Bitcoin price drop oct 2011

[skilo]

Bitcoin is at $2 now lol whats happening? is $2 the actual value of a bitcoin after the speculation bubble has burst?

Your thoughts?

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[Etlase2]

This was written mid-september:

15 THash/s divided by 250Mhash/s means approximately 60,000 miners. Multiplied by 150Wh, you get 9MWh of electricity. If we assume an average of 12 US cents per kWh, that means it costs $1,080 USD for 300 BTC, or $3.60 to produce 1 BTC at current levels. The difficulty is currently at 1.755 million. If we take 15 THash divided by 1.755 million, we get 8.5MHash/s for a difficulty of 1. 2MHash/s is a fairly safe estimate for a CPU miner in 2009, when the first 32,000 blocks were mined at a difficulty of 1. So we’re looking at about 400Wh or about 0.00016 cents per 1 BTC.

This means the cost to produce 1 BTC has increased by a factor of 2,250 in about 2-1/2 years. At the current trading price of $4.80, that is a 3,000,000% return on the original 1.6 million BTC, and a 33% return on a BTC mined today.

Businesses commonly make use of a simple calculation called Return On Investment (ROI). If we assume that there was a linear increase of the price to produce 1 BTC (highly unlikely, but simplifies calculations greatly), we come to a figure of $1.80 worth of electricity to produce an average coin. For the sake of including all factors, I will make a gross guestimate that with all of the computer hardware purchased for BitCoins, the average coin has cost $2.50 to produce. This is heavily, heavily weighted on later coins as initial coins were CPU mined, not expensively GPU mined.

ROI is calculated as (Gain - Cost) / Cost. ($4.80 - $2.50) / $2.50. We get a figure of 92%. The average BitCoin sees a 92% ROI at a trade price of $4.80 (as of 2011/09/20, the current trading price is closer to $6). 92% ROI, almost a guaranteed double-your-investment, by turning on a computer and making it do stuff.

Common sense would argue that this is not a sustainable economy. In fact, if we use that $0.70 figure for cost of hardware and add it to the current $3.60 price to produce, we are dangerously close to the $4.80 sell mark.



So, by my guestimated calculations, bitcoins are being sold for less than their average cost to produce. If that is the case, there is not much hope for a bottom since there is no economy to sustain it.

[Revalin]

I think that looking to mining to determine the price to be backwards logic: price drives hashrate, not the other way around.

I consider the fundamental price floor to be driven by the needs of commerce, and right now it's very low - cents, not dollars.  I've blabbered on about this recently, so let me recycle some of it here:

like every second wise-crack inside this forum advocating the total-death of bitcoin

Let me stand up as one of the people who's glad to see it falling.

I don't want Bitcoin to die at all.  I just want the wild-eyed speculation that's turned it into a pyramid to die.  I'm after a decentralized transactional currency and until we have some stability here or in another cryptocurrency, I'm stuck doing my business with international wire transfers and other traditional banking bothers.  The longer people are hung up on trying to pump the price the longer I have to wait for the speculators to wash out of the market.

but i have to say: i hate it if something goes down not out of fundamentals, but because people are (bitcoin)talkING it to death!! and that is what you do! you say "THE COURSE WILL GO UNDER 0,5$!!!" and encourage everybody to sell with that. what happens?! the course goes to under 0,5$!

I've been talking fundamentals for a while, and here's my formula:

A = USD-value of goods and services purchased per day in BTC
B = Number of days buyers and sellers hold the coins before and after a transaction
C = Number of coins in circulation
D = Number of coins hoarded by (speculators/early adopters/whatever)

Fundamental price = A * B / (C - D)

When we hit that floor (I estimate it's well under a buck, probably in the low-cents range), it will not matter how much people preach doom and gloom; the price WILL stop falling, guaranteed.  It'll cushion well above that level (B and D will increase), but that's the hard floor.

Attempting to hold it higher by encouraging D while we're still far above the fundamental price increases volatility and increases the amount we're subsidizing miners, and ultimately just shifts who's holding the bag.

If you want a healthy market, focus on A.  As long as A increases, Bitcoin has a future, and the price will stabilize.  Without it, all the happy posts in the world won't save anything.

Much more detail on how this model works: https://bitcointalk.org/index.php?topic=42514.msg579137#msg579137
Explanations for my guesses for the variables: https://bitcointalk.org/index.php?topic=42514.msg579196#msg579196

[FreeMoney]

So, by my guestimated calculations, bitcoins are being sold for less than their average cost to produce. If that is the case, there is not much hope for a bottom since there is no economy to sustain it.

When the price to buy is less than the cost to mine people will tend to buy more and mine less. This will bring the price up and the difficulty down. They will meet somewhere. No one really knows where.

If you are worried about mining completely stopping, I wouldn't. People have different costs and will not all stop at once. This will give the difficulty a chance to adjust.

[Dan The Man]

So, by my guestimated calculations, bitcoins are being sold for less than their average cost to produce. If that is the case, there is not much hope for a bottom since there is no economy to sustain it.

When the price to buy is less than the cost to mine people will tend to buy more and mine less. This will bring the price up and the difficulty down. They will meet somewhere. No one really knows where.

If you are worried about mining completely stopping, I wouldn't. People have different costs and will not all stop at once. This will give the difficulty a chance to adjust.

Just because you paid a certain amount for something, it doesn't make it inherently that valuable to other people. If miners were buying bitcoins at that price, then there would be some value lock in. But if it simply costs them that much to produce, well then mining will be dictated by market price not the other way around. Since the inflation rate is locked in by difficulty, the actions of miners can't actually affect the value of the coins, except perhaps through the ability to accumulate and sell in large blocks. If they mine unprofitably it makes no difference to the market exchange rate.

[Red]

is $2 the actual value of a bitcoin after the speculation bubble has burst?

I don't think it is really that complicated a question. It is just very hard to get a straight answer!

From my view, the bitcoin price is clearly being set by speculators.

It's not being "supported" by people demanding BTC to trade for goods. Sure some people are using it that way, but most seem to be mining and donating. That process supports the Bitcoin concept as a whole, but not the BTC price. Those folks are more likely to cash out the donations than to trade them or buy more BTC. Thus donations tend to create a downward pressure on price.

You are clearly asking the right question in the right place. I just doubt you will get the answer by asking.
Probably better to score each bull post +1 and each bear -1.

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Oops! I thought you were in the speculation forum. Ask those guys!

[P4man]

This was written mid-september:

And it was thoroughly debunked back then, but it seems despite everyone's attempts, you still dont understand how bitcoin and mining works. To argue from the perpective of production cost is stupid.
There is no production cost, its not like oil or cars, my 486 could generate the entire blockchain and produce one block per 10 minutes all by itself.  heck, I might even be able to do it by hand if no one else is mining!

Its because there is a value attributed to bitcoin that more miners mine than just my 486, and therefore, the cost goes up, but the amount of miners and therefore the production cost, is dependent only on the price attributed to BTC (mostly by speculators) and for a tiny % for now, transaction fees. You cant just turn that relationship around and pretend its valid. Its not.

Oh well, why do I even bother trying again.

[FreeMoney]

So, by my guestimated calculations, bitcoins are being sold for less than their average cost to produce. If that is the case, there is not much hope for a bottom since there is no economy to sustain it.

When the price to buy is less than the cost to mine people will tend to buy more and mine less. This will bring the price up and the difficulty down. They will meet somewhere. No one really knows where.

If you are worried about mining completely stopping, I wouldn't. People have different costs and will not all stop at once. This will give the difficulty a chance to adjust.

Just because you paid a certain amount for something, it doesn't make it inherently that valuable to other people. If miners were buying bitcoins at that price, then there would be some value lock in. But if it simply costs them that much to produce, well then mining will be dictated by market price not the other way around. Since the inflation rate is locked in by difficulty, the actions of miners can't actually affect the value of the coins, except perhaps through the ability to accumulate and sell in large blocks. If they mine unprofitably it makes no difference to the market exchange rate.

Yeah, I know. All I'm saying is that if anyone wants coins and it is not profitable to mine them people will buy them instead. This will push the price up until it makes more sense for the marginal user to mine than to buy. All of this assumes some demand, but not any particular amount of demand.

[Dan The Man]

It will always be profitable for the miners with the cheapest electricity and already owned equipment to mine. The difficulty fluxuation assures that mining will always be profitable by whoever can scrape out the lowest costs to run their rig, and not for anyone else. Since we can assume that there will always be some schleps who mine unprofitably, the profitable mining will be limited to cheap electricity user and botnets and they are all competing to gain that marginal edge. 

[Jack of Diamonds]

It will always be profitable for the miners with the cheapest electricity and already owned equipment to mine. The difficulty fluxuation assures that mining will always be profitable by whoever can scrape out the lowest costs to run their rig, and not for anyone else. Since we can assume that there will always be some schleps who mine unprofitably, the profitable mining will be limited to cheap electricity user and botnets and they are all competing to gain that marginal edge.  

Hardware does depreciate in value & could break. So unless you both steal electricity & the components (or use a botnet),
it's hard to see any profit at $2 per coin unless you run a really, really big operation.

[Bind]

The majority of the people involved in bitcoins are not in it for its viability as a mechanism for trade and barter (alternative form of currency), so we are seeing less demand, less market volume, lower btc-to-fiat currency values.

Until people actually start truly believing in it for what it is intended to be, and using it regularly, we will see these cycles from time to time, with the market correcting itself.

If you believe in it, use it ... frequently.

Actively persue ways to use it. Create ways to use it for goods and services. Contact existing merchants in your area and try to convince them research it to start accepting it.

Consumers, merchants and service providers know of the problems with our current system, but few know we have lawful choices. If they know we have lawful choices, change can start ocurring.

Your only alternative is to continue using fiat currency with the attached TAX of interest debt making its value much less with every dollar printed/coined.