The Fallacy of Mining Cost and Bitcoin Price

[chiropteran]

No, that doesn't make sense.  Miners do not all pay the same costs, they will drop out gradually as price drops/difficulty rises and will start up as price rises/difficulty falls.

Duh.  That is exactly what I said. 

The hard limit is where all miners drop out or all miners mine.  Yes, there are a few irrationals who might mine even when it is economic suicide, and a few irrationals who won't mine even when it's guaranteed pure profit, but for the most part the hard limits apply.

In-between the limits, *some* miners will mine and others will choose not to, depending on individual situations.

 Some people have very little costs, and if BTC gets low enough difficulty could drop to a point where even CPU mining would make sense again (especially for people who don't pay the electricity costs of the computer they are mining on).  I don't understand why you are using the term 'hard limit' for any of this.

 

Because it is a hard limit.  At a certain price to difficulty ratio, electricity cost even for the most efficient miners is greater than mining income.  At that hard limit, only fools mine.

It is a gradient.  As price rises, so will difficulty.  If electricity costs fall, difficulty rises (if price stays the same).  It is a marginal adjustment and BTC could rise to $100 each and depending on other factors it might not be rational to buy a mining rig.  

Did you misunderstand my entire post?  My point was that difficulty and price are interlinked.  Saying "as price rises, so will difficulty" is an odd way to paraphrase my post.  Thank you for agreeing, even if you do so in an overly simplistic manner.  The numbers I listed were based on current difficulty.  Obviously if you assume some OTHER number for difficulty, the numbers I picked may not apply.

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[CNMOH]

The key to understanding the bitcoin economy is knowing that you cannot understand it.

So just shut up and mine until it is no longer profitable.

[bittersweet]

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.

That's the only Bitcoin speculation that makes any sense, that in the future more traders than now will accept it as currency.

I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

LOL. Well, good luck with that...

[bitcoinBull]

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.

That's the only Bitcoin speculation that makes any sense, that in the future more traders than now will accept it as currency.

Trading bitcoins for dollars is accepting it as currency.  And yes, I am speculating that there will be more traders in the future than now.

I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

LOL. Well, good luck with that...

Thanks.  I've had great luck so far.  Of course, its not pure luck but also good foresight, IMHO.

[tsvekric]

No, that doesn't make sense.  Miners do not all pay the same costs, they will drop out gradually as price drops/difficulty rises and will start up as price rises/difficulty falls.

Duh.  That is exactly what I said. 

The hard limit is where all miners drop out or all miners mine.  Yes, there are a few irrationals who might mine even when it is economic suicide, and a few irrationals who won't mine even when it's guaranteed pure profit, but for the most part the hard limits apply.

There will never be a situation where no miners mine.  First of all, bitcoin would collapse in security, and second of all, I'd just sit at my job and CPU mine and make 300BTC/hr.  That's why there is no hard limits - free riders on one side, barrier to entry (expertise, OpenCL-ready graphics card availability) on the other.  If BTC drops below $2/BTC I will still mine because it doesn't cost me anything to sit at my work computer and run a mining program.

It is a gradient.  As price rises, so will difficulty.  If electricity costs fall, difficulty rises (if price stays the same).  It is a marginal adjustment and BTC could rise to $100 each and depending on other factors it might not be rational to buy a mining rig.  

Did you misunderstand my entire post?  My point was that difficulty and price are interlinked.  Saying "as price rises, so will difficulty" is an odd way to paraphrase my post.  Thank you for agreeing, even if you do so in an overly simplistic manner.  The numbers I listed were based on current difficulty.  Obviously if you assume some OTHER number for difficulty, the numbers I picked may not apply.

Difficulty is a function of price of BTC and cost of mining and not vice versa - we agree on that, I think.  But the market for BTC/$ does not 'adjust' to difficulty in any way.

[DrYe5]

Mining generates bitcoins which devalues each individual bitcoin. It occurs at a known rate, regardless of the number of miners. It should theoretically always be priced in.

Saying mining costs X and gives bitcoins X value is like saying because you paid $10 for a gallon of milk, milk should now cost $10.

This fallacy results from cognitive dissonance; too many miners in the shaft.

[HappyFunnyFoo]

99% of bitcoin price is pure market speculation.

The problem with assuming the value of bitcoin will relate directly to power consumption & generation costs is that this really only logically follows if you can rapidly convert bitcoins back into usable units of power - e.g., "power tokens".  This is not the case.  You could exchange bitcoin for dollars and then pay for your power bill, but there's absolutely no guarantee that selling 100 btc won't tank the market, or that the price drops relative to the dollar and they're redeemable for nothing.  Therefore, the cost of 'mining' bitcoins is only loosely related to power consumption costs.  Another problem with assuming the price is a function of power consumption & mining difficulty is you're admitting that bitcoin deflates 30-50% every 9 days, since if the value of bitcoin is a function of power consumption & hash difficulty, and power consumption/hashing requirements increase 30-50% every 9 days at current rates, it becomes clear that existing bitcoins increase in value 30-50% every 9 days.  That's rampant, impossible deflation.  Bitcoin is a useless commodity like gold - esteemed for its shininess and malleability, ineffective as a medium of exchange in modern day society, and limited in function outside of being a great tool for the criminal market.

[chiropteran]

There will never be a situation where no miners mine.  First of all, bitcoin would collapse in security, and second of all, I'd just sit at my job and CPU mine and make 300BTC/hr.  That's why there is no hard limits - free riders on one side, barrier to entry (expertise, OpenCL-ready graphics card availability) on the other. 

I think you still missed something I am trying to get across.

The hard limit I stated is for the current difficulty.  Now in reality, if that limit is reached (BTC value is below electricity cost to mine), when miners start to mass drop-out, difficulty will go down in the next adjustment and everything will be fine.  Also, many miners will drop out early, before the hard limit is reached, because individual energy costs vary and willingness to mine for little profit isn't universal.

The hard limit simply means everyone would drop out if reached this point.  Reality is that most miners would drop out before it is reached, and furthermore reality is that as these miners dropped out difficulty would go down before the hard limit was hit and adjust the limit.


As far as the "other side", the barrier to entry you refer to doesn't exist because it doesn't require new miners to start mining- existing miners can simply add additional mining hardware, if profit is high enough.  It doesn't matter if x% of bitcoin users will never have the capability to buy even a cheap mining rig.  If it becomes profitable enough, mining difficulty WILL be pushed up because of existing miners who add additional capacity.

Although, just like the lower hard limit, the upper hard limit will never really be reached, because some miners are willing to add more capacity at lower levels of profit, which in turn will push up difficulty and keep the hard limit from ever being reached under normal circumstances.

If BTC drops below $2/BTC I will still mine because it doesn't cost me anything to sit at my work computer and run a mining program.

I covered this too.  A few irrational people would mine even knowing it'll be at a net loss.   While it might be a gain for you, your employer is losing electricity, and overall it's a net loss..  You might as well steal money from a bank and use it to pay for your electricity.  But again, this wouldn't occur because the market would adjust before hitting this point.

[DrYe5]

99% of bitcoin price is pure market speculation.

The problem with assuming the value of bitcoin will relate directly to power consumption & generation costs is that this really only logically follows if you can rapidly convert bitcoins back into usable units of power - e.g., "power tokens".  This is not the case.  You could exchange bitcoin for dollars and then pay for your power bill, but there's absolutely no guarantee that selling 100 btc won't tank the market, or that the price drops relative to the dollar and they're redeemable for nothing.  Therefore, the cost of 'mining' bitcoins is only loosely related to power consumption costs.  Another problem with assuming the price is a function of power consumption & mining difficulty is you're admitting that bitcoin deflates 30-50% every 9 days, since if the value of bitcoin is a function of power consumption & hash difficulty, and power consumption/hashing requirements increase 30-50% every 9 days at current rates, it becomes clear that existing bitcoins increase in value 30-50% every 9 days.  That's rampant, impossible deflation.  Bitcoin is a useless commodity like gold - esteemed for its shininess and malleability, ineffective as a medium of exchange in modern day society, and limited in function outside of being a great tool for the criminal market.

So ask yourself this: If you were a miner for the past year, six months, whatever and the price hit a stable point. Would you sell? How much?

[wolftaur]

So ask yourself this: If you were a miner for the past year, six months, whatever and the price hit a stable point. Would you sell? How much?

I sell a portion. I have to be able to give the electric company the money for what my mining rigs use. I sometimes sell to get more hardware. But I'm really planning to hold at least some on a continual basis, if possible. Having something spendable is always a good thing, whether it's fiat or not. Even if I can't buy everything I need (at the moment!) with bitcoins, I always have the option of buying something I need I can get with bitcoins, and leaving more dollars in my bank account as a result.

[dinzy]

If difficulty goes up that means more people are mining, hence there is a higher demand for BTC since more are involved in creating them.  New miners are likely new to bitcoin and hence will want to mine/buy coins.  So difficulty increase could correlate well to price increase if it is due to increased demand. 

[DrYe5]

If difficulty goes up that means more people are mining,

Not entirely true. Difficulty also increases with time, even if the same or even less people are mining.

hence there is a higher demand for BTC since more are involved in creating them. 

Also not true. Since some can mine for free (on CPU, at school, etc.), mining demand is not like buying demand. They must be accounted for separately.

  So difficulty increase could correlate well to price increase if it is due to increased demand. 

Contrarily, buying demand is reduced by mining.

[DrYe5]

Difficulty also increases with time, even if the same or even less people are mining.

I suppose this isn't entirely true? Can someone elucidate?

[Keninishna]

Well I wonder what the average cost of a 1 GH/s rig. Lets say 800$ and eletricity to run it for 1 month lets say 25$. That rig will generate ~ 22 bitcoins a month. Initial investment: 38$ a BTC. Close to double market price and your mining investment will stay around that over time due to difficulty increases. I think the market is just a few months lagged but once people realize the worth of their hard earned bitcoins it will go up because its cheaper to just buy the coins then to mine them.

[chiropteran]

Not entirely true. Difficulty also increases with time, even if the same or even less people are mining.

No, it does not.  It goes down if less people are mining.  Where do you get your facts?

[DrYe5]

Not entirely true. Difficulty also increases with time, even if the same or even less people are mining.

No, it does not.  It goes down if less people are mining.  Where do you get your facts?

I acknowledge as much in the following post. Thanks for the help.

Edit: There's confusion between cost of mining and mining difficulty. Because the bitcoins afforded by a block drops over time, it is possible for the cost of mining to increase while the number of miners decrease, but only at the end of a 210,000 block series. The rest of the time difficulty should indicate the hashing power of the community, not the number of miners.

There's no way to show these miners would be market buyers and to what extent. Again, it's possible to mine for free, especially this community.

[Jack of Diamonds]

Difficulty also increases with time, even if the same or even less people are mining.

I suppose this isn't entirely true? Can someone elucidate?

It's entirely untrue.

Difficulty will go down if less than 6 blocks per hour are found on average during a 336 hour span.

If people find more than 6 blocks/h difficulty will adjust upwards.

[Jonathan Ryan Owens]

Difficulty also increases with time, even if the same or even less people are mining.

I suppose this isn't entirely true? Can someone elucidate?

It's entirely utnrue.

Difficulty will go down if less than 6 blocks per hour are found on average during a 336 hour span.

If people find more than 6 blocks/h difficulty will adjust upwards.

Difficulty is the wagging of the dog in terms of price. The old Bitcoin money came into the market, which made speculation possible. Now there will be a moderate weekly gain, more press and more demand. The largest holders of Bitcoin know better than to dump their entire supply onto the market, as they lose out that way.

The market will always adjust. Difficulty and measured depreciation are great.