The BitCoin Mining Curve (same as oil)

[Batshit]

I'm just throwing it out there as I wait to get out of the Noob jail...

It seems to me that BitCoin mining should be expected to follow the same curve as oil, but within a much more compressed time frame.  BitCoin mining has behaved exactly like oil.

While it was at the surface, everyone could get it.  Just pick a spot and dig a hole.  Over time, it became more scarce and difficult to get out of the ground.  2009-2012, one only needed some retail parts to be a miner.  Now, with ACIS boxes set to zerg within the next few weeks, all that easy BitCoin mining is a goner.  Only very high-end players from then on out need plug into the mining market until eventually, just as it is with Exxon now making profit at the rate of $5M/hr, so too will BitCoin mining become limited to just 2-4 ACIS-powered swarms.  One needs to be in that swarm to survive.  Standard Oil or Exxon - pick one.

WHEN that consolidation happens, will BitCoin be less attractive and thus not as readily adopted?  Or even dumped?  Will the price soar because most BitCoin holders are hoarders and supply/demand fully kicks in?  Or will BitCoin tank because the price rise would have been too much faster than the BitCoin rate of adoption and proliferation?  

I don't know.  I'm just a Noob wasting time until I can post elsewhere...

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[b!z]

I think that is a good analogy. Mining is getting harder and harder. However, miners need to sell BTC or else they will not be making money :-)

[Batshit]

So, following on the heels of my OP, at some point it will be possible for those ASIC swarms to control the math.

What am I going on about?  Well, if the new standard is, say 100k M/sec, then the mom & pop miners become statistically insignificant.  In fact, they would likely take themselves offline.  That means the remaining 2-4 swarms could operate essentially like the OPEC cartel and willfully control BitCoin production rates because the algorithm can go up AND down.  So, perhaps the BitCoin cartel - after wiping the mining landscape of the mom and pop competition - might mine at 100,000 M/s for two weeks, 200,000 for two weeks, 300,000 for two weeks, 400,000 for two weeks, then throttle back down to 100,000 until the difficulty goes back down to what it was before at 100,000 M/sec.  Rinse and repeat.

In this way, the mining recovery rate remains high  (except during the throttle-down period) because the ASIC swarms control the difficulty and the BitCoin cartel could (in theory) manipulate the price of BitCoins by controlling the supply-side in the same way OPEC impacts the price of oil.

I am just a Noob and I haven't read any papers regarding the mechanics of the algorithm.  Perhaps I should?  As a capitalist, it just seems logical to me...

[Batshit]

Christmas(!)...I can't believe the Noob jail timer only says I've been logged in for just 2hrs and 51 minutes...I haven't logged out since my 2nd post...

So, more ranting is in order... 

So, one might attempt to argue that up to now, the evidence does not prove that production does not affect the BitCoin price.  Well, that is because up to now, mom & pop miners (sub-ASIC miners) have been willing to sell production at prevailing prices, the BitCoin proliferation/adoption rate has been relatively low, and the competing currencies are more readily available as an option to using BitCoin.  In other words, society does not NEED BitCoins to function.  There are too many alternatives.

So, it is (for now) in the interest of the ASIC swarms to find an equilibrium where the price remains high enough to be profitable, but low enough so as to encourage broad adoption of BitCoin throughout society.  Ergo, the BitCoin swarms must behave just as the OPEC cartel has behaved (and continues to behave).  In this way, the ASIC miners are handsomely rewarded and society prospers on the back of reasonably priced BitCoin.

[BurtW]

So, perhaps the BitCoin cartel - after wiping the mining landscape of the mom and pop competition - might mine at 100,000 M/s for two weeks, 200,000 for two weeks, 300,000 for two weeks, 400,000 for two weeks, then throttle back down to 100,000 until the difficulty goes back down to what it was before at 100,000 M/sec.  Rinse and repeat.

In this way, the mining recovery rate remains high  (except during the throttle-down period) because the ASIC swarms control the difficulty and the BitCoin cartel could (in theory) manipulate the price of BitCoins by controlling the supply-side in the same way OPEC impacts the price of oil.

I am just a Noob and I haven't read any papers regarding the mechanics of the algorithm.  Perhaps I should?  As a capitalist, it just seems logical to me...

Hmmm...

If they mine at a 4X rate for two weeks and the difficulty adjust to this high rate then the "cartel" cuts back to a 1X rate the block production rate would go from an average of 10 minutes per block to an average of 40 minutes per block.  So now they would have to wait 8 weeks for the difficulty to adjust downward so they could "rinse and repeat".

All of this has no effect on how many Bitcoins they would make in the long run.  Your scenario has them doing all the hashing, producing all the block and therefore earning all the fees and block subsidies - so there is no economic incentive to do this hash rate manipulation.

In your scenario (a cartel does all the hashing for us) hash rate would follow the market price.  If the market price drops then they would drop their hash rate in order to maintain their profit margin.  If the market price were to go up they would need to increase their hash rate in order to maintain their share of the network (keep others from profitably turning their mining rigs back on).

[Batshit]

So now they would have to wait 8 weeks for the difficulty to adjust downward so they could "rinse and repeat".

That would mean the algorithm's deceleration (decrease rate) would have to be linear.  Is it?  Would it really take that long for the algorithm to correct following an abrupt and significant decrease?  In the extreme (humor me, please), if the rate was 400,000 and then reduced to 0, then how long would it take for the difficulty to reset to the default difficulty?  Another 3 years?

I am also thinking with a "floor" of 100,000 M/sec, yesterday's mom and pops won't turn their rigs back on.  They would never be profitable.  Therefore, the cartel would not have to increase production to maintain market share as there would be no other (significant) production.  Just like it is with oil.

[Batshit]

Oh!  Clarification:

Those hashrates I am throwing around are PER MACHINE, not in aggregate.  So the cartel output would be that times however many ASIC machines they control.

[Batshit]

All of this has no effect on how many Bitcoins they would make in the long run.  Your scenario has them doing all the hashing, producing all the block and therefore earning all the fees and block subsidies - so there is no economic incentive to do this hash rate manipulation.

In the long run, yes the cartel would get all the remaining BitCoin eventually.  The incentive to hash rate manipulation is that they would get all the remaining BitCoin sooner and without additional investment in hardware (as has been the case to now).

[jspielberg]

All of this has no effect on how many Bitcoins they would make in the long run.  Your scenario has them doing all the hashing, producing all the block and therefore earning all the fees and block subsidies - so there is no economic incentive to do this hash rate manipulation.

In the long run, yes the cartel would get all the remaining BitCoin eventually.  The incentive to hash rate manipulation is that they would get all the remaining BitCoin sooner and without additional investment in hardware (as has been the case to now).

A bitcoin cartel won't work (just like cartel's don't work in the physical world) because there are no means of detection and enforcement.  Anyone can setup a solo pool an mine anonymously... double so if mining on the darknet.  Greed keeps the difficulty climbing which further protects the network.

[BurtW]

So now they would have to wait 8 weeks for the difficulty to adjust downward so they could "rinse and repeat".

That would mean the algorithm's deceleration (decrease rate) would have to be linear.  Is it?  Would it really take that long for the algorithm to correct following an abrupt and significant decrease?  In the extreme (humor me, please), if the rate was 400,000 and then reduced to 0, then how long would it take for the difficulty to reset to the default difficulty?  Another 3 years?

The difficulty adjustments happen after a certain number of blocks are found.  So, if you reduce the hash rate to zero no blocks are ever found so the block counter does not go up (ever) so the difficulty never adjusts.

Given a large enough drop in hashrate, for whatever reason, the next difficulty adjustment could be weeks, month or even years because the next difficulty adjustment will happen after a set number of blocks are found at the higher difficulty caused by the very high hash rate.

I am also thinking with a "floor" of 100,000 M/sec, yesterday's mom and pops won't turn their rigs back on.  They would never be profitable.  Therefore, the cartel would not have to increase production to maintain market share as there would be no other (significant) production.  Just like it is with oil.

Your floor is based on a certain market price.  If the market price were to go up enough and the "cartel" were to not increase the difficulty then, given enough of a rise in price, it would become a good idea for mom and pop to turn their ASIC machines back on.  Remember all the ASIC machines purchased only have one purpose, Bitcoin mining.  So these miners are either off because the BTC made does not cover the cost of electricity or they are on because the BTC made does cover the electricity cost.

One more factor is that given a steady rise in BTC price you can mine at a current loss because you figure you will get you money back tomorrow with the rise in the value of the BTC you mine at a loss today.

[BurtW]

In the long run, yes the cartel would get all the remaining BitCoin eventually.  The incentive to hash rate manipulation is that they would get all the remaining BitCoin sooner and without additional investment in hardware (as has been the case to now).

In the aggretate they do not get them sooner because while they are running at a hash rate above the difficulty they do get more than 6 blocks per hour BUT when they are running at a hash rate below the difficulty they get less than 6 blocks an hour.

In the long run these effects cancel each other out and they will get exactly 6 blocks per hour - no matter how much they screw with their hash rate.

As noted above:  the amount they will have to invest in hardware is driven by the market price of BTC.  The higher the price gets the higher the break even hash rate and difficulty.  The lower the price the lower the break even hash rate and difficulty.  If the price goes up they will have to bring more machines on line or others will.

[BurtW]

Try this thread for a more technical discussion:  https://bitcointalk.org/index.php?topic=281279.0