The Value of BTC, in terms of Hardware Purchased and Installed

[nerioseole]

I was trying to estimate the value of the hardware that has been purchased by BTC Miners so far.  By doing some back-of-the-enveloppe calculations, I came up with some interesting figures:

1.  If we assume that cost of GPU is about $2000/Gh/s ($400 for 200 Mh/s) which was the norm until early 2013 - up to network speed of 33 TH/s
2.  If we assume that cost of ASIC was about $200 / GH/s between March 2013 to Dec 2013 (up to network speed of 2400 TH/s)
3.  If we assume that cost of ASIC is now about $20 / GH/s (up to 19 000 TH/s)
4.  If we assume that cost of ASIC will be about $3 / GH/s (ref new 1 TH/s Cointerra rigs).

Then the cost of the current installed hardware to mine Bitcoins would have been (33 000 GH x $2000) + (2 400 000 x $200) + (19 000 000 x $20) = $926M for 12M coins, about $77 per coin. If we add the electricity cost and some PCs in there, we could reach the $100 value that BTC was going for, in the most part of 2013.

Just in January, 10 PH/s was added to the network, to produce an additional 110k BTC.  At $10-20 per GH, that is $100M-200M for 110k coins - or $909-1800 per coins.

The next generation will allow about $3 per GH - but at one TH/s per machine added to the network - the network speed will increase by another 100 fold by October (ref TheGenesisBlock).  So, another 2 000 000 000 GH/s at $3 ($6B), for an additional 1M coins - $6 000 per coin...  

Therefore, it is very conceivable that BTC will be worth $5 000 to $10 000 by the end of 2014.  Just by the value of the hardware added to the network. In addition, that "investment" in hardware will probably be THE reason why the bitcoin network will not die anytime soon.

EDIT:  This adds another dimension to Bitcoin - we have estimated that there has been about $1B spent already on this "experiment".  That is very close to the birth of an industry - it is hardware, software, electricity production, new ventures, etc.  Another $6B in expenditure is expected for 2014.  For the politicians out there, Bitcoin is more than just a "bubble" - Bitcoin creates jobs ! - talk to the ButterflyLabs, Cointerra, KNC of this world!  Even AMD never sold so many high-end Graphic cards in history!

EDIT2: New graph!

The red line is the Bitcoin Hashrate over the last 4 years (on a log scale - values are on the left of the graph).  The hash rate can also translate in $$$ injected in the Bitcoin economy.

The blue line is the Bitcoin market price over the last 4 years (also on a log scale - values are on the right of the graph).  

Which one is leading which?

Data courtesy of Blockchain.info.


https://i.imgur.com/20KcPEb.png

My opinion?  I believe the hash rate knows where it is going (miners) - the market follows, or tries to keep up with the pace, and gets distracted along the way by good/bad news, by market manipulation attempts, heist on websites, government acceptance/rejects, silk road, etc.  But eventually, gets back on track!

[odolvlobo]

The cost of mining has very little (if any) effect on the price of Bitcoins. Instead, the price determines the cost of mining (except these days when people seem to be happy to mine at a loss).

[empoweoqwj]

The cost to mine doesn't create the price of bitcoin, that's the market's job.

If it was the mining cost that decided the price of bitcoin, bitcoin would be over $1000 now because most miners are losing money.

[atc1]

10K is very hard to even imagine. I mean,come on,people are gonna lose BTC the second it reaches 2k or something. You saw the sell-walls at the 1k mark a few weeks ago.

[empoweoqwj]

If it was the mining cost that decided the price of bitcoin, bitcoin would be over $1000 now because most miners are losing money.

BTW:  the Bitcoins I mined last summer, that I didn't sell until the price reached $1000 were profitable - very.  No miners have ever lost money with Bitcoin, unless they converted to $US as soon as the BTC was minted.... but who does that?

Last summer was last summer. That is a million years ago in bitcoinland. The bitcoin price was increasing crazily. There wasn't much hash rate. You have to live in the present, not last year.

[R3qUi3M]

The cost of mining has very little (if any) effect on the price of Bitcoins. Instead, the price determines the cost of mining (except these days when people seem to be happy to mine at a loss).

I totally disagree! The model you are talking about works for fiat currency. It's not going to work with cryptos. Cryptos are the exact oposite of fiat so you have to reverse your thinking aproach.

[R3qUi3M]

If you are correct, then Robert Shiller, 2013 Nobel Prize winner in Economics, is also right, and Bitcoin has no "value" and is indeed a "bubble".  Therefore, worthless.

If I am correct, Bitcoin has a value, as much as gold that had to be extracted from the ground with hardware, and labor.  The value of Bitcoin is, I believe, built-in every coin minted - maybe not equally, but as a group.  Again, I believe that it is the amount of work required (and hardware resource) that gives it its value.  It doesn't have to have a day-to-day immediate correlation, but over a year or two - it must.  Otherwise, it will just go away and not be valued by anyone.  The coins miners are mining today at values of tomorrows price, not today - otherwise, they are all dumb.  I believe that one or two person can be that dumb, but not thousands.

Similarly, gold itself, is just plain metal, like copper or aluminum. The value of gold is given by its rarity, by the amount of work to find it, and the cost to produce it in sufficient quantities to meet the demand - and also in part by its esthetic and cultural significance (which makes Dogecoin so attractive in crypto currency...)

I sure hope I am right and he is not.  But I have never studied at Yale, so, not being as educated, he will probably win - sadly for us.  Let's then enjoy the bubble while it last!


 

I think Robert Shiller is wrong. I dont think he understands the algorythm behind bitcoin. He just uses technical analysis for bitcoin market price which in fact looks like a bubble.

I think you are right and i came up with same conclusion couple of days ago. Its the scaresity that drives it price not the present market usefullness (which is great by the way).

[odolvlobo]

The cost of mining has very little (if any) effect on the price of Bitcoins. Instead, the price determines the cost of mining (except these days when people seem to be happy to mine at a loss).

I totally disagree! The model you are talking about works for fiat currency. It's not going to work with cryptos. Cryptos are the exact oposite of fiat so you have to reverse your thinking aproach.

This has nothing to do with how currencies work. It is basic microeconomics. Price affects mining because if the price drops, then fewer people mine because it is no longer profitable for them. The difficulty drops and the costs go down. If the price rises, then more people mine because they can now make a profit. The difficulty goes up and the cost goes up. In the end, the cost of mining is around the value of the bitcoins mined (in theory).

Now, please explain the mechanism behind how the cost of mining affects the price. Keep in mind that the amount of newly mined coins is only a small fraction of the trading volume on the exchanges.

I don't understand why people continue to cling to your belief. Perhaps it is because the miners that are currently mining at a loss (which is most of them right now) pray that their mining will cause the price to rise so they don't feel so bad about it.

Its the scaresity that drives it price not the present market usefullness (which is great by the way).

Scarcity is a factor, but you have to be careful because demand is an equal factor. If there were only a single bitcoin it would be extremely scarce, but if nobody wanted it, its value would be 0 despite its scarcity.

[R3qUi3M]

The cost of mining has very little (if any) effect on the price of Bitcoins. Instead, the price determines the cost of mining (except these days when people seem to be happy to mine at a loss).

I totally disagree! The model you are talking about works for fiat currency. It's not going to work with cryptos. Cryptos are the exact oposite of fiat so you have to reverse your thinking aproach.

This has nothing to do with how currencies work. It is basic microeconomics. Price affects mining because if the price drops, then fewer people mine because it is no longer profitable for them. The difficulty drops and the costs go down. If the price rises, then more people mine because they can now make a profit. The difficulty goes up and the cost goes up. In the end, the cost of mining is around the value of the bitcoins mined (in theory).

Now, please explain the mechanism behind how the cost of mining affects the price. Keep in mind that the amount of newly mined coins is only a small fraction of the trading volume on the exchanges.

I don't understand why people continue to cling to your belief. Perhaps it is because the miners that are currently mining at a loss (which is most of them right now) pray that their mining will cause the price to rise so they don't feel so bad about it.

Its the scaresity that drives it price not the present market usefullness (which is great by the way).

Scarcity is a factor, but you have to be careful because demand is an equal factor. If there were only a single bitcoin it would be extremely scarce, but if nobody wanted it, its value would be 0 despite its scarcity.

Well if there would be a single bitcoin mined at the cost of 100000000000000000000000000000$ it would be worth exactly that. For example one gram of a moon dust is worth aproximately 5mln dollars... not because everyone wants to have it but because it's scarce!!! Get it?

Bitcoin is a finite resource and the harder there is to obtain some, the bigger it's price will be. Nobody with any common sense to business would buy a miner for 40k$ just to mine 20k$ worth BTC and sell it for this price. The price drop after the 10 fold increase is just because the fact that miners were waiting to sell their ore. When ore reaches a certain level they sell driving the price down. If none of them would sell and just kept their BTC price would grow expotentialy to infinity because Bitcoin is finite resource! They actualy destabilize it's value by selling BTC on a peak. But it's totally OK to do so because they are going to use newly gained $ to buy a better miner (that will drive price up again in the future).

Call me crazy man but if i could buy a 40k$ miner right now just to harvest 20k$ worth BTC i would buy it right now (unfortunatly i dont have 40k$).

[odolvlobo]

Well if there would be a single bitcoin mined at the cost of 100000000000000000000000000000$ it would be worth exactly that. For example one gram of a moon dust is worth aproximately 5mln dollars... not because everyone wants to have it but because it's scarce!!! Get it?

If nobody wanted that bitcoin, then it might be worth 100...000$ to you, but it would be worth 0$ to everyone else.

If none of them would sell and just kept their BTC price would grow expotentialy to infinity because Bitcoin is finite resource!

If miners stopped selling mined bitcoins, there would still be 12 million bitcoins. The price would not go to infinity. Are you claiming that when the last bitcoin is mined, the price will go to infinity or zero?

Call me crazy man but if i could buy a 40k$ miner right now just to harvest 20k$ worth BTC i would buy it right now (unfortunatly i dont have 40k$).

A sane person would use 40k$ to buy 40k$ worth of bitcoins instead of buying something that will mine only 20k$ worth of bitcoins.

[R3qUi3M]

If nobody wanted that bitcoin, then it might be worth 100...000$ to you, but it would be worth 0$ to everyone else.

just... wrong thinking there... Moondust is so damn expensive because it requires a space mission to obtain some.

If miners stopped selling mined bitcoins, there would still be 12 million bitcoins. The price would not go to infinity. Are you claiming that when the last bitcoin is mined, the price will go to infinity or zero?

True however the price would be driven by the increase of hashing power - difficulty to obtain bitcoin. Price will go to infinity only theoreticaly when last bitcoin is mined. Sum of all bitcoins price will be just equal to energy and resources that were required to produce all of those. And since the closer we get to the mining last one of them the more resources and energy are required to produce them. You cannot look at cryptos like you look at ordinary fiat money or gold. In 20 years i can imagine someone buying a miner that will have like 5godzillionhash/sec for 50 bilion dollar just to mine 1 bitcoin which will be worth perhaps 25billion.

A sane person would use 40k$ to buy 40k$ worth of bitcoins instead of buying something that will mine only 20k$ worth of bitcoins.

Not exactly because you not only mine 20k$ worth bitcoins but you also increase the hashspeed of the pool that will eventualy drive the price up so your bitcoin will be worth more than 20k$ eventualy. Also you have a miner that you can sell for some amount of $ even though it wont mine much but with the new BTC price this "not much" maybe just enough for someone else to profit as the BTC price increases

I totally appreciate miners and without them bitcoin would not exist in its present form.

[odolvlobo]

If miners stopped selling mined bitcoins, there would still be 12 million bitcoins. The price would not go to infinity. Are you claiming that when the last bitcoin is mined, the price will go to infinity or zero?

... Price will go to infinity only theoreticaly when last bitcoin is mined. Sum of all bitcoins price will be just equal to energy and resources that were required to produce all of those. ...

The price can't go to infinity because then I could buy everything in the world with a single satoshi ... and so could everyone else.

A sane person would use 40k$ to buy 40k$ worth of bitcoins instead of buying something that will mine only 20k$ worth of bitcoins.

Not exactly because you not only mine 20k$ worth bitcoins but you also increase the hashspeed of the pool that will eventualy drive the price up so your bitcoin will be worth more than 20k$ eventually.

My 40k$ worth of purchased bitcoins will always be worth double your 20k$ worth of mined bitcoins regardless of what happens to the difficulty. Spending 40k$ to buy 20k$ worth of newly mined bitcoins makes no sense when you can buy 40k$ worth of previously mined bitcoins.

[zerk89]

I was trying to estimate the value of the hardware that has been purchased by BTC Miners so far.  By doing some back-of-the-enveloppe calculations, I came up with some interesting figures:

1.  If we assume that cost of GPU is about $2000/Gh/s ($400 for 200 Mh/s) which was the norm until early 2013 - up to network speed of 33 TH/s
2.  If we assume that cost of ASIC was about $200 / GH/s between March 2013 to Dec 2013 (up to network speed of 2400 TH/s)
3.  If we assume that cost of ASIC is now about $20 / GH/s (up to 19 000 TH/s)
4.  If we assume that cost of ASIC will be about $3 / GH/s (ref new 1 TH/s Cointerra rigs).

Then the cost of the current installed hardware to mine Bitcoins would have been (33 000 GH x $2000) + (2 400 000 x $200) + (19 000 000 x $20) = $926M for 12M coins, about $77 per coin. If we add the electricity cost and some PCs in there, we could reach the $100 value that BTC was going for, in the most part of 2013.

Just in January, 10 PH/s was added to the network, to produce an additional 110k BTC.  At $10-20 per GH, that is $100M-200M for 110k coins - or $909-1800 per coins.

The next generation will allow about $3 per GH - but at one TH/s per machine added to the network - the network speed will increase by another 100 fold by October (ref TheGenesisBlock).  So, another 2 000 000 000 GH/s at $3 ($6B), for an additional 1M coins - $6 000 per coin...  

Therefore, it is very conceivable that BTC will be worth $5 000 to $10 000 by the end of 2014.  Just by the value of the hardware added to the network. In addition, that "investment" in hardware will probably be THE reason why the bitcoin network will not die anytime soon.

EDIT:  This adds another dimension to Bitcoin - we have estimated that there has been about $1B spent already on this "experiment".  That is very close to the birth of an industry - it is hardware, software, electricity production, new ventures, etc.  Another $6B in expenditure is expected for 2014.  For the politicians out there, Bitcoin is more than just a "bubble" - Bitcoin creates jobs ! - talk to the ButterflyLabs, Cointerra, KNC of this world!  Even AMD never sold so many high-end Graphic cards in history!

FINALLY, someone who is not brain dead on this forum and is able to clearly see the relationship between miners and price. See my last posts, i've basically came to the exact same conclusion. Well done buddy you have some brain cells. Price does not regulate miners, but the other way around, through hoarding after miners realise they can't get ROI on their initial investment on the hardware. Best well disguised pyramid 21st century.

[Undone]

True however the price would be driven by the increase of hashing power - difficulty to obtain bitcoin. Price will go to infinity only theoreticaly when last bitcoin is mined.

So, just because something is scarce, it puts a gun to the head of a potential bitcoin purchaser, drives them to log on to create an account on an exchange, and purchase bitcoin at ever increasingly-higher amounts?

Increased network hashrate does not fuel a demand for bitcoin.

[zerk89]

True however the price would be driven by the increase of hashing power - difficulty to obtain bitcoin. Price will go to infinity only theoreticaly when last bitcoin is mined.

So, just because something is scarce, it puts a gun to the head of a potential bitcoin purchaser, drives them to log on to create an account on an exchange, and purchase bitcoin at ever increasingly-higher amounts?

Increased network hashrate does not fuel a demand for bitcoin.

Because miners create the artificial scarcity when they wre not prepared to sell at a loss

[odolvlobo]

True however the price would be driven by the increase of hashing power - difficulty to obtain bitcoin. Price will go to infinity only theoreticaly when last bitcoin is mined.

So, just because something is scarce, it puts a gun to the head of a potential bitcoin purchaser, drives them to log on to create an account on an exchange, and purchase bitcoin at ever increasingly-higher amounts?

Increased network hashrate does not fuel a demand for bitcoin.

Because some miners create the artificial a negligible scarcity when some are not prepared to sell at a loss

FTFY

Miners have no significant effect on exchange rates. Newly mined bitcoins are only a small fraction of total exchange volume. Furthermore, you have no evidence that miners act the way you say they do, which by the way is irrational.

[Undone]

+1, odolvlobo.

Well said.

[odolvlobo]

Any large buyer or holder can affect the exchange rate. Miners as a group are a large holder over the long term and can affect the exchange rate if they act as a group. But there is no evidence that a significant portion of miners act as others describe -- holding bitcoins until the price rises to the point where they can sell mined bitcoins at a profit.

Furthermore, that behavior depends on miners acting irrationally -- the cost of mining is a sunk cost and should have no bearing on when a miners sells, and mining at a loss defeats the purpose of mining (assuming the miner intends to make a profit). Right now, miners are currently mining at a loss and most people don't understand sunk costs, so irrationality is a weak argument. But in general we should expect most miners to be mostly rational.

[Undone]

I agree and disagree.

On a micro-scale, a daily basis, I agree - it may even look that the miners follow where the money is.  

But on a macro-scale, over a long period of time (1yr) and if you include all the coins? That, I am still not convinced.   I still believe that the mining group does increase the overall market cap of all the coins, eventually.  The miners provide the product that the speculators need (or will need).  Over a 6 months to a year period, the two balances out. But because we are in a period of growth, the miners are putting more money in the system than the buyers of the coins.  And that is normal, the coins have to be mined first, like the shovels have to purchased before any ore can be discovered.

It doesn't matter if there is one person mining, 100, 1,000,000, or 10,000,000. The same amount of bitcoins are "supplied;" 25 bitcoins every ten minutes (with the obvious caveat of the rising difficulty bumping that number slightly higher than the block target, etc.). Somebody gets them.

The cost of mining equipment in total doesn't really matter. If there is an increasing amount of miners such that the difficulty continues to rise, it encourages hoarding - that much we already know. This aids indirectly in scarcity. But the amount of hardware invested into mining equipment does not drive the price of bitcoin up.

EDIT: And the minute the speculators will stop buying at the global price (to include all coins) - the miners will stop buying new equipment and the prices will eventually level off - at last!

The minute that speculators stop buying bitcoin on the exchanges at the current price is the minute bitcoin's price declines. And when bitcoin's price declines, the prospective new buyer's cash doesn't flow into the buy side of the market. Because afterall, nobody wants bitcoin if bitcoin can't prove itself as a competent store of value.

New cash flowing into the exchanges is what will drive bitcoin's trading value up. Not the increasing sum total of the value of mining hardware.

[Undone]

Ok.  Someone buying BTC to buy a product would, at the micro-level contribute ever so slightly to increase the demand, thus raising the price.  The BTC transaction against a product would occur (buying a computer on Overstock.com, for example).  Then, the merchant would sell back the BTC against fiat almost immediately, contributing, again at a micro-level, in reducing the price ever so slightly.  So, BTCs transactions as a currency - the claim to fame of Bitcoin - should be neutral, in theory, to the price of Bitcoin.

 
But the elephant in the room is, why the f*** would someone trade fiat for bitcoin (which incurs an exchange fee) merely to turn around and spend it on a good? It's rhetorical - you just wouldn't do this. It's not even a one-for-one transaction; it's a loss for that consumer because of the exchange fee. Someone will surely chime in about lower transaction fees lowering the cost of goods in a world where bitcoin merchant adoption is widespread. But that just isn't a tenable argument, because it's not enough of a reason for the average person to exchange his trusty fiat for bitcoin. It probably is for us, because we get it. But the average person just won't.

The only reason *for the average person* to buy bitcoin at present is speculation that it will prove itself as a good store of value; aka, be an investment. Whether that is measured against fiat, or buying power, it doesn't matter.

Bitcoin may very well be such a "bubble", after all...

It's the epitome of a bubble.