Bitcoin network cost is OK now, but may soon be hugely wasteful

[jaked]

Imagine that the price of BTC reached $1,000,000 USD on January of 2016. The block reward will still be 25 BTC, meaning that every day, 3.6 billion dollars worth of bitcoins is distributed to miners. Miners would be expected to spend almost 3.6 billion dollars per day to mine these coins. That's 1.3 trillion dollars per year, or almost 2% of the wealth produced globally every year (as of right now).

First of all, a probably more relevant comparison would be to the amount of money in circulation (M0), which is ~$10T.
This means, that at 1.3T per year, Bitcoin represents ~13% of the global wealth.

At these levels, governments power are much weakened, and as a result their spending is cut.
Governments typically spend anywhere between 40-70% of the GDP.
On top of government, we have financial institutions which coercively trade with our money, without paying dividends.

So we pay 2%, but get smaller and more efficient governments, and shrinked financial institutions in return.
I'd say the saving potential is dramatic.

[stompix]

How much is spent protecting the fiat currency system? All those guns and drones... If bitcoins are ever worth $1M each, it means people will be wasting less energy on fiat.

People will still get guns to protect their usb drives with the copy of the pkey , get electric fences for their mining equipment.
So the cost will just go back from the government to the people
I see an exponential raise in number of guard dogs the coming years.

[stompix]

Imagine that the price of BTC reached $1,000,000 USD on January of 2016. The block reward will still be 25 BTC, meaning that every day, 3.6 billion dollars worth of bitcoins is distributed to miners. Miners would be expected to spend almost 3.6 billion dollars per day to mine these coins. That's 1.3 trillion dollars per year, or almost 2% of the wealth produced globally every year (as of right now).

First of all, a probably more relevant comparison would be to the amount of money in circulation (M0), which is ~$10T.
This means, that at 1.3T per year, Bitcoin represents ~13% of the global wealth.

At these levels, governments power are much weakened, and as a result their spending is cut.
Governments typically spend anywhere between 40-70% of the GDP.
On top of government, we have financial institutions which coercively trade with our money, without paying dividends.

So we pay 2%, but get smaller and more efficient governments, and shrinked financial institutions in return.
I'd say the saving potential is dramatic.

You assume that bitcoin will replace money , but it's not like that right now and it's not heading in that direction too fast either.
Right now , you can see the bitcoin value more like an oil field getting discovered and explored.

This currency commodity investment puzzle has to come to an end but it won't be that fast.

[DerKorb]

I think this is a very good question and although many here state that 1 Million per Bitcoin is to much or mining will get more efficient etc it does not change the basic facts:
Miners will allways spend roughly the equivalent of the coins worth for mining. Because if they spend way less it would be so profitable that other will join up to the point where it isn't. A considerable portion of it will be spent for energy.
Energy consumption of the network already is quite huge and probably way more than would be neccessary (i'm no an expert there but it does not look reasonable).
Assuming bitcoin continues its considerable growth we don't have to wait until it hits a million. Each growth in value by factor ten will also be followed by a similiar growth of energy consumption. The question is does the block reward shrink fast enough to counter the growth in value?

[stompix]

To start an attack on the bitcoin network (51%) you need around 4000 Neptunes right now.
That would lead to around 50 millions , if bought directly not production cost.
And the cost would be 1mil/month.

So , is the bitcoin network such an expensive and wasteful thing?
By comparison one of the banks in my country , 5th by importance was paying 5 millions euros per year as rent for their main branch office.
Let's multiply this by at least 5x for all the subsidiaries , by 5x for all the top 5 banks , and taking into account the size of my country by 300x for the world.

And , we're talking rent here , not electricity.

[bitpop]

Miners are being made as fast as possible already. ANY increase couldn't make more.

[go1111111]

First of all, a probably more relevant comparison would be to the amount of money in circulation (M0), which is ~$10T.
This means, that at 1.3T per year, Bitcoin represents ~13% of the global wealth.

No, M0 is not equivalent to global wealth.

You do bring up a good point that the deadweight loss resulting from excessive government power is perhaps greater than 2% of gross world product, and therefore even if 2% of GWP was spent on the Bitcoin network it might be worth it if it weakens governments enough.

The question is does the block reward shrink fast enough to counter the growth in value?

And the question in the future is: will the block reward eventually fall off too quickly to keep the network adequately secure? In general, the strength of the network is determined in a very crude manner, based on hardcoded rules, picked at a time when Satoshi could not know how fast Bitcoin would gain traction and what kind of security it would need at different points in its evolution. I think this is Bitcoin's biggest weakness.

[smooth]

The question is: is 2% of global wealth devoted to protecting the Bitcoin network overkill?

The financial sector is roughly 10% of US GDP so 2% isn't automatically a "wasteful" number. It might be, depending on how much more efficient the rest of the financial sector becomes, or how much incremental wealth is created by people using bitcoin.

Also, the issue with 25 BTC/block is entirely temporary. When the block reward gets cut in half in ~2 years your 2% estimate instantly drops to 1% (and then 1/2% at the next reward drop). Of course that ignores transaction fees.

[stompix]

The question is: is 2% of global wealth devoted to protecting the Bitcoin network overkill?

The financial sector is roughly 10% of US GDP so 2% isn't automatically a "wasteful" number. It might be, depending on how much more efficient the rest of the financial sector becomes, or how much incremental wealth is created by people using bitcoin.

Also, the issue with 25 BTC/block is entirely temporary. When the block reward gets cut in half in ~2 years your 2% estimate instantly drops to 1% (and then 1/2% at the next reward drop). Of course that ignores transaction fees.

You can safely ignore transactions fees for the moment.
Without the once in a while mistakes when somebody pays some outrageous tx fees , it has rarely touched 50BTC per day and only 10-15 lately.

[jaked]

Imagine that the price of BTC reached $1,000,000 USD on January of 2016. The block reward will still be 25 BTC, meaning that every day, 3.6 billion dollars worth of bitcoins is distributed to miners. Miners would be expected to spend almost 3.6 billion dollars per day to mine these coins. That's 1.3 trillion dollars per year, or almost 2% of the wealth produced globally every year (as of right now).

First of all, a probably more relevant comparison would be to the amount of money in circulation (M0), which is ~$10T.
This means, that at 1.3T per year, Bitcoin represents ~13% of the global wealth.

At these levels, governments power are much weakened, and as a result their spending is cut.
Governments typically spend anywhere between 40-70% of the GDP.
On top of government, we have financial institutions which coercively trade with our money, without paying dividends.

So we pay 2%, but get smaller and more efficient governments, and shrinked financial institutions in return.
I'd say the saving potential is dramatic.

You assume that bitcoin will replace money , but it's not like that right now and it's not heading in that direction too fast either.
Right now , you can see the bitcoin value more like an oil field getting discovered and explored.

This currency commodity investment puzzle has to come to an end but it won't be that fast.

Of course it's not like that right now. But IMO it can't reach the level of 10% or even 1% of global GDP without replacing a roughly equivalent amount of fiat.

Although BTC has many use cases, its function is first and foremost be direct competitor to fiat.
In the long run, it's success will depend and be directly correlated to the amount of fiat it replaces.

[ShadowOfHarbringer]

You've all heard the environmental/waste argument "the Bitcoin network uses too much computing power."

Right now I don't think this is a good argument. We're not spending that many resources mining if you make the comparison with the cost of securing banks and credit cards. However, if bitcoins jump in price like a lot of us hope they will, this will be a legitimate problem.

Actually, it will never be a problem because modern computing technology is still extremely inefficient and there are no signs that it will improve anytime soon.
Most of the power (I don't remember exact numbers, but it is at least 75% or more) that CPUs/ASICs use is still wasted as heat.

So we can use the heat produced by CPUs, GPUs and ASICs to heat our buildings.

Problem solved. NEXT, PLEASE !

[jaked]

First of all, a probably more relevant comparison would be to the amount of money in circulation (M0), which is ~$10T.
This means, that at 1.3T per year, Bitcoin represents ~13% of the global wealth.

No, M0 is not equivalent to global wealth.

I didn't say M0 is equivalent to global wealth.

BTC's value shouldn't be expected to reach the level of global wealth.
It should be compared to the amount of physical money in circulation, because that's what's used for direct exchange between consumers and producers, and that's where it competes in.
M1,2..n levels can be built on top of any currency, including Bitcoin, but those levels don't increase the value of the currency.

BTC's ultimate potential is equivalent to the global M0, not any higher level. (I'll note that BTC has other uses that increase its demand, such as a registrar and notary of all sorts, but let's put them aside for the purposes of our discussion).

[bithernet]

How much is spent protecting the fiat currency system? All those guns and drones... If bitcoins are ever worth $1M each, it means people will be wasting less energy on fiat.

good answer!

[Phinnaeus Gage]

He said imagine, not "is this possible?"

I believe tom is giving us a thought exercise, isn't this what the forums are for.  Thinking up situations that could possibly happen, and what those consequences would be.

I for one think that the argument is a valid one.  As the price rises, the more miners jump on board.  The more miners, the difficulty increases.  Difficulty increases, miners want a price increase to cover it.  So on and so forth.  It all started about a month after the reward halving, and then when ASICs hit the scene then the price skyrocketed.

It's not an instant effect, but it's there.

I assume when you said tom you meant the OP?

We can all dream up situations that could possibly happen and then concoct some kind of thought exercise, sure. But what's the point in dreaming up a totally implausible thought exercise? There is no worth to it.

What is far more useful is to imagine a scenario that could realistically happen and then explore around that point.

The reason this situation is implausible is because the time it would take to get to a $1million per btc price tag would allow for significant technological developments, making mining more efficient as well as energy infrastructure, energy generation etc.

There is simply no point in conjecturing around something which is so far into the future that you cannot even begin to comprehend how different even the most basic functions of life will be. If Bitcoin does have an effect comparable to the Internet, then the world we will be inhabiting in 15 years time (when the price per bitcoin will still not be anywhere near $1million) will be totally different, having gone through a new round of innovation and economic evolution. Then imagine how it will look if we do reach 1btc=$1million. I cannot even begin to comprehend what that world would look like, hence this debate is pointless.

Anyway, I realise I'm just being annoying now so I'll bow out and leave you to your conjecturing. Happy Christmas!

Tom

For me, it was worth reading your well-written post (seriously), and coming to the realization that you may have penned other nuggets that I may have missed.

I can't count how many times I've read threads where the OP was skewed in some way, yet subsequent posts offered up golden kennels. Likewise, how many threads have you (the reader) stumbled upon where the OP was spot on (via Google, I just learnt that a hyphen is not needed) and well-articulated, yet subsequent posts spanning several pages offered nothing much of substance? Rare, but probably has happened.

~TMIBTCITW

[go1111111]

<snip some stuff>

The equation of exchange will let you calculate the value of any currency, if you have an estimate of its velocity. In Bitcoin's case, it's:

(price of 1 BTC) == [(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(bitcoin velocity)]

Your argument is so general that it uses figures from the world today to create an argument about the world in X years time?

Your thesis is based on annual global wealth being $1.3 trillion. As I've said, the world in X years time (when btc = $1million) is so far into the future that this figure is utterly ludicrous (unless the global economy fails to grow at all in those many decades...)

In my hypothetical scenario, 1.3 trillion was the total mining rewards in one year, not the global wealth. You are fixating on the random numbers I picked to illustrate my point, and you're missing the actual argument.

To put it another way: people will spend roughly the value of all mining rewards in an effort to get these rewards. The best amount of security for the Bitcoin network is only very crudely related to the value of these mining rewards. That is a problem.

[bitpop]

So what's the answer

(price of 1 BTC) == [(World GDP in dollars)*(fraction of economic transactions

[jubalix]

[1] block reward goes down so less btc rewards to fund mining, though transaction may become more valuable

[2] PeerCoin/NXT/emunie gives answers to this question. Nothing to stop BTC forking to PeerCoin code base for mining

[Phrenico]

You've all heard the environmental/waste argument "the Bitcoin network uses too much computing power."

Right now I don't think this is a good argument. We're not spending that many resources mining if you make the comparison with the cost of securing banks and credit cards. However, if bitcoins jump in price like a lot of us hope they will, this will be a legitimate problem.

Actually, it will never be a problem because modern computing technology is still extremely inefficient and there are no signs that it will improve anytime soon.
Most of the power (I don't remember exact numbers, but it is at least 75% or more) that CPUs/ASICs use is still wasted as heat.

So we can use the heat produced by CPUs, GPUs and ASICs to heat our buildings.

Problem solved. NEXT, PLEASE !

This doesn't solve the problem. Let's say that you productively harvested all of the heat that BTC mining equipment released, (used it to toast bread, heat water, etc..), the marginal cost of mining would be 0 (because you needed the electricity anyway).

That would simply entice more people to enter the market, and the cost of maintaining the bitcoin network would be in raw materials, semiconductors, time, rather than in energy.

The standard economic analysis is perfectly valid and predicts that the cost of maintaining the network will equal the value of the coins created.

This is real dead-weight loss. Not even on the order-of-magnitude loss as government, so I'm happy to take money-creating authority from them. I don't think it will cause a problem for bitcoin adoption from an individual point of view, but it's a legitimate concern.

Interestingly, this means that taxation () of bitcoin mining is one of the few forms of taxation that results in no dead-weight loss, so if the government can put this money to good use somehow, that wouldn't be a bad thing. Further, if bitcoins were fractionally reserved, the price could stabilize at a fraction of the theoretical amount resulting in less dead-weight loss.

Obviously, the flipside to this is a price that is too low to subsidize miners and a weak network, provided no fixes to the transaction fee tragedy of the commons are implemented. It's an amazingly tough balance to strike, especially for Satoshi who had to do this all years in advance.

[minerva]

7% of GDP goes to the financial sector.
It used to be 2% in the 80s.
Basically, instead of spending money on fat cats, we'll be spending it on engineers and IT professionals and coal miners.