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Author Topic: [reddit] The real cost of bitcoin? - Breaking Down the Math  (Read 9075 times)
enmaku
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August 13, 2011, 06:48:34 PM
 #61

People don't purchase the system on MtGox, they purchase Bitcoin.  You accurately describe bitcoin (the system) but not bitcoin (the bitcoin.)  True that bitcoin cannot exist apart from the system, neither can any program, including the bitcoin system, exist separate from a computer.  Windows is still a product though (even though it's just some useless 1's and 0's), I can buy the OS, it's my copy, it belongs to me.  The same appears to apply to bitcoin.

This is true, there is some difference though. If I purchase Windows i'm not expecting to my get anything back from it, as long as i'm able to use it for a certain length of time i will be happy. However with bitcoin people who purchase it are expecting to receive their investment back (whether that be by purchasing services/goods or exchanging back for USD).

 - If a miner produces 1 BTC at the cost of $1.
 - $1 production cost goes to the power company, leaving the system.
 - I buy the coin for $1.10, believing that i will be able to purchase goods/services worth that value.

How can the coin be worth $1.10 when $1 has already left the system? The system is insolvent.



So you're saying that if a manufacturer spends $10 to make a t-shirt and then I buy it for $11 that my t-shirt only has $1 worth of value because $10 already "left the system" at the manufacturer? You have no idea what you're talking about... Think of it less like a currency and more like a commodity: As a miner I spend about $4 on electricity to create one bitcoin, which I then sell for a marked-up price. I turn a profit on the act of creating the coin, just like a manufacturer printing t-shirts. People then use these coins I've created to barter with. If you had a pile of t-shirts worth $150 and you had a video card worth $150, that would be a fair trade.

In short, mining bitcoins is a business with costs and markup while bitcoins themselves are a barter instrument used to facilitate trade. The one has little to do with the other except for the slight inflation caused by the ~7200 new BTC mined each day.

Gold, for example, has a market value and it has a cost to mine. If the cost to mine gold is less than the selling price, people will mine it. The greater the disparity between cost and resale value the more people will mine for it. Let's say it costs $600 in overhead to mine 1 oz of gold and that gold sells for $1,600 per oz. The cost of production doesn't remove money from the system, the only effect the miner has is the slight inflation of gold stockpiles created by the new gold entering the system.

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August 13, 2011, 07:03:05 PM
 #62

Thank you Enmaku, for saying a thousand things that should have been said earlier in this thread.  I blame myself.

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I don't support the artificial value of BTC, don't buy BTC at ridiculous prices.  Let Miners learn the lesson banks wouldn't.  The Supply has outgrown Dema
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August 13, 2011, 08:00:49 PM
 #63


ZBY, what are you smoking, seriously.  How does 1) Computers being profitable relate to whether or not you can hold Bitcoin purchases up to ethical standards as a product; 2) Money transferring from one human to another not qualify as spent?  (Spent money only vanishes in video games, bro.)  I don't mind existentialism in it's place, but I'm gonna stick with the dictionary on this one.

Ad 2. If you transfer $10 from one of your accounts to another one - do you count this as your revenue?

Ad 1. - please expand on this I don't see how it relates to what I wrote.

And please use meritoric arguments not these low ad. hominem attacks.
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August 13, 2011, 08:56:54 PM
 #64

Once cold fusion reactors are here, electricity will be limitless and unmetered anyway, so what's the problem?
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August 13, 2011, 11:15:23 PM
 #65


ZBY, what are you smoking, seriously.  How does 1) Computers being profitable relate to whether or not you can hold Bitcoin purchases up to ethical standards as a product; 2) Money transferring from one human to another not qualify as spent?  (Spent money only vanishes in video games, bro.)  I don't mind existentialism in it's place, but I'm gonna stick with the dictionary on this one.

Ad 2. If you transfer $10 from one of your accounts to another one - do you count this as your revenue?

Ad 1. - please expand on this I don't see how it relates to what I wrote.

And please use meritoric arguments not these low ad. hominem attacks.

*feeds ZBY some troll chows and scratches behind it's ear* Night bro.

I use Trade Hill, you can use my referral code (TH-R115864) for a 10% discount on commissions
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I don't support the artificial value of BTC, don't buy BTC at ridiculous prices.  Let Miners learn the lesson banks wouldn't.  The Supply has outgrown Dema
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August 13, 2011, 11:41:25 PM
 #66

The main error here, apart from the incorrect kw/h cost quoted, is assuming that 306 transactions per hour is the current network capacity. It isn't. I don't know exactly how many transactions per hour could be processed by the current hash pool, but I'm sure it's many orders of magnitude higher than 306.
The transaction rate can't grow more than two orders of magnitude before we hit the artificial cap on the block size. In practice I'm not sure if the pools could even scale up that far; if I'm reading the code correctly the cost to pools of generating work scales linearly with both the number of miners and with the number of transactions per block, and they're struggling a bit as it is.

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August 14, 2011, 06:09:20 AM
 #67


ZBY, what are you smoking, seriously.  How does 1) Computers being profitable relate to whether or not you can hold Bitcoin purchases up to ethical standards as a product; 2) Money transferring from one human to another not qualify as spent?  (Spent money only vanishes in video games, bro.)  I don't mind existentialism in it's place, but I'm gonna stick with the dictionary on this one.

Ad 2. If you transfer $10 from one of your accounts to another one - do you count this as your revenue?

Ad 1. - please expand on this I don't see how it relates to what I wrote.

And please use meritoric arguments not these low ad. hominem attacks.

*feeds ZBY some troll chows and scratches behind it's ear* Night bro.

I take this that you do understand that transferring money between your own accounts does not count as revenue.  Next step is to realize that if you count the revenue of two companies treated together - you also would not count the money transfers between them.  Think more about the problem at hand and less about inventing this stupid troll accusations - just say - explain this or I don't get it here.
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August 14, 2011, 06:21:24 AM
 #68

Except I do not see why you would account for two separate companies together, unless you owned both of them, which would still be transferring money between two accounts you own. 

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August 14, 2011, 06:42:29 AM
 #69

Except I do not see why you would account for two separate companies together, unless you owned both of them, which would still be transferring money between two accounts you own. 

The point is that if we compute the revenue of the bitcoin system as a whole - we treat humanity as the bitcoin owner also as a whole.  The question is is bitcoin profitable for humanity?  And to answer this we need to treat the humanity as it was one person.  It is as if one person did something - like planting a seed - will that be profitable for him?  You count on one side the work he puts into the endeavour, the cost of his tools etc. on the other hand you count the benefits he gets from the plant after it grows, the nutrition from the fruits.  You don't count the fruits twice if when picking them he takes them from one hand to the other.
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August 14, 2011, 10:52:06 AM
 #70

So you're saying that if a manufacturer spends $10 to make a t-shirt and then I buy it for $11 that my t-shirt only has $1 worth of value because $10 already "left the system" at the manufacturer?

Ok bad analogy, "worth" was the wrong word. However if I buy a t-shirt which costs $10 not because I want it or have any use for it then yes I am in deficit $10 until i manage to find a buyer. However people buy t-shirts because they have a purpose, to wear, they have a a fundamental use as a product. If at anytime the t-shirt "system" closed the manufactures have their money and the customers have their t-shirt, nobody looses. However the bitcoin "product" does not have a use outside the system, so if at anytime the bitcoin system closed the miners would have their money, but the holders would be left with a bunch of worthless hashes. The bitcoin system is insolvent, requiring a constant injection of new cash which means eventually someone has to loose out.

What if everyone in the bitcoin economy was using a shared pot of money. In the current bitcoin system anytime a person buys a coin a small profit goes to the miners (staying in the pot) but the majority goes to the power companies (leaving the pot). When the system closes the miners can take their small profit but the the majority has been spent on electricity, leaving the pot looking decidedly empty. If bitcoin was of negligible cost to manufacture when an investor bought a coin all the money would go to the miners, staying in the pot. When the system closed the holders still loose out but the miners have made significantly more, there is a redistribution of wealth, but as a whole the group breaks even.

Until 2014 miners will be producing some 7200 blocks / day which at a market price of $10 requires an input of $72,000 / day to pay them. At $30 it is $216,000 / day (or nearly $80 million dollars a year). The miners are parasites feeding off the collective bitcoin system, but not even they will be the real winners, as a collective group we are throwing our money away. Sure, while the system is running we get some use out of bitcoin as currency but the cost of this dwarves all other types of money and the bigger the system grows the more and more people that will suffer.


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August 14, 2011, 01:05:52 PM
 #71

Once cold fusion reactors are here, electricity will be limitless and unmetered anyway, so what's the problem?

The laws of physics?
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August 15, 2011, 01:07:50 AM
 #72


kilowatts per gigiahash * cost per kilowatt * gigahash per hour = bitcoin running cost per hour
So at 650 watts per gigahash at 15 cents per kilowatt hour.
0.65 * $0.15 * 13,300 = $1,297 per hour


Sorry to bring up the OP, but there were some interesting points missed in the discussion.

$31,000 for electricity for 13,300 Ghash is one value, but remember a short time ago (June) it was 1/3 of that, and a mere 12 months ago was 1 Ghash ($30/day world wide electricity!!)

The cost per transaction appears driven by more than just the transactions.  Given the right numbers, you can prove almost anything.
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August 15, 2011, 08:20:14 AM
 #73

Sorry to bring up the OP, but there were some interesting points missed in the discussion.

$31,000 for electricity for 13,300 Ghash is one value, but remember a short time ago (June) it was 1/3 of that, and a mere 12 months ago was 1 Ghash ($30/day world wide electricity!!)

The cost per transaction appears driven by more than just the transactions.  Given the right numbers, you can prove almost anything.

New advancements in hardware efficiency only effect energy consumption briefly. Once all miners are using the new technology they now have lower costs and competition forces difficulty to increase until their profit margins are the same. If GPU's are twice as cheap to run then miner can afford to run double the amount.

Quote
If bitcoin replaced visa.
Some various scenarios on energy consumption:

  • At the current bitcoin minimum transaction fee of 0.5 cent (low priority) BTC miners would consume 2 million MW-h/yr. Enough electricity supply pa for 400,000 Europeans.
  • If miners charged a similar 2% transaction fee they would consume more electricity than the whole of Japan. If this electricity was provided by solar panels it would require an area the size of the Bahamas (13,333k km2).
  • If the security bitcoin miners provide at present was to scale up linearly to Visa's volume miners would consume enough electricity to power Spain (43 million people).
  • Disregarding transaction fees, if the price of bitcoin rose to $50 before 2014 miners would consume 1,314,000 MW-h/yr, enough to power the Virgin Islands. If the price were to skyrocket to $1000 miners would consume 26,280,000 MW-h/yr, enough to power Ireland.

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August 15, 2011, 08:30:01 AM
 #74


Okay, I get it now.  The part I didn't understand is the part that nobody has worked out yet.  I think any possible solution would either be just as taxing on the ecosystem as the bitcoin system, or would be so efficient that bitcoin would adopt it to replace the inefficient hashing in it's own system.  I don't see a change in Proof of Stake except to move shift the responsibility for mining/transacting costs off of the miners and onto the End Users.


Yeah, the idea is to shift responsibility on to end users, that is, the people who are harmed by declines in security should be the people responsible for maintaining security.
The beauty of that you can get away with making very small payments to the security guards, whereas hiring third parties (miners) requires large payments.
 
Sure it might be copied by bitcoin. For society that is a good outcome. True, that possibility is is not attractive to the potential innovators. Meh, I was relying on someone else to do the dirty work of innovation anyways.

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August 15, 2011, 08:38:40 AM
 #75

Sorry to bring up the OP, but there were some interesting points missed in the discussion.

$31,000 for electricity for 13,300 Ghash is one value, but remember a short time ago (June) it was 1/3 of that, and a mere 12 months ago was 1 Ghash ($30/day world wide electricity!!)

The cost per transaction appears driven by more than just the transactions.  Given the right numbers, you can prove almost anything.

New advancements in hardware efficiency only effect energy consumption briefly. Once all miners are using the new technology they now have lower costs and competition forces difficulty to increase until their profit margins are the same. If GPU's are twice as cheap to run then miner can afford to run double the amount.

Quote

Ooops, missed the point I was making.  Having another go - even if GPUs were 10 times more efficient, the original math was that for a given X Ghash it cost Y dollars of electricity meaning it is currently expensive (relatively).  But if you did the same calculation a short time ago, the answer is quite different.
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August 15, 2011, 08:47:03 AM
 #76

Ooops, missed the point I was making.  Having another go - even if GPUs were 10 times more efficient, the original math was that for a given X Ghash it cost Y dollars of electricity meaning it is currently expensive (relatively).  But if you did the same calculation a short time ago, the answer is quite different.

Sure things were different bitcoin is now much more popular and can support a larger ecosystem of miners. Also a few months ago we were still going through the "gold rush" e.g. the cost of producing a bitcoin was significantly lower than the market price. Things are now starting to reach their natural equilibrium where the electricity cost of producing 1 bitcoin is close to the market price (not quite there yet).

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August 15, 2011, 09:12:27 AM
 #77

One more thing to add. Consider these scenarios:

We have approx. 14 million coins left to mine.

1) If the price of bitcoin stayed at $10 tomorrow then by the time all bitcoins are mined we will have spent in the region of $140 million dollars on electricity.

2) If the price of bitcoin rose and held at $100 tomorrow as a collective group we would spend $1.4 billion dollars.

What is gained in the 2nd scenario? The security provided is surplus to requirements and cannot exist at that level when the 50 BTC block rewards stop. We are paying to distribute wealth but using that wealth in the process.

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August 15, 2011, 10:15:11 AM
 #78

It will be interesting when the reward drops to 25btc.... I think all these get rich quick dweebs with 20+ rigs could be the first to shut up shop and take their Gh/s with them
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August 15, 2011, 11:25:08 AM
 #79

It will be interesting when the reward drops to 25btc.... I think all these get rich quick dweebs with 20+ rigs could be the first to shut up shop and take their Gh/s with them
If/when people actually start using bitcoins universally, the income from transaction fees will make these rigs profitable for those with the cheapest electricity. We will be talking about Ghz/s/Kw.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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August 15, 2011, 01:14:44 PM
 #80

true.... will still be an interesting time though.... either bitcoin has to be much more valuable or there needs to be many more transactions to cover the network's elecy bill
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