Why You Haven't Seen Miners Leave in Hordes.....

[mikethebodacious]

The reason miners haven't left in hordes is because even at $5.00/BTC mining is STILL profitable.  I am not saying it's great profit but it's profit nonetheless and I guess if you have an unstable rig which you have to constantly coddle then it's not worth the hassle.  I will give examples of my rigs, which are very common rigs (nothing special), and my electrical rate is middle of the road ($.12/KWh) for United States:

Rig # 1 (Antec Lanboy Air w/ 2 x Radeon 6950s & 7 high-speed 120mm fans for cooling)

   - 730 MH/sec. with current difficulty 1,755,425 = .40 BTC/day => $6.10 current price = $2.44/day
   - 455 Watts = .455 KWh @ $.12/KWh = $1.31/day
   - Net Profit = $1.13/day for 28 days = $31.64/month

Rig # 2 (Open rig w/ Radeon 5970, 2 x Radeon 5830s, 2 high-speed 120mm fans & one Honeywell Table Fan for cooling)

   - 1350 MH/sec. with current difficulty 1,755,425 = .72 BTC/day => $6.10 current price = $4.39/day
   - 736 Watts = .736 @ $.12/KWh = $2.12/day
   - Net Profit = $2.27/day for 28 days = $63.56/month

So as you can see nearly $100/month for just keeping an eye on two rigs is easy money (if you plan on selling BTC at this low of a price).  This is imo the lowest point Bitcoin will go, so any rise in value will make your profitability go up significantly.  For everyone complaining about electricity rates just go get a Kill-A-Watt EZ and measure your energy consumption.  736 watts for 3 power-hungry cards is pretty damn good, granted the PSU is a Cougar 1050W GX which has 80 Plus Gold energy efficiency but any long-term miner should invest in some solid PSUs.  Enermax, Cougar, and Lepa make some very affordable 80-plus Gold PSUs not to mention others if you can catch rebates/sales on Newegg.  For fun here are some other appliances around the house I measured:

Hairdryer on High
   - 1,520 Watts 
Toaster
   - 850 Watts
Fridge
   - 11 Watts closed, 47 Watts with fridge open - 660 Watts Starting
Lasko Blower Fan
   - Speed 1 = 77 Watts, .64 Amps => $0.22/day
   - Speed 2 = 86 Watts, .71 Amps => $0.24/day
   - Speed 3 = 102 Watts, .88 Amps => $0.29/day
Honeywell Table Fan
   - Speed 1 = 26 Watts, .17 Amps => $0.07/day
   - Speed 2 = 29 Watts, .22 Amps => $0.08/day
   - Speed 3 = 34 Watts, .3 Amps => $0.10/day
TV, Cable Box, Wii Idle
   88 Watts => $0.25/day

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[DeathAndTaxes]

Also the previous ROI% were simply unsustainable.

Mining has no barrier to entry and there is minimal advantage when it comes to economies of scale.
Somewhat unusual the highest ROI is for people doing it "part time" reusing existing hardware.  For example a gamer who already owns and uses a high end gaming rig that discovers bitcoin and mines for some beer money (or the hope/chance to get rich).  His hardware has an effective cost of $0 because it is a sunk cost.  He already bought it and would buy it again even if bitcoin didn't exist.

High ROI situations only exist when there is some competitive advantage or barrier to entry.  Also anyone using open-source mining software and off the shelf hardware has no competitive advantage (that can be exploited for higher ROI%) over other miners.   There is no market in the world that has no barrier to entry where one can earn 5000% annual ROI.  Free markets don't work that way.  High ROI attacts competition unless the ROI is crushed.

Eventually the "mining market" will stabilize on a low but sustainable ROI.  Something in the 5% to 20% annually range based on how risky mining is perceived to be.  Ironically the thing that people want the most will result in even LOWER profits for miners.  If bitcoin takes off and becomes very mainstream and daily volatility falls then the risk in mining decreases and economic theory tells us the margin (profit) will decline also.

Now granted if your write a customer miner (and keep it a secret) that gets 10% higher hashes than public miners then you have a competitive advantage.  If you discover a FPGA breakthrough and build a massive FPGA cluster lowering your operating expense then you also have a competitive advantage.  However so far everything about bitcoin is rather open.  People share miners, kernels, fixes, enhancements.  There is an open source FPGA project, etc. 

[mike678]

Ironically the thing that people want the most will result in even LOWER profits for miners.  If bitcoin takes off and becomes very mainstream and daily volatility falls then the risk in mining decreases and economic theory tells us the margin (profit) will decline also.

This isn't entirely correct. In long term I agree it will make mining less attractive but any coins mined and saved before this will make profits even greater. I'll give an example and before I do I want to point out that I don't think this is realistic any time in the near future its just an example.

Say you started mining in june and by october you have saved up 300 bitcoins. The price of bitcoins is hovering around 8 dollars making that worth $2,400. Then out of know where newegg and amazon decide they want to start accepting bitcoins. The price skyrockets to $30 because of all the news bitcoins is getting now. That 2,400 in bitcoins is now worth 9,000.

So the early investors (us) get a pretty damn big payday. I don't plan to get rich off bitcoins but anything like that would make me extremely happy and I'm sure I'm not the only one in this boat. That's why people want wide spread adoption.

[P4man]

Calculating ROI by speculating on future BTC value is fallacious.  If you want to speculate, you can just buy BTCs with dollars. The same dollars you need to buy hardware and electricity cost, so they compete.

[mike678]

Calculating ROI by speculating on future BTC value is fallacious.  If you want to speculate, you can just buy BTCs with dollars. The same dollars you need to buy hardware and electricity cost, so they compete.

Thank you captain obvious. I was just pointing out the reasoning of why people who are mining would want wide spread adoption. Also mining is better long term because eventually you pay the rig off and generate bitcoins only for the cost of electricity.

[P4man]

Nope. Either you pay off the rig, or you accumulate bitcoins, not both. Again you ignore that the money you spend on electricity (and hardware) could be spent buying bitcoins.

[mike678]

Nope. Either you pay off the rig, or you accumulate bitcoins, not both. Again you ignore that the money you spend on electricity (and hardware) could be spent buying bitcoins.

I'm not giving people advice here you do realize that right? I'm giving examples of what people can do. Also unless you are day trading mining is better long term because eventually you will have generated enough bitcoins to cover the initial investment and all the electricity. After that point anything generated is more then what you could have received from investing one big lump sum in coins alone.

[P4man]

DeathAndTaxes analysis was spot on. Unless I misunderstood you, your claims that mining is more profitable than what he says is based on a fallacy that earning BTC is somehow better than earning $. Mining generates bitcoins or cash if you sell them, or a ratio of them, but not both. Any profits from an increase in BTC value applies equally to BTC you mine or buy with cash.

Now I agree mining is  better than not mining as its currently still (marginally) profitable for most. But only because it generates more $ than it costs;  not because it generates bitcoins, $ can generate those too. The day electricity costs are higher than revenue from mining, you should turn your rig off. And possibly buy bitcoins if you think they will increase in value, but not mine them.

[jjiimm_64]

Nope. Either you pay off the rig, or you accumulate bitcoins, not both. Again you ignore that the money you spend on electricity (and hardware) could be spent buying bitcoins.

Also keep in mind that the elec and hardware are business expenses that can be written off..

[AngelusWebDesign]

Which only helps those who currently run a business. The average person can't deduct anything like that from their taxes.
And as soon as you're filing taxes for a business, H&R Block charges you $350, not $35.

[dunand]

Also keep in mind that the elec and hardware are business expenses that can be written off..

You nailed it jjiimm_64. If I had a company and I could write off the cost of electricity and hardware my mining rig farm would look like this

[stryker]

I think a lot of miners have left as the network hash rate is hovering around 12 Th/s now.... it was around 12.7 or more before.

Also noticed deepbit is lingering around 4.8 Th/s where as it was more like 5.4.

Think about the figures, a lot of people have stopped, thing is were talking very big numbers all round here.

[AngelusWebDesign]

Also keep in mind that the elec and hardware are business expenses that can be written off..

You nailed it jjiimm_64. If I had a company and I could write off the cost of electricity and hardware my mining rig farm would look like this

For those unfamiliar with "writing things off" as a business expense, I'd also like to point out:
If you "write off" $1000 in expenses, you save whatever taxes you would have paid on that amount -- not the full $1000.

How it DOESN'T work: You owe $2000 in taxes, but you spent $900 on equipment, so now you owe $1100.
No, you only save the % in self-employment tax (15%) plus whatever tax bracket you're in (10%, 15%, etc.) which varies by how much you make per year.

Deducting things from your taxes basically means you get to spend your pre-tax income on them, that's all. You're lowering your total tax burden, but you *are* spending money that would otherwise be yours as well. Namely, that other 75%.

So if I buy $1000 in PC equipment, I spent $750 of my own money, plus $250 that would have gone to the government anyway. Attractive, yes, but it would be even better if I could spend $1000 of the government's money

Oh, and electricity is only deducted if you have a separate facility. If your rigs are at home, you can only deduct a PERCENTAGE of the electricity spent -- namely, you have to divide the square footage of your server room by the total square footage of the house (10% or 15%?) and that's how much of your home's electric bill you can deduct as a "business expense".

So, long story short, starting an official "business" doesn't magically make un-economical ventures economical You still have to deal with expenses, making sure your income is greater than your expenses, etc.

This is not tax advice. Please speak to your tax advisor, accountant or CPA.

[P4man]

Now you guys make wonder, assuming you have a bitcoin business,  if you could deduct losses of your bitcoin holdings as currency exchange costs

[Etlase2]

Eventually the "mining market" will stabilize on a low but sustainable ROI.  Something in the 5% to 20% annually range based on how risky mining is perceived to be.  Ironically the thing that people want the most will result in even LOWER profits for miners.  If bitcoin takes off and becomes very mainstream and daily volatility falls then the risk in mining decreases and economic theory tells us the margin (profit) will decline also.

I believe the 5-20% ROI figure to be accurate for the future. However, the risk is much higher than you might think.

I use a similar Mh/W efficiency to the OP in my proposal for EnCoin, a currency based around the cost to produce. According to my guestimates, a coin produced today costs about $3.60, excluding the cost of hardware. That's only a 28% ROI based on a sell price of $5. The average cost to produce, on the other hand, is $1.80. If early coins begin to circulate, 28% ROI on $1.80 makes new coins strictly unprofitable. People lose money, stop mining, and bitcoin becomes a security risk.

Feel free to peruse the proposal and the ensuing discussion.

https://bitcointalk.org/index.php?topic=44682.0

[kirax]

Which only helps those who currently run a business. The average person can't deduct anything like that from their taxes.
And as soon as you're filing taxes for a business, H&R Block charges you $350, not $35.

Yes, this is true, because H&R is really meant to do personal taxes, not real taxes. You can get a much more reasonable deal locally, I have. And if you keep good books and do a lot of it yourself, it's usually even cheaper.

[P4man]

Eventually the "mining market" will stabilize on a low but sustainable ROI.  Something in the 5% to 20% annually range based on how risky mining is perceived to be.  Ironically the thing that people want the most will result in even LOWER profits for miners.  If bitcoin takes off and becomes very mainstream and daily volatility falls then the risk in mining decreases and economic theory tells us the margin (profit) will decline also.

I believe the 5-20% ROI figure to be accurate for the future. However, the risk is much higher than you might think.

I use a similar Mh/W efficiency to the OP in my proposal for EnCoin, a currency based around the cost to produce. According to my guestimates, a coin produced today costs about $3.60, excluding the cost of hardware. That's only a 28% ROI based on a sell price of $5. The average cost to produce, on the other hand, is $1.80. If early coins begin to circulate, 28% ROI on $1.80 makes new coins strictly unprofitable. People lose money, stop mining, and bitcoin becomes a security risk.

Feel free to peruse the proposal and the ensuing discussion.

https://bitcointalk.org/index.php?topic=44682.0

You seem to think the value of a bitcoin is related to the mining cost, but it isnt. Mining cost is indirectly linked to the value, but the value of a bitcoin is purely supply and demand. Supply being fixed, no matter how many miners there are, or their cost.

[Etlase2]

You seem to think the value of a bitcoin is related to the mining cost, but it isnt. Mining cost is indirectly linked to the value, but the value of a bitcoin is purely supply and demand. Supply being fixed, no matter how many miners there are, or their cost.

Indirectly or directly, it is still linked. The value of bitcoin may be mostly based on supply and demand, but that is only because a significant amount of the supply has been withheld throughout its history. And since Bitcoin has relatively no base of demand other than speculation, if a lot of those early coins went into circulation or the security of the network drops out when the award halves at the 210kth block, it may create a cascade of effects that bring the bitcoin sell price below the value of its current cost to produce. Then another cascade (crash) of effects to follow.

The supply is not quite so fixed as you think.

[P4man]

Indirectly or directly, it is still linked. The value of bitcoin may be mostly based on supply and demand, but that is only because a significant amount of the supply has been withheld throughout its history. And since Bitcoin has relatively no base of demand other than speculation, if a lot of those early coins went into circulation or the security of the network drops out when the award halves at the 210kth block, it may create a cascade of effects that bring the bitcoin sell price below the value of its current cost to produce. Then another cascade (crash) of effects to follow.

The supply is not quite so fixed as you think.

None of that has anything to do with the cost of mining. I agree with your point of most of bitcoin transactions being speculation right now, but not with the rest. Whether a speculator bought bitcoins at $0.18 or $18, or a miner spent $1.8 on electricity and hardware to mine his coins. It doesnt matter and has no influence on bitcoin value.

[Etlase2]

None of that has anything to do with the cost of mining. I agree with your point of most of bitcoin transactions being speculation right now, but not with the rest. Whether a speculator bought bitcoins at $0.18 or $18, or a miner spent $1.8 on electricity and hardware to mine his coins. It doesnt matter and has no influence on bitcoin value.

You are forgetting that the number of miners drives up demand. For every additional miner, every other miner's payout is reduced on average by (1 / total # of miners). This lowers supply (per person) and increases demand. If the number of miners is reduced, supply is easier to get and demand reduces because the COST (time, electricity) goes down. This will, believe it or not, be reflected in the exchange sell price.

If miners don't make a profit, don't expect them to stick around. There goes demand.