The mining equipment paradox

[aes1]

I was wondering about the economics of mining the other day, and I'm not probably the first one to be puzzled by this...

If a piece of specialized mining equipment (ASIC, FPGA, whatever) is cost efficient (i.e. the value of the bitcoins it generates is more than it costs to manufacture and operate), it doesn't make any sense to sell it.

If a piece of mining equipment is not cost efficient (i.e. it takes more electricity to operate than the bitcoins it generates are worth), it doesn't make any sense to buy it.

So if someone buys hardware to mine bitcoins, the manufacturer is either screwing them, or being charitable. Which one of these is true, or am I missing something obvious?

[dree12]

I was wondering about the economics of mining the other day, and I'm not probably the first one to be puzzled by this...

If a piece of specialized mining equipment (ASIC, FPGA, whatever) is cost efficient (i.e. the value of the bitcoins it generates is more than it costs to manufacture and operate), it doesn't make any sense to sell it.

If a piece of mining equipment is not cost efficient (i.e. it takes more electricity to operate than the bitcoins it generates are worth), it doesn't make any sense to buy it.

So if someone buys hardware to mine bitcoins, the manufacturer is either screwing them, or being charitable. Which one of these is true, or am I missing something obvious?

There is also a "gambling paradox" and an "insurance paradox". Are gamblers being "charitable"? Are insurance brokers "screwing" their customers over?

Avalon is being charitable. What BFL is doing, I do not know.

[Korbman]

So if someone buys hardware to mine bitcoins, the manufacturer is either screwing them, or being charitable. Which one of these is true, or am I missing something obvious?

The purpose of mining is to secure the network and process transactions, and to generate a Bitcoin income for the miner..it just so happens that Bitcoins carry a value (substantially, lately) in fiat to turn that virtual income into "real world" income.

You touch on some points to a more complex situation. The vast majority of people purchase mining equipment (CPUs, GPUs, FPGAs, and now ASICs) with the intent to generate an income for themselves. The crux is that a miner can't ever be truly certain that they will generate an income for themselves..given that there are a multitude of factors at play (future difficulty, number of total (and future) miners, individual hashrate, value per BTC, etc). It could very well be that every Average Joe and their friend will buy an ASIC if USD/BTC is $1000+ ..or it could just as well be a small dedicated group of geeks mining away if USD/BTC is $1.

That said, the manufacturer doesn't know where the future of Bitcoin will go. If they built their businesses around mining on the hardware instead of selling it, then I'd imagine the value of a coin wouldn't be nearly that much because it would mean competing to mine would require a substantial amount of capital for custom made chips. Centralizing the mining power (assuming BFL and Avalon solely built hardware to mine on) doesn't bode well for Bitcoin and defeats the purpose of its creation to begin with.

On the other hand, if they sold the equipment to the masses they may stand to make more money in the long term..assuming continued community support, a competitive product compared to others on the market, and a willingness to continually develop better products. There's a 100% chance for the manufacturer to make money if they sold the equipment to others..compared to an unknown percent if they mined on the hardware themselves.

It's essentially the same scenario as the 1849 Gold Rush...why dig for gold yourself when you can sell tons of shovels/equipment to the prospectors

[reg]

There is also a "gambling paradox" and an "insurance paradox". Are gamblers being "charitable"? Are insurance brokers "screwing" their customers over?

Avalon is being charitable. What BFL is doing, I do not know.

everything is relative and changes over time. gambling is always charitable because the odds are stacked in favor of the house. insurance brokers always screw their customers otherwise it would not pay to do it. When specialized mining equipment was conceived the cost of the equipment could be recovered over say a year leaving a reasonable return on investment so it was economic to make and buy. however the phenomenal increase in the btc price means manufacture of avalon has become charitable and nobody knows what bfl are doing?/. reg

[glendall]

Think about it also this way:  if you invented a computer that was 10x better at mining, and you decided to keep it to yourself, and you build 1000 of them, there is a good chance you would end up making less money than you could of.

Why?

Because everyone would be like 'fuck this' and stop mining seeing how they could not compete. Then the entire cryptocurrency would be devalued as people would get away from it.

It may instead be better to keep 500 of the machines for yourself, and sell the other 500 for profit.  You could/would possibly make more as the cryptocurrency overall would be stronger, and besides, you would make decent profit in the sales of the 500 machines.

There are a lot of unknowns of course...

But it does seem like Avalon for example, their rationale was that they did not one ASIC company dominating the market. Which makes sense.

As a decentralized currency its strength would be diminished if a small group of people controlled the majority of the hashing power.

[dg2010]

I think it mostly comes down to money.

They need lots of money to actually develop and build these things.

And selling the miner hardware diverts the risk away from you to the buyer. It's now up to them whether it's actually worth while.

If you simply developed and kept them for yourself, you better be damn sure they can make more than your R&D costs.

[aes1]

Ok,

it seems that the bigger picture is more complex than I assumed. I didn't realize Butterfly depended so massively on preorders. Apparently making an ASIC is not too cheap, according to this StackExchange answer so the economics related to mining are very interesting indeed.

Let's hope for a healthy mining economy with multiple competing ASIC vendors.

[Miner99er]

Still buying GPU's. 0 fucks given.

[Kazu]

They sell their mining rigs for the same reason that people starting a company sell part of their company to investors.

[Operatr]

There may well be an increase of GPU based miners being sold as ASICs come online, which is a good thing for the Litecoin and Terracoin crowds as GPU is still the most viable option for those that are where Bitcoin was a couple years ago. Others will sell because its getting too intense to keep up with Bitcoin, as ASICs will simply be required to jump in and actually make anything doing it soon enough which are more than a dabbler will invest. Those serious enough will get the big hardware and probably rent out GHash to those who don't want the worry of hardware but still want to participate in mining.

A big fundamental shift is coming, we'll see who's metal enough to run with it.

[firefop]

The smart miners with fiat to spend are madly building GPU rigs right now... you can hit 100% ROI in 3 weeks if you're buying the right video cards.

And you're catastrophic failure scenario results in breaking even after 10 days (by reselling the gpus) if you're honest. or 4 days if you'd be willing to abuse your vendor by restocking the 'less than 3 week old video cards' (gogo shady dealings).

Anyway, most of us on the BFL (short?) bus aren't sending anymore money to any asic 'manufacturers' until they've got a solid delivery time table and we can count on delivery within a set time-frame.

Personally I'm desperately hoping that AMD jumps into the arena with a x530 card stacked 5 slots deep with sha256 cores... then we'd see a real arms race that wasn't dependent on flaky hardware developers overseas (or anywhere else).