Bitcoin mining will not be profitable in the long term

[justusranvier]

A lot of people seem to think that even in the most optimistic scenario in which Bitcoin becomes widespread and ubiquitous, mining then will look like mining today from a profitability standpoint. That mining would still be profitable in that future is inconceivable, because the interests of retailers would dictate otherwise.

The act of moving currency around incurrs fees for retailers. They pay fees to card processors, they pay fees for cash movements, they pay fees to payroll processing companies, and they pay fees to their banks. For the purposes of this though experiment let's assume they pay out 5% of their gross revenue in the forms of various fees that Bitcoin could potential eliminate for them.

That's a lot of incentive to switch to Bitcoin. 5% of the gross revenue of the top 100 retailers is over $100 billion. Consider that number to be a first order estimate of how much these companies would be willing to spend on mining to make Bitcoin a viable replacement for existing currencies.

If a store like Walmart wants to accept bitcoins instead of credit cards then they want their customers' transactions processed quickly. They don't care about prioritizing transaction by fee because their big picture is the profitability of the company as a whole. They don't need mining to be profitable. If they decide the providing complementary mining to the network will benefit their business they will provide it, for the same reason they provide complimentary public restrooms.

Given that the retail sector alone has up to $100 billion to spend on mining as a loss leader, don't plan for it to stay profitable if Bitcoin becomes ubiquitous.

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[notme]

It's not profitable now.

This.

Also, yes, this has been the end game all along, It is also what will keep mining honest.

Finally, profits are determined by revenue - expenses.  Using bitcoin (and mining to avoid fees) lowers expenses, thus raising profits.  But no, it won't be profitable to mine for the sake of mining, only if you need to process transactions and bitcoin continues to be the cheapest way to do that securely.

[justusranvier]

But no, it won't be profitable to mine for the sake of mining, only if you need to process transactions and bitcoin continues to be the cheapest way to do that securely.

During the bootstrapping phase mining can be profitable for some, but I've encountered more than a few people who think they will be able to print profits forever with their rigs.

Besides saving some people from disappointment down the road, I think this merits further discussion because the motives of the miners in the intermediate and long term will affect questions like what should happen to maximum block size and anti-spam rules.

[FreeMoney]

If it isn't profitable for anyone it won't be done. It will be done. If you insist it isn't or won't be profitable you have too narrow a definition of profitable.

[Lethn]

Mining should be seen as a method of transferring your wealth not as a method of getting rich.

[-ck]

If mining is not profitable, people will not do it. Mining will always parallel the difficulty/BTC value relationship and will always be slightly profitable with people coming and going to stick to that equation over time with some lag time to stay in sync with it.

[meowmeowbrowncow]

Agree with con.  Incentive was a very pragmatic part of the design.  Though, getting rich shouldn't be possible.  Making a modest profit should be possible.


If someone is put off by the idea that miners would 'get rich,' one's concern and criticism should be focused towards those that indeed stand a very good chance of becoming rich - BFL, ASICMiner, et. al.


A community sourced, crowdfunded ASIC project would have eliminated concentrated riches derived from mining incentive.

[Meni Rosenfeld]

I see multiple issues with the scenario in the OP.

1. You say that $100B will be spent on mining by retailers, and assume this must take the form of owning mining hardware themselves to the exclusion of freelance miners. But it seems they can just as easily sponsor it in other ways, such as assurance contracts payable to miners or paying PPS pools directly. The people actually doing the hashing could still be freelancers, some of them at least.

2. "They want their customers' transactions processed quickly" - I don't find this likely. Walmart isn't going to wait 10 minutes (actually much more, see below) to accept payment from a customer. They'll accept 0-confirm txs, and rightfully so - 99.99% of their customers won't double-spend. So the confirmations really only affect their ability to use these funds further. The idea that they will pay 5% of their revenue to get the funds maybe an hour earlier is ludicrous - that's a 188-digit APR (better than Pirate!)

Also, I don't think most Bitcoin payments will take the form of transactions. There will be intermediary services with various trust requirements (Bitcoin's powerful scripting allows for some options with little trust). So the customers should be able to do instant irreversible payments without needing confirmations for the payment.

3. There will be people sending transactions which the retailers don't care about, and they will pay fees to get them included. Depending on the retailer's policy on accepting transactions for their fee, this could leave some revenue to sponsor freelance mining.

4. You speak of this as a scenario in which Bitcoin is successful. I don't. If mining is dominated by big retailers who only care about their own transactions then Bitcoin can hardly be thought of as decentralized, which defeats the purpose. (The incentive structure which makes it feasible to do freelance mining if one so chooses is more important than how many different groups end up actually doing it. Which is also important, of course.)

5. You present a false dichotomy between "not use Bitcoin" and "pay as much as Bitcoin saves them on mining". Even as a "first order estimate" it fails to take into account that the retailer will only spend money on this if the situation with the spending is sufficiently better than the situation without the spending. If the Bitcoin network functions properly transactions will be included eventually even with a modest fee. The retailer doesn't have that much to gain by adding its own hashpower to the mix. How this plays out exactly depends on the details of the scenario. In a scenario where so few miners would include the transactions to Walmart that it has something to gain by hashing for it, it means that even with its hashing it will be included only in a fraction of the blocks, so the confirmations would still take much more than 10 minutes.

6. Bitcoin would need to be extremely "widespread and ubiquitous" for Walmart to even consider mining or sponsoring it. Maybe it will happen but it will be a long, long time in the future.



Anyway, I guess I agree with the main point - mining is currently a speculative investment, and as Bitcoin catches on it will become less speculative, and correspondingly less potentially profitable.

[tacotime]

If mining is not profitable, people will not do it. Mining will always parallel the difficulty/BTC value relationship and will always be slightly profitable with people coming and going to stick to that equation over time with some lag time to stay in sync with it.

Yep.  No one will mine to lose money because that makes no sense.  The more people who drop out, the lower the difficulty goes.  Mining has seldom been unprofitable since the beginning of bitcoin.

That being said, we will probably see BTC mining profit approaching that of other popular investments (3-7% per annum) after ASICs come out.  I always expected mining would likely become centralized to large mass ASIC possessing corporations as profit reduced, as a corporation with $50 million invested would be happy to make $1.5 million in profit per year or $51.5 million in revenue.  By contrast, the average joe probably wouldn't care to generate $15 of profit from a $500 investment in an ASIC miner.

[odolvlobo]

If a store like Walmart wants to accept bitcoins instead of credit cards then they want their customers' transactions processed quickly. They don't care about prioritizing transaction by fee because their big picture is the profitability of the company as a whole. They don't need mining to be profitable. If they decide the providing complementary mining to the network will benefit their business they will provide it, for the same reason they provide complimentary public restrooms.

Given that the retail sector alone has up to $100 billion to spend on mining as a loss leader, don't plan for it to stay profitable if Bitcoin becomes ubiquitous.

The fact that Walmart might mine at a loss doesn't mean that they will devote enough hashing power to make it unprofitable. In fact, retailers will strive to reduce mining costs as much as possible, assuming they feel they need to mine. Retailing is a very low margin business.