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Author Topic: Economic Equilibrium and ROI for Miners  (Read 1938 times)
tacotime
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August 06, 2011, 10:43:02 PM
 #1

Bitcoin will currently continue to lower in value as long as the following is satisfied:
- Miners can sell the BTC they make for more than they can easily invest it for (>5% annual, maybe >2.5% in the current economic atmosphere)
- The global economy is a downfall and people are looking to liquidate assets while they are still worth something.
- The BTC surplus as a result of high speed mining and immediate resale of mined BTC continues, that is, there is a low demand for BTC while the number of sellers remains high.

Eventually a point must be reached at which the miners are no longer willing to sell any BTC and an equilibrium must be established.  Where is this?

Average price of power in the US: 0.1109$ / KWh (2.66$ USD/day)
Typical hash rate/KWh: 1,750 MH/s (AMD 58xx/69xx cards), or 0.84 BTC/day
Average amount of time to mine 1BTC at this hash rate: 1.19 days
Total cost/BTC: 3.16$ USD

Let's looks at the current price of BTC, 7.5$ USD or so.  This represents an insane 99% profit after addressing for power.  Of course, hardware must be factored in here too, and it is assumed that at the end of the year most miners will have spent more on hardware than on power.  How much more?  A rig that can mine 1750 MH/s probably costs in the vicinity of 1000-1300$ USD.  The value of the hardware probably declines by about 30% each year.

Looking at each miner per year, let's say the rig costs 1200$ USD and by the end of the year just 840$ USD from devaluation.  The bitcoin miner must make 360$ to recoup this loss.  This makes our math easy, because it's clear than that he or she must make at the very least about 1.00$ per day.  We also know that we owe 2.66$/day of electricity, or about 971$ per year.  We mine 6.30$ USD a day (0.84 BTC), so our ROI (return on investment) is still 72% percent.  This is an enormous and unsustainable value.

Altogether, the cost of mining with this 1,750MH/s rig is 1330.90$ USD per year.

We need to make all this back plus at least 5% for ourselves.  That's about 1400$ that we'd need to make that year, to make this worthwhile.  That would mean we'd have to be mining 3.84$ USD of BTC a day, or that the value of BTC would have to be 4.57$ USD.

What matters is not the amount of BTC being mined each day or the difficulty or whatever.  What matters is the USD equivalents of whatever is being mined per day.  If the USD equivalent is less than the end of the year hardware costs and power costs plus a small 5% or so share, no one will mine, period, and the price must rise.  If the USD equivalent is more than the end of the year hardware costs and power costs plus a small 5% or so share, everyone will mine and the price must fall.

The current price seems to be unsustainable, as there is no reason to invest anywhere else if BTC mining returns such insane amounts.  For people investing in mining rigs there is another loss fear in case the market collapses and you lose the amount you spent on electricity and the devaluation of your hardware, but there is no way that price is an additional 65%.  There are no 70% junk bonds; at best it represents an additional maximum of 5%.

ASIC mining/other highly targeted hardware may not change this much because the resale value of something that can only mine BTC will be worth dickall in the event of the BTC market collapsing and must be purchased cautiously at the present time.

Code:
XMR: 44GBHzv6ZyQdJkjqZje6KLZ3xSyN1hBSFAnLP6EAqJtCRVzMzZmeXTC2AHKDS9aEDTRKmo6a6o9r9j86pYfhCWDkKjbtcns
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fastandfurious
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August 06, 2011, 11:04:20 PM
 #2

Nice looking calculation. I have been saying this for a long time now.

Let me add one important fact, many people as me mine without any electricity cost. In the end (one year from now?) , most of miners will have very low or no electricity cost. Putting even more pressure on the price.
tacotime
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August 06, 2011, 11:07:32 PM
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Nice looking calculation. I have been saying this for a long time now.

Let me add one important fact, many people as me mine without any electricity cost. In the end (one year from now?) , most of miners will have very low or no electricity cost. Putting even more pressure on the price.

No, that will never happen.  What will happen is that electric companies and people who provide power will begin to become much more aware that people are using their power to mine bitcoins and will put a stop to people mining for free, because what it amounts to is theft.  With bitcoin, we've basically made a way to produce money from electricity.  Once this is more widely known it will be clamped down upon hard, much like marijuana grow-ops that do so are (which operate on the same principle aside from the sale of an inflated black market product).

Code:
XMR: 44GBHzv6ZyQdJkjqZje6KLZ3xSyN1hBSFAnLP6EAqJtCRVzMzZmeXTC2AHKDS9aEDTRKmo6a6o9r9j86pYfhCWDkKjbtcns
fastandfurious
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August 06, 2011, 11:13:34 PM
 #4

Nice looking calculation. I have been saying this for a long time now.

Let me add one important fact, many people as me mine without any electricity cost. In the end (one year from now?) , most of miners will have very low or no electricity cost. Putting even more pressure on the price.

No, that will never happen.  What will happen is that electric companies and people who provide power will begin to become much more aware that people are using their power to mine bitcoins and will put a stop to people mining for free, because what it amounts to is theft.  With bitcoin, we've basically made a way to produce money from electricity.  Once this is more widely known it will be clamped down upon hard, much like marijuana grow-ops that do so are (which operate on the same principle aside from the sale of an inflated black market product).

The world is a big place, you are saying it will never happen is not right. There will always be opportunities in many places in the world where you can get very cheap or free electricity (for different reasons). I imagine that you live in US, US is not the whole world, and Bitcoin is a international phenomenon.
tacotime
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August 06, 2011, 11:18:13 PM
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Electricity price is dictated by the price of gas and coal and a few other materials and the amount of demand.  No one is going to give it away for free or even next to free.  The one thing economics and thermodynamics have in common is the law of conservation.  Even in places where it is about 1/3 of the cost of that in the US it is certainly still not free, and if suddenly everyone went there and started bitcoin mining the price would go up anyway because the demand for electricity would go up.  Start up costs are also higher in these countries because they are not the leading importers or fancy electronic goods and therefore must pay more to have them shipped to them, and also have to deal with high taxes of importation many times.

Code:
XMR: 44GBHzv6ZyQdJkjqZje6KLZ3xSyN1hBSFAnLP6EAqJtCRVzMzZmeXTC2AHKDS9aEDTRKmo6a6o9r9j86pYfhCWDkKjbtcns
fastandfurious
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August 06, 2011, 11:24:00 PM
 #6

Electricity price is dictated by the price of gas and coal and a few other materials and the amount of demand.  No one is going to give it away for free or even next to free.  The one thing economics and thermodynamics have in common is the law of conservation.  Even in places where it is about 1/3 of the cost of that in the US it is certainly still not free, and if suddenly everyone went there and started bitcoin mining the price would go up anyway because the demand for electricity would go up.

Let me tell you why I mine with free electricity. I have my mining rig at my families company. The company have a fixed level electricity cost, they consume a lot of electricity and the mining rig is a small part of it. A real example of how you mine for free. I can promise you that there is many more examples of this in the world. We are talking about a world with more than 6 billion people.
tacotime
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August 06, 2011, 11:26:07 PM
 #7

Yes, but how many of them are sustainable?  It's only a matter of time before someone realizes they are being short changed.  It's a zero-sum game.

Code:
XMR: 44GBHzv6ZyQdJkjqZje6KLZ3xSyN1hBSFAnLP6EAqJtCRVzMzZmeXTC2AHKDS9aEDTRKmo6a6o9r9j86pYfhCWDkKjbtcns
fastandfurious
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August 06, 2011, 11:28:20 PM
 #8

Yes, but how many of them are sustainable?  It's only a matter of time before someone realizes they are being short changed.  It's a zero-sum game.

Read what I wrote, I'm not saying that everyone will mine with free electricity, but many will, and most will mine in the end with a low electricity cost (relative others in the world).
fcmatt
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August 06, 2011, 11:30:12 PM
 #9

it does not really matter if there are 10000000 miners or 10.. difficulty will adjust on network speed and about the same amount of BTC will be mined
on average over time until we the reward drops to 25.

correct?
fastandfurious
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August 06, 2011, 11:33:32 PM
 #10

it does not really matter if there are 10000000 miners or 10.. difficulty will adjust on network speed and about the same amount of BTC will be mined
on average over time until we the reward drops to 25.

correct?

Correct.

Look at the increasing hash levels, it shows in a easy way the money that has been invested in mining rigs. Money that they/we will want to get back at the exchanges.
RandyFolds
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August 09, 2011, 03:56:40 AM
 #11

Electricity price is dictated by the price of gas and coal and a few other materials and the amount of demand.  No one is going to give it away for free or even next to free.  The one thing economics and thermodynamics have in common is the law of conservation.  Even in places where it is about 1/3 of the cost of that in the US it is certainly still not free, and if suddenly everyone went there and started bitcoin mining the price would go up anyway because the demand for electricity would go up.

Let me tell you why I mine with free electricity. I have my mining rig at my families company. The company have a fixed level electricity cost, they consume a lot of electricity and the mining rig is a small part of it. A real example of how you mine for free. I can promise you that there is many more examples of this in the world. We are talking about a world with more than 6 billion people.

Cost =/= free. No one has fixed rate electrical cost. If your family's usage goes up, so will the costs. If you think that isn't the case, you are an idiot....but you already think that something you admittedly pay for is free, so...

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istar
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August 09, 2011, 07:30:13 AM
 #12

I dont believe a price of $7 can be sustained for 7500 new coins each day for 1.2 years more. As price drops. Miners with high electricity cost will go away. As they go away. Miners with no electricity bill, mines more of the coins to sell at any price and still make a profit.

Meaning more miners will quit as the price goes down. In the end, a year from now only miners with zero electricity cost m ight be left.

Price could go down to perhaps $1-$2 in a year from now. Only when production of coins start to dry out, and a few years after will we know the final price.

Bitcoins - Because we should not pay to use our money
tacotime
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August 09, 2011, 11:17:21 PM
 #13

I dont believe a price of $7 can be sustained for 7500 new coins each day for 1.2 years more. As price drops. Miners with high electricity cost will go away. As they go away. Miners with no electricity bill, mines more of the coins to sell at any price and still make a profit.

Meaning more miners will quit as the price goes down. In the end, a year from now only miners with zero electricity cost m ight be left.

Price could go down to perhaps $1-$2 in a year from now. Only when production of coins start to dry out, and a few years after will we know the final price.


You are ignoring operation scale; obviously people who are making loads more money mining are mining in larger volumes where it would impossible to steal electricity without anyone noticing.  Someone with a quarter terahash/s operation will easily outcompete these free miners because their revenue is so much higher and they will have greater capital to invest in future mining operations, especially as difficulty increases, and will receive better rates because they are using hardware that utilizes less power (ASIC mining) or better deals on power because they are consuming it in bulk.  Free miners with small operational expenses will be more likely to bail as time goes on, as the market will swamped will large-scale miners operating on 5-10% margins from ASIC/hardware specific mining.  If the free miner buys a video card, mines all year with it and only loses money in the end because of the devaluation of the video card, there will be little to no incentive to mine even with no electricity cost.

In short if an ASIC miner can mine at 1/10th the power consumption of GPU mining, I would estimate the collapse of small-scale GPU mining (free or not) in a couple months time.  This will only happen after extended stability in the market and is probably not an immediate concern, but sometime next year folks who are small time mining should probably be concerned.

That is, the GPU mining market will eventually be outcompeted by people who have the revenue to invest to do it more cheaply.

Code:
XMR: 44GBHzv6ZyQdJkjqZje6KLZ3xSyN1hBSFAnLP6EAqJtCRVzMzZmeXTC2AHKDS9aEDTRKmo6a6o9r9j86pYfhCWDkKjbtcns
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