Miners running costs must pass trough exchanges - this limits the Bitcoin price

[mestar]

Miners running costs must pass trough exchanges and this will always be a downward pressure on the Bitcoin price.  Why must costs go trough the exchanges?  Because miners must pay their bills in currencies other than Bitcoins.

It's easy to estimate the combined running costs of all the miners, because they will always tend to the amount of total mining awards given.  This is due to the fact that mining is in a near perfect competition situation, and thus the profit margins will always be low.   

There are periods where profit margins could be temporary higher, like when the price of Bitcoin price jumps 30 times up, or when there are delays in delivering mining hardware, as was happening in 2013.   

So, what does this means for Bitcoin price?  It means that the higher the price of Bitcoin is, the higher the selling pressure becomes.  So, for Bitcoin to be a store of value, this must be offset with fresh buyers on the exchanges.

And this puts a limit on how high the price can go. 

Currently, this means that the total mining costs can go up to $3.6 million daily (price of $1000 per Bitcoin).  So, once we reach a somehow stable state, (where difficulty is not doubling each month), there will be a, perhaps $2 million of fresh cash needed to keep the price stable.

Also, when somebody says that Bitcoin can go up to $100,000 per Bitcoin (as Max Kaiser did), this means that there will be perhaps $200 million fresh money daily needed to prop up the price.   So, we can safely say that Bitcoin will never be that expensive.

[komar]

Also, when somebody says that Bitcoin can go up to $100,000 per Bitcoin (as Max Kaiser did), this means that there will be perhaps $200 million fresh money daily needed to prop up the price.   So, we can safely say that Bitcoin will never be that expensive.

Hi mestar.

According to BitPay blog:

The month of August was another record month for BitPay, processing over 10,000 merchant transactions worth over $6.4 million.

According to my chart, the current minings cost is about $100 per bitcoin. It's just an electricity cost.

And there are 3600 bitcoins generating every day.

So capacity to work for our crypto-currency costs $360,000 dollars every day, or $10,800,000 per month.

And we have just $6,400,000 of real operations per month.

Is that all a big ponzi-investment game or have I missed something?

[johnyj]

Some people say that it is always cheaper to buy coin instead of mine. From a trader point of view it is true, but from a bitcoiner's point of view, it is very wrong

Every amount of hash power you put in the mining will strengthen the network and raise the cost of each newly generated coin. This is the fundamental support for bitcoin's market price. If everyone just bought coins since 2011 and no mining equipments, bitcoin would never rise to $1000, because every new comer can easily mine 1 coin per day with a $300 graphic card at 2011's difficulty, no one will buy coin at $1000 price

And miners don't need to cash out all the coins, if they hold mined coins, the coins supply on the exchange will dry up quickly (Speculator's sell were absorbed by the long term investors and mostly disappear from circulation), thus support the exchange rate. The operating cost will be so tiny compared to the bitcoin's value after a couple of years, so they most likely finance that through other means

[cp1]

The depreciation cost is also significant, it's not just electricity.  I did a quick calculation based on the numbers in the genesis block.  If 50% of the hash rate are 50GH/s singles and 50% are 400 GH/s Jupiters then it's about $145 / coin if you give the hardware a two year depreciation, and $250 for one year.

Though I'm not sure that makes it a ponzi scheme.  I don't understand why you're comparing the currency's value to its electricity cost.  No other currency is based on its electricity cost, so why should bitcoin?

[Impaler]

BitPay transaction levels are irrelevant to the OP's analysis because commerce done with BTC-dollar conversion is neutral with respect to BTC and dollars quantities available on the market when people buy back their coins (which has become standard practice among the faithful for the explicitly goal of keeping valuation artificially high).

Say Bob starts with 1 BTC, Bob buys a Guitar from a merchant, the merchant uses BitPay which sells the coin on an exchange and gives the merchant $1000.  Then Bob goes onto the exchanges and spends $1000 to buy a single BTC.  The net effect is to move $1000 from Bob to the merchant and a Guitar from the merchant to Bob.  The value of BTC is irrelevant to the transaction and causes no net movement in BTC value because the same number of BTC and dollars are available on the market.

Mining though is a continual creation process that puts a downward pressure on prices IF the newly mined coins are allowed to reach the exchanges.  Currently most newly mined coins are being hoarded by miners out of the same kind of collective market manipulation that the Bob example demonstrates.  This can't be maintained forever, eventually miners will over-invest (they may already be) and difficulty will squeeze out nearly all profit forcing them to start selling.  That will begin a long bear market trend.


komer:  Your numbers look right to me (but I use 4k as a rough mining production per day during a period of exponential hash-growth, difficulty lags a bit and this means mining averages ~9 minutes per block), the dirty secret of BTC is that (on average) it dose not circulate.  Generally new coins get used at most once in a real transaction and then disappear into hoards.  This is all by design of the BTC crowd that actively promote the disappearance of coins into hoards so that the available pool of coins shrinks causing exchange rates to balloon on artificial scarcity.  Also BTC is best described as a Pryamid scheme mixed with a stock-bubble, it is not a Ponzi scheme.

[kdrop22]

I would say the total coins coming into the market = Mining supply + Divestment of existing holders.

Divestment of existing holders / per year - I would say is around 20%. (can be higher or lower that this).
Lets say there are 12 million coins = 
20% of this = 2.4 Million coins

Mined coins per year = 1.3 Million

Total Supply = 3.7 Million

at 1000$ price -> you need 3.7 Billion/year just to hold the price.


 

[An amorous cow-herder]

The depreciation cost is also significant, it's not just electricity.  I did a quick calculation based on the numbers in the genesis block.  If 50% of the hash rate are 50GH/s singles and 50% are 400 GH/s Jupiters then it's about $145 / coin if you give the hardware a two year depreciation, and $250 for one year.

What difficulty increase are you using for those calculations? Assuming current difficulty increases (which are likely to hold true for at least a couple of months with current pre-orders) a 50GH/s single will generate less income than electricity cost by may 2014. Linky

[An amorous cow-herder]

Also, when somebody says that Bitcoin can go up to $100,000 per Bitcoin (as Max Kaiser did), this means that there will be perhaps $200 million fresh money daily needed to prop up the price.   So, we can safely say that Bitcoin will never be that expensive.

While i consider it unlikely that BTC will ever be that expensive that prediction highly depends on when you expect that price. If you fast foward to the year 2028 the block reward will drop to just above 1.5BTC. In which case the pressure from miners selling freshly minted coins at that price is reduced to a "mere" $22.5M per day.
Well, you have to put that figure in some kind of perspective so i´ll pull some random numbers out of my a** which you may or may not consider reasonable assumptions.
Assumption one, as a payment network bitcoin may not be more expensive than current existing options. PayPal fees exceed 2% of the transfered value, so lets take 2% as an upper limit (and conveniently ignore current additional costs like exchanges for now).
While transaction costs seem low for btc you basicly got to add the cost of freshly minted coins towards that number, since they are basicly the running overhead for network maintenance.
Since i got to choose some figures i will go for a 1% fixed fee and assume that the actual transaction fees are at least as large as the hidden overhead from freshly minted coins (that is, total network cost does not exceed the aforementioned 2%), so basicly the transaction fees are at least $22.5M as well, and since i already said that is 1% of the actual transaction value, i will assume a total daily transaction value of at least $2.25B.
For comparision, Paypal (using 2010 numbers) processed around $300M worth of transaction every day. That equated to 18% of the total online B2C commerce.
To achieve a value of $100k by 2029 a combination of the following has to happen:
-Online retail will surge
-Value of the dollar will decline more rapidly than currently
-BTC will be a/the dominant player in online commerce and/or achieve a strong foothold in offline commerce as well

So basicly, i dont consider that scenario very likely, ymmw, but i´m not saying its impossible.

[mestar]

The depreciation cost is also significant, it's not just electricity.  I did a quick calculation based on the numbers in the genesis block.  If 50% of the hash rate are 50GH/s singles and 50% are 400 GH/s Jupiters then it's about $145 / coin if you give the hardware a two year depreciation, and $250 for one year.

Very true.  However, it is the electricity cost that has this unique property that it has to hit the exchanges if miners want to pay their bills.

Miners' hardware investments don't interfere with the exchanges, and thus are not influencing Bitcoin price at all. 

Bitcoins used in transactions, where a person buys them on an exchange, uses them to buy something, and merchant then quickly sells them, also don't influence the price much. (depending on the velocity of the whole process).

So, we are left with two other major factors in Bitcoin price formation:  speculators and miners.  Most of Bitcoins bought are a pure speculation, hoarded in a hope that the price will go up.  I would say this is the biggest one.  The other would be miners selling them to cover the running costs.  This one can easily go up 10 times, and start to put some real pressure on the price.

So, this is what Bitcoin is all about.  Speculation and mining.  Also, an interesting fact is that once Bitcoins are bought and "hoarded", they don't influence their price on the exchange (at least not directly.)  So, in a sense, speculators are free-loading on the whole network, making money if the price goes up with no costs at all.  This situation can be sustained for a little while, while fresh cash is coming in, or when the total network costs are not huge.  But in the long term, the only possible stable state is where the costs of the network are comparable to the value created by the Bitcoin network. 

[mestar]

From the thread https://bitcointalk.org/index.php?topic=404164.0 we have two estimates of current mining cost of one Bitcoin:

10% - $100 , Avalon #2 miner
2% - $20, the most efficient hardware (?)

So this means that the difficulty must increase 10 to 50 times before this current bubbly situation starts to sort itself out.  If it doubles each month, this means 3 to 7 months.

There is asymmetry of miners' costs lag in up market and down market.  In the up-market, it takes time for miners to get new hardware, and we have a situation where current miners are hugely profitable.  In an down-trend market, the least efficient miner will always be at zero profitability, and there will always be full mining saturation. 

In other words, when the price goes up, breaks on the price have a lag.  This makes Bitcoin very prone to bubbles, and this is exactly what we have seen so far.  We are in a third major bubble in less then 3 years.  Is this the never-ending feature of Bitcoin, bubble after bubble?

[mestar]

Also, when somebody says that Bitcoin can go up to $100,000 per Bitcoin (as Max Kaiser did), this means that there will be perhaps $200 million fresh money daily needed to prop up the price.   So, we can safely say that Bitcoin will never be that expensive.

While i consider it unlikely that BTC will ever be that expensive that prediction highly depends on when you expect that price. If you fast foward to the year 2028 the block reward will drop to just above 1.5BTC. In which case the pressure from miners selling freshly minted coins at that price is reduced to a "mere" $22.5M per day.

You are right, all this "costs will catch up with price" business and cost numbers are for the next 3 years.  Then half the amounts for the next 4 years.

Bitcoin the transaction vehicle can function, no matter what the price is.  You buy them today, the other party sell them tomorrow, it can work if the price is $1, or if the price is $100k per BTC. 

But if you want to "invest" in Bitcoin, a non yielding instrument (so by the future cash flow calculation its value should be 0), and with a hidden costs (that also increase together with the Bitcoin price, a truly unique property),  if you want to invest, you should be very concerned in what happens in next 3 or 7 years.  I predict speculators will be hit hard.

Well, you have to put that figure in some kind of perspective so i´ll pull some random numbers out of my a** which you may or may not consider reasonable assumptions.
Assumption one, as a payment network bitcoin may not be more expensive than current existing options. PayPal fees exceed 2% of the transfered value, so lets take 2% as an upper limit (and conveniently ignore current additional costs like exchanges for now).

Currently, Bitcoin will not win against Paypal on price of transactions, since you can have two exchange transaction fees, costs of getting money into exchange, cost of getting the money out of exchange, and an actual Bitcoin transaction fee, (which can be zero).

However, Bitcoin will win in the markets that Paypal will not touch, like gambling, poker, sending money to Iran and others.  Those areas are auto-win for Bitcoin. 

...
So basicly, i dont consider that scenario very likely, ymmw, but i´m not saying its impossible.

I agree.

[giantdragon]

Also, when somebody says that Bitcoin can go up to $100,000 per Bitcoin (as Max Kaiser did), this means that there will be perhaps $200 million fresh money daily needed to prop up the price.   So, we can safely say that Bitcoin will never be that expensive.

Only until reward per block will halve!

[cp1]

What difficulty increase are you using for those calculations? Assuming current difficulty increases (which are likely to hold true for at least a couple of months with current pre-orders) a 50GH/s single will generate less income than electricity cost by may 2014. Linky

That's just looking at today's cost.  It'll of course vary over the coming months, according to $/GH/s and W/GH/s of new hardware.

[BlockChainLottery]

By reading all this, it can be concluded that Bitcoin as a way of paying, has little impact on the price. Would that ever be possible? I mean, would the Bitcoin price change if it would be used to pay employees and they would use it again to pay for groceries as the dollar or euro would?

[An amorous cow-herder]

By reading all this, it can be concluded that Bitcoin as a way of paying, has little impact on the price. Would that ever be possible? I mean, would the Bitcoin price change if it would be used to pay employees and they would use it again to pay for groceries as the dollar or euro would?

Sure, the total amount of BTC circulating has to have a big enough value to pay for all trades done within a time frame. Simple example, if all coins together were worth the equivalent of $20M you couldnt buy a yacht worth $50M even if you had all the coins. The trade is simply impossible. If town had e.g. 100k inhabitants and every one get an average salary of $3k/month and spends all coins every month the total supply of coins must exceed a value of $300M. A somewhat more complicated calculation was done by the Bank of America. Basicly they calculated the value of a bitcoin under the assumption that one day 10% of the online trade is done in bitcoins, that would justify a value of $1300/BTC. However bitcoin is very, very far away from that goal. Current prices are imho far too inflated by speculation.

[TrollboxChamp]

The idea this thread brings about has been on my mind alot lately. For other alt coins as well.

[Holliday]

OP assumes every miner needs to offset his costs. I can only speak for myself, but mining was simply my way of purchasing Bitcoins. I had a certain amount of fiat which I wanted to convert into Bitcoin and I purchased mining gear (GPUs at the time) and then spent the rest on electricity. When the fiat ran out, I sold the hardware directly for Bitcoins.

So... I mined and never put any downward pressure on the exchanges. Quite the opposite, I removed (through evil hoarding) coins from circulation.

To grasp the total "downward pressure" that miners put on the exchanges, one would have to know the financial situation and intentions of every Bitcoin miner, which is quite impossible.

[BlockChainLottery]

By reading all this, it can be concluded that Bitcoin as a way of paying, has little impact on the price. Would that ever be possible? I mean, would the Bitcoin price change if it would be used to pay employees and they would use it again to pay for groceries as the dollar or euro would?

Sure, the total amount of BTC circulating has to have a big enough value to pay for all trades done within a time frame. Simple example, if all coins together were worth the equivalent of $20M you couldnt buy a yacht worth $50M even if you had all the coins. The trade is simply impossible. If town had e.g. 100k inhabitants and every one get an average salary of $3k/month and spends all coins every month the total supply of coins must exceed a value of $300M. A somewhat more complicated calculation was done by the Bank of America. Basicly they calculated the value of a bitcoin under the assumption that one day 10% of the online trade is done in bitcoins, that would justify a value of $1300/BTC. However bitcoin is very, very far away from that goal. Current prices are imho far too inflated by speculation.

It's very hard to know how much BTC is used for payments, right? I know we can see how much BTC is send in total, but we don't know what the change is. If someone sends 10BTC, it could mean he just bought something for 9.99BTC. In that case the total BTC in circulation could be very small, and for now has minimal influence onto the BTC price.

[An amorous cow-herder]

So... I mined and never put any downward pressure on the exchanges. Quite the opposite, I removed (through evil hoarding) coins from circulation.

No. You didnt apply any preasure in either direction. Upward pressure is buying. Hoarding is pressure neutral.

To grasp the total "downward pressure" that miners put on the exchanges, one would have to know the financial situation and intentions of every Bitcoin miner, which is quite impossible.

The situation is different nowadays. Simple put there are 4 possibilities.
Miner buys with fiat and does not sell or spend coins. "Old case", since e.g. Ati didnt sell graphics cards for BTC. No coins are bought or sold on exchanges, pressure neutral.
Miner buys with BTC and does not sell or spend coins. Initial downward pressure on purchase since the manufacturers needs to sell BTC for fiat as the supply chain (e.g. chip manufactures) and staff get (at least mostly) paid in fiat.
Miner buys with fiat and sells coins on exchanges (or buys goods via services such a Bitpay). Delayed downward pressure since the BTC can only be mined after the hardware has been delivered.
Miner buys with BTC and sells coins on exchanges (or buys goods via services such a Bitpay). Both initial and delayed downward pressure.
As you can see there is not a single upward pressure case.
The "best" case for the BTC price from mining is neutral.
I dont know the percentages for each of those case, your guess is as good as mine. But mining obviously generates downwards pressure.

As opposed to a user of the currency. Probably not too many of those yet.
User buys coins and buys goods via e.g. Bitpay. Initial upwards pressure from buying, later downwards pressure from purchasing. Sum is pressure neutral.

And the last case, the speculator.
Speculator buys coins and does not spend them any time soon. Creates a direct upwards pressure on the price.

As price for BTC rises the downwards pressure from the miners increases (assuming the general composition does not change, that is the same percentage of miners still sell coins) and the upwards pressure from speculators decreases since the same amount of fiat invested will now buy less coins. And vice versa if the price for BTC drops.

And well, since your guess on the intentions of miners is probably as good as mine (10% of the miners selling? 30%? 50%? Maybe even 80% of total freshly mined coins?) you can directly calculate the required upward pressure required to keep the price merely stable. And dont forgot that a large amount of the mining pressure is delayed pressure, mining equipment worth three digit million dollars still waiting to be shipped ...

[An amorous cow-herder]

It's very hard to know how much BTC is used for payments, right? I know we can see how much BTC is send in total, but we don't know what the change is. If someone sends 10BTC, it could mean he just bought something for 9.99BTC. In that case the total BTC in circulation could be very small, and for now has minimal influence onto the BTC price.

Blockchain.info has a chart that tries to guess which part of the transaction is the change and which part is the actual transfer. I have no idea how good their guess is though.