[reddit] The real cost of bitcoin? - Breaking Down the Math

[zby]

>Or to look at it another way bitcoin miners will spend over $11 million dollars this year on electricity, which is 17.6% of bitcoin's market cap.
>In contrast the federal reserve printing budget is ~$650 million or 0.0812% of USD value.

The $11 million is for securing the integrity of the currency not printing.
The Fed may spend ~$650 million on printing but that doesn't include security costs.

How much is spent on...

Continually developing new measures to make the bills hard to counterfeit.
The Secret Service in their effort to stop counterfeiting.
Prosecuting counterfeiters.

What's the cost of counterfeiting that is successful?


Since mining is a true free market the cost to mine will always be dropping as miners seek to maintain or increase profit.
Eventually all miners will have free or near free electricity, the rest having been driven from the market due to their inefficiency.

how much is spent on paper currency is irrelevant. Alternatives to bitcoin with similar security, but next to no electricity expenditure seem feasible. This should be enough to squash bitcoin. I'm just waiting for someone with the requisite skills to do it.

This is what Ben Laurie proposed (http://www.links.org/?p=1183).  It is still very vague and has the weak point of needing an 'admission' mechanism, some way for the system to accept new members for the guild of transaction timestamping servers.  Some argue that this can never be done in any secure way.  But it is important to note that the timestamping servers don't need to know what they are timestamping and thus they don't have big chances to manipulate the market.  Their task is very restricted and easy to control.

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[cunicula]

I think you would allow any client to stamp transactions and just give it voting power proportional to the number of coins in its wallet. A very small amount of interest would be issued as a reward for exposing coins in the wallet to the internet. Money supply expansion associated with the interest could be mopped up with very small txn fees.

Yes, you could amass a fortune in coins and attempt double spends, but you'd screw yourself by destroying the value of your assets. No one would do this.

[RandyFolds]

No one would do this.

Wanna bet?

[piuk]

Zby is right, the 50 btc mining reward has no value when paying electricity costs. All that matters is you've got x amount of USD coming into the system and x amount USD going out. Its true that miners are bringing more coins into circulation, increasing the Market cap and on paper creating a USD profit. But There is no guarantee there will be a buyer in future, to me it just sounds like a bubble.

For example even a few months ago when mt.gox was exchanging $3m per day. Let's say all of that is new income (extremely unlikely as people buy and sell multiple times. - $31,128 electricity per day is still 1% wasted. On the 28th July the volume was only ~$60k that means over 50% would be swallowed in electricity costs.

Bitcoin users are supporting this ecosystem of miners (not just electricity also time/hardware costs). Rather like the government I can't help but think a large deficit must be building.

[cunicula]

No one would do this.

Wanna bet?

Yes, but we'll have to wait for the new currency to come out before we have something to bet on. Also the currency has to be worth more than the value of the bet. I'll let you know when I feel this has happened and stake 30 bitcoin when the time comes.

Scratch that, I'll stake 30 bitcoin worth of the new coins. Otherwise, winning the bet will not be beneficial to me.

[Ridi]

I will not continue the conversation about the mined bitcoins being the revenue of the system - because this is useless.

If you are discussing the cost of producing a product (bitcoin), it doesn't seem feasible to ignore the market value of the product.  Even if the market is faith based, so long as the market exists it is a real factor.  Yes the market can cease to exist the next day or years from now.  We see that with every product.  I don't think iPhones (a physical product) will be around in 100 years, or the TurboTax program (a digital product.) That does not mean they are not worth producing today for their real world applications.  As long as BTC are profitable to produce, it is the linking factor between costing electricity and paying for it.

Yes, you could amass a fortune in coins and attempt double spends, but you'd screw yourself by destroying the value of your assets. No one would do this.

That is like asking why someone would counterfeit a deflationary currency like USD, since it's going to be worth less the next day anyways and more so with counterfeiting.  Even if you lower the value of the currency, the cost is distributed throughout everyone who holds the currency, so it ends up profitable at the cost of everybody else.



As for the electric cost/transaction, somebody raised the interesting point that the transactions are no where near the capacity of the system.  From what I've read the system can handle much more that Visa/MasterCard can on a daily basis.  Am I to understand that, if the amount of processing power dedicated to the system remains the same, but the amount of transactions increased 10-fold, the result would be that the cost/per transaction bore by the miners would be reduced to a tenth of it's current cost. In effect, no matter how many transactions go through the system the cost over all is the same, it's the miners who effect the economic cost, and therefore bear the burden, and not the end users?

[BubbleBoy]

If you are discussing the cost of producing a product (bitcoin), it doesn't seem feasible to ignore the market value of the product.  Even if the market is faith based, so long as the market exists it is a real factor.

Dollar is product too, and it seems sensible to compare the two. As it turns out, if bitcoins were to replace the dollar tomorrow, and deflate to the cover the ~2 trillion dollars in circulation (M1), then mining new bitcoins would profitable enough to command 70% of the current US electricity output for the next 10 years. It seems a world where bitcoins replaced the dollar is much more like Mordor, a shitty society where huge amounts of natural resources are wasted for solving the monetary problem.



Don't get me wrong, the huge office buildings banks build in our current society are also wasteful. But I don't necessarily want them replaced with coal or gas power plants. Don't even bring renewables into discussion until you understand them.

[Ridi]

Dollar is product too, and it seems sensible to compare the two.

You seem to be arguing my point for me, but I don't think this deflects from the point you were trying to make.

As it turns out, if bitcoins were to replace the dollar tomorrow, and deflate to the cover the ~2 trillion dollars in circulation (M1), then mining new bitcoins would profitable enough to command 70% of the current US electricity output for the next 10 years. It seems a world where bitcoins replaced the dollar is much more like Mordor, a shitty society where huge amounts of natural resources are wasted for solving the monetary problem.

Don't get me wrong, the huge office buildings banks build in our current society are also wasteful. But I don't necessarily want them replaced with coal or gas power plants. Don't even bring renewables into discussion until you understand them.

The amount of miners in BTC does make it seem to be very wasteful.  At current I feel that it's due to the profitability driving investors to push the capabilities of the system far beyond it's needs.  There seems to be a fault with Supply and Demand here that shows just how artificial the Bitcoin trade market has become.  Miners are screwing themselves into a corner in a similar way bankers did, by ignoring simple economic principles and abusing their control of the market.  Bitcoin is not worth 9.301 (mtGox) that is simply what idiots are willing to pay for it.

Some miners have said the price won't drop below five dollars because mining won't be profitable anymore.  I think it MUST drop below five dollars, because it's not worth that much.  If mining isn't profitable anymore after that then there is a simple explanation, the market is tapped out, nobody needs you.  Stop Mining and let the people who do it better than you take care of it.  You don't have to give up right away, you can give it a good college try, but at the end of the day supply and demand should determine your bottom line.

Unfortunately mining is rewarded whether their contribution is necessary or not.  In fact is rewards those who contribute the most resources the most often.  I think this is how it should be and that the problem is not with the protocol, but the idiots who are feeding the delusion that Bitcoin is as valuable as the artificial market has made it appear.

Enough idiots made a lot of money on the bubble though, so I'm thinking this artificial market is going to last quite a while until the BTC community goes broke from their idiotic spending splurge.

tl;dr  Bitcoin community has given Bitcoins an S&P AAA rating and it's going to burn a hole in our pockets fair and square.

[cunicula]

The point of proof-of-stake is that you have the fraud or you have the asset value. You can't have one without destroying the other.

Yes, you could buy half the coins out there (or some substantial fraction thereof). Now you could start ripping people off with chargebacks (this is how a double spend works). Everyone receiving coins could no longer tell if the coins were genuine or doublespends. If they could, then your fraud wouldn't have worked in the first place. Now that you've made your fortune completely illiquid, how are you going to convert it to goods and/or currency without taking an enormous loss?

A more or less direct analogy:

Paypal or VISA will start buying goods with paypal dollars / VISA and then charge them back intentionally to resell the goods. Do you think paypal / VISA 's shareholders would approve this?  Even without any legal enforcement whatsoever, the value of paypal / VISA is probably about 2 orders of magnitude larger then the goods that could be received through a temporary fraud operation. Fraud is not compatible with their incentives.

[Ridi]

Okay that is the second time that Proof of Stake has come up in this conversation.  Made up terms need to be explained.

[cunicula]

Currently votes on transaction validity are linked to hashing power. This is proof of work. Proof of stake refers to linking votes on transaction validity to the number of coins in your wallet. This is a good idea because it ensures truthful reporting without wasting vast amounts of electricity at the expense of asset holders.

[hugolp]

The attack of the trolls.

I bet you its only one troll with multiple accounts.

[da2ce7]

who said that the value of the bitcoins is judged by how cheaply (or expensive) they are to transfer between each-other...

Bitcoins value come from the fact that the barriers to disrupting the transactions are huge!   It requires a huge investment in bitcoin mining to start mucking around with other peoples transactions.

[zby]

I will not continue the conversation about the mined bitcoins being the revenue of the system - because this is useless.

If you are discussing the cost of producing a product (bitcoin), it doesn't seem feasible to ignore the market value of the product.  Even if the market is faith based, so long as the market exists it is a real factor.  Yes the market can cease to exist the next day or years from now.  We see that with every product.  I don't think iPhones (a physical product) will be around in 100 years, or the TurboTax program (a digital product.) That does not mean they are not worth producing today for their real world applications.  As long as BTC are profitable to produce, it is the linking factor between costing electricity and paying for it.

bitcoins are not the product of the bitcoin system - they are it's internal part.  The purpose of the bitcoin system is to make cheap value transfers and storage - not to produce some useless hashes.

[Ridi]

Currently votes on transaction validity are linked to hashing power. This is proof of work. Proof of stake refers to linking votes on transaction validity to the number of coins in your wallet. This is a good idea because it ensures truthful reporting without wasting vast amounts of electricity at the expense of asset holders.

Except that the amount of coins in your wallet don't actually do anything to improve your computers ability to make a transaction.  I don't understand the mechanics of it, but I can comprehend to an extent how Hashing (or whatever we are calling it that Miners do) is actually used to serve a purpose, even if the available power in the system far exceeds the need.

bitcoins are not the product of the bitcoin system - they are it's internal part.  The purpose of the bitcoin system is to make cheap value transfers and storage - not to produce some useless hashes.

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.

If the Hashes are so useless you should send them to me. 

[cunicula]

Your hashing power allows you to solve a mathematical problem (minimization by trial and error). Solving the problem entitles you to vote on transaction validity. You do not use the hashing power directly to verify txns. The alternative is to use the amount of coins in your wallet to assign votes. It is not entirely clear how this would work in practice, but it seems much more promising to me than the current approach. The big problem, i think, is how to aggregate information coming from many different nodes. It is probably infeasible to use info from all the nodes at once. One approach is to have the verifying node be picked randomly somehow linking the probability of random selection to the amount of coins in that node's wallet. This is analagous to how proof of work functions currently. If someone can make this work, it will be interesting.

[Ridi]

Your hashing power allows you to solve a mathematical problem (minimization by trial and error). Solving the problem entitles you to vote on transaction validity. You do not use the hashing power directly to verify txns. The alternative is to use the amount of coins in your wallet to assign votes. It is not entirely clear how this would work in practice, but it seems much more promising to me than the current approach. The big problem, i think, is how to aggregate information coming from many different nodes. It is probably infeasible to use info from all the nodes at once. One approach is to have the verifying node be picked randomly somehow linking the probability of random selection to the amount of coins in that node's wallet. This is analagous to how proof of work functions currently. If someone can make this work, it will be interesting.

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.

I'm making a separate post regarding the gouged prices in the bitcoin market.

[piuk]

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.

[zby]

bitcoins are not the product of the bitcoin system - they are it's internal part.  The purpose of the bitcoin system is to make cheap value transfers and storage - not to produce some useless hashes.

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.

If the Hashes are so useless you should send them to me. 

Let's say you wanted to compute if the computer industry is profitable for humanity.  You'd need to count the costs - and the revenue. What you'd need to count on the costs side is the work of the programmers, the electricity, the natural resources used in computers etc, and on the revenue side you'd need to count how computers help people with their work, how they let us communicate, etc. - all the value that we get from computers (all the things that 'computers do for us').  The price of a Windows installation that someone bought would not be counted on any side because this money gets from one member of humanity to another member of humanity - it does not vanish in this process, it is not spent.

As to sending the hashes - they are all public, available for anyone to grab, go and copy the current blockchain if you want them.

[Ridi]

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.

Except I do expect a return on investment on my Windows OS.  It depends on how I utilize it, but I expect at the very least for it to fulfill the terms of it's warranty.  Since Windows is a versatile product used to create and use other products, it's return on investment is a longer calculation that for currency which is a value placeholder.

The rest of your point is regular economics that seems to argue my point for me. Miner's have extended are use of resources beyond the need and it is hemorrhaging value out of the system, while also forcing investors to pay more for devalued currency.

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.