equipment Investment and Profitability.

Not at all. Then price would not have reached 1000+ in 2013 and fall below 200 in 2014. Like any other free market asset, Bitcoin price is dependent on complex trading functions like future, shorting etc.

The price for the most part is based on the cost to generate a coin.   That has to be in balance with the trading markets or you will get into a situation where the market price is lower than the cost to create a Bitcoin.   If that happened for a prolong period of time you would see the difficulty decrease until it was back in balance.   

In the real world this has happened with the paper gold price (Comex) versus the physical price.  When the miners have the paper price dip below their cost to mine the same amount of gold they stop or severely slow down production until the price rises so they can cover their costs.  This assumes they are un-hedged.  Same thing is happening in the U.S. oil market with the frackers.  Many of their hedges at higher prices ($60-$80 dollars per barrel) are expiring so now they are faced with producing at $40 per barrel which is unprofitable.  This can be proven by looking at the well and rig count in U.S. oil fields.  They are declining and as more hedges come due and are not renewed at that higher price, more capacity will be brought off the market.

[smith88]

Spot on with the article, thanks for taking the time, good material, good refresher.  Definitely points to some solid points as well as good food for thought.  It's fun to look at miners that have been around for about a year; yet their inefficiencies make them obsolete.

[Dalkore]

Spot on with the article, thanks for taking the time, good material, good refresher.  Definitely points to some solid points as well as good food for thought.  It's fun to look at miners that have been around for about a year; yet their inefficiencies make them obsolete.

Thank you.  Any suggestions for another article you would like me to cover?  I am brainstorming ideas for the next article.  I want to get down to writing.