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Author Topic: BitCoin Pricing Formula  (Read 649 times)
shaun5000
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July 19, 2011, 07:18:22 PM
 #1

BitCoin Pricing Formula
When I first started to look at BitCoin I wondered if their might be a base price requirement in order to keep the BitCoin economy going. Here are the results of some of my thought, please let me know what you all think.

The basic costs of BitCoin are the following
1.   Hardware Capital Costs
2.   Hardware Upkeep
3.   Power
4.   Storage

Factors at affect BitCoin value*
1.   Mining Difficulty Factor (DF)
2.   Current Market Price
3.   External Demand (For uses other than just market trading)   

The following section is how I calculate what I call the ‘Base Price Network Cost’ or (BPNC).
   
The BPNC is the amount of money that a BitCoin must be sold for to ensure it was worth the initial cost of mining it. It has been my experience as a BitCoin miner that it costs approximately $1.70 USD per Mega Hash of mining power. I accept that people can get better rates but I use this figure as it is an accessible pricing rate. Given a DF of (1564057) 1G/hash will produce 0.58 BTC per day. The data has shown that historically the DF has increased by a factor of 10 every three months. The increase in DF operates at an increase interval of 0.667% every 6 days on average (Please feel free to let me know if I got my math wrong). The way to keep up is to ensure that your base cost of operations covers its own expenses. Let’s say the energy cost is $0.10 per KW/h and the miners are operating 24 hours a day. Based on my own systems, a 1.2 G/hash system uses approximately 17KW/h a day. This totals about $1.70 a day or $51 a month. Given that 1 system will generate approximately 17 BTC per 30 days. Using the price of $14 per BTC 1G/hash system puts out $238 – 51 (Power Costs) = $187 per 30days. Given a single system is approximately $1700; it will take 9 months to recover costs (assuming the DF remains constant, and we know it won’t).
**To keep price to DF ratio in line, the BPNC must follow that 1BTC must trade for 1.67 per 1T/hash of network production. Given the current network hash rate of 11.196 (as of 3:07pm July 19, 2011), the current BPNC should be approximately $18.69 USD. I propose that as new miners enter the BitCoin economy the price must rise to justify the cost of new capital investment. If we use the network hash rate as an indicator of new capital investment then it follows that when the total network hash rate reaches 20 T/hash than the BPNC must be $33; this does not include any costs outside of upkeep and capital repayment.

*I accept that there are a lot of other factors that BitCoin pricing.
*More research finding to be posted
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gigabytecoin
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July 19, 2011, 07:22:02 PM
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Interesting formula!

It is a great idea to keep your own personal metrics about various mining aspects.

When I started out, I calculated the speed/USD cost of each potential video card and calculated how long it would take to pay off from there.

You are right however that the valuation of a BTC depends on many other factors. The most impossible one to guage being "speculation".

I have seen USD/BTC prices jump as much as 30% in a single day.

So whatever you calculate today, might be off 30% by tomorrow Tongue Don't you just love bitcoins!?
shaun5000
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July 19, 2011, 07:25:29 PM
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My consideration here is not the price jumps per day, but the average change over a period of week and months. My concern is measuring the true cost of maintaining a BitCoin infrastructure. I suspect that because of a 'ratchet effect' caused by the DF, the price is forced to rise over time at an average and consistent rate. Thoughts?   
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