Impact of ASIC on BTC price - Lowering the Marginal Cost of Production

[Fuzzy]

You wear a little bitcoin watch and there are "places" you swipe your watch and... bang. Food. Rent. Clothing. Take your friend on a little trip. When he asks where the money is, say your watch makes the money and they're on sale for $49.99 right now.

The watch does the mining.

That must be some sticky stuff you're smoking.

[Raize]

As others here have stated, eventually ROI for Bitcoin mining will approach infinity and be owned by individuals who can never reasonably expect to make their original money back. Perhaps later, when they petition the government or lobby for forced transaction fees in the leading Bitcoin clients, they will have some power.

Right now, while mining is still profitable at all and we are under a 2 year ROI, there doesn't seem to be any reason not to mine if you can afford to. What ASIC design is going to do is make the design a lot of money. Actually buying the miners and mining once ASIC is out is going to be one of the worst financial decisions you can make (unless you can run an entire farm at the cheapest or free electricity rates).

[yochdog]

As others here have stated, eventually ROI for Bitcoin mining will approach infinity and be owned by individuals who can never reasonably expect to make their original money back. Perhaps later, when they petition the government or lobby for forced transaction fees in the leading Bitcoin clients, they will have some power.

Right now, while mining is still profitable at all and we are under a 2 year ROI, there doesn't seem to be any reason not to mine if you can afford to. What ASIC design is going to do is make the design a lot of money. Actually buying the miners and mining once ASIC is out is going to be one of the worst financial decisions you can make (unless you can run an entire farm at the cheapest or free electricity rates).

This is exactly why BFL et all should price their products to only have a slightly better ROI than GPU's.  Otherwise they simply fuck over their own market. 

[punningclan]

I'm just guessing here but FPGA's are going to improve over time also, especially with the incoming 22nm process, effectively doubling hashes, and ever better mining firmware (another area where ASICs are lacking, they can't be improved without re-manufacture). Even GPU manufacturer, a place where there is vast investment in research and design, might play a part far into the future. As an aside a lot of these FPGA boards can easily be re-tasked since they can be flashed so re-sale my not be as bad as predicted which can't be said for ASICs. Every one of these hardware solutions is going to be prone to Moores curve so even GPUs will likely hang on far longer especially for those with marginal electricity costs. I think it's too early to call but predict that FPGAs will have a very strong foothold by the time ASICs become a real issue.

My point is that even if Bitcoin is a niche what's good for it is actually good for the industry at large so any improvements in GPU, FPGA and ASICs are likely to be beneficial to Bitcoin in the long run.

[P4man]

This is exactly why BFL et all should price their products to only have a slightly better ROI than GPU's. 

Even that wont help; you are suggesting they keep the price high to prevent difficulty from going up too fast, but a high per GH price also linearly increases the payback period, so the period BFL would have to limit sales to keep difficulty more or less stable. Thats not gonna happen,; BFL cant keep selling machines at the same price if difficulty goes up and BTC value does not.  BFL will have to lower their price or sell not nearly enough to make up for their investment. More so if they worry about a competitor, which they probably should. 

So those people who buy them early at maximum per MH price are likely shafted just like the ones that will come after them, particularly if there are many of them, which I think there will be; at almost any price point I suspect there will be a race to get those machines early from people who just dont realize whats about to happen.

The only thing BFL can do is limit sales; not even by raising the price, but simply limit the number of GH they sell even if there is a big demand for their product. And when you think that through, it means having money printing machines on the shelves that you dont monetize. In short, BFL will have the choice between screwing themselves or screwing miners.

[phelix]

What happened to the idea of regularly modifying the algorithm so that ASICs are not worth it?

[thezerg]

Why do you imagine ASICs are so exclusive... sure the first run will be quite expensive but prices generally come down rapidly as volume goes up.  At that point anybody will be able to buy one and mine at about the same cost/MH as the pros, if connected via USB to a netbook or something that sips power.

The fact that you have to have a particular GPU to mine profitably (and really you want to pack as many as possible into a single machine to avoid electricity overhead) already puts mining in the hands of the pros.

The best argument for general ASIC availability is probably for the security of bitcoin...if the market moves to the fastest/most efficient solution around, it will make it much harder for a large entity to grab 51%... with the intent of shutting down the network by not allowing anyone's txns for example.

Even switching to an algorithm that favors CPUs over GPUs is a bit dangerous, due to the existence of special-purpose massively cored CPUs.  For example this one's got 100 cores: http://www.tilera.com/

[AzN1337c0d3r]

ASICs aren't negligible cost to produce. A good mask set costs a couple of hundred grand and a good rough estimate for cost for a 300mm wafer is $5000.

BFL would literally need to sell thousands of these at hundreds of dollars to break even.

I'm curious on how they plan to do so which makes me suspicious of the ASIC announcement.

[P4man]

ASICs aren't negligible cost to produce. A good mask set costs a couple of hundred grand and a good rough estimate for cost for a 300mm wafer is $5000.

Mask set is an NRE, no one ever said NRE was low, quite the opposite (and a few 100K is if anything, too low an estimate). We are talking variable production costs being negligible.  A fully processed 200mm wafer costs around $1000 for an older 130nm process. One such wafer should yield somewhere between 1 and 10 terrahash. $0.1-$1 per GH is negligible compared to current prices and asic development costs.

[AzN1337c0d3r]

Mask set is an NRE, no one ever said NRE was low, quite the opposite (and a few 100K is if anything, too low an estimate). We are talking variable production costs being negligible.

But the fact of the matter is that even if every single bitcoin miner bought an ASIC to mine with, the mask costs are still a significant part of the overall cost of bringing one model of ASIC to market. Thus all these models that assume negligible marginal cost of production results in a very low equilibrium price are suspect.

One such wafer should yield somewhere between 1 and 10 terrahash.

How do you estimate this number?

[P4man]

But the fact of the matter is that even if every single bitcoin miner bought an ASIC to mine with, the mask costs are still a significant part of the overall cost of bringing one model of ASIC to market. Thus all these models that assume negligible marginal cost of production results in a very low equilibrium price are suspect.

its not cost that will determine price initially, its demand. At current difficulty, demand will enable BFL insanely high gross margins (which are needed to pay back the NRE), easily 10000% or more of marginal cost;  but as difficulty increases, prices will come down accordingly, or miners will no longer buy them; eventually its the marginal cost that will determine prices.

lower prices -> increasing difficulty -> causing lower prices; its a feedback loop you do not have with cpus, gpus or fgpgas because their price is not determined by bitcoin difficulty. Thats the key issue, the difference between initial prices and eventual prices per GH will likely be several orders of magnitude, since no one is going to buy asics that cant generate a profit in their lifetimes, and there is no reason BFL wouldnt want to sell products as long as they still have a huge gross margin.

How do you estimate this number?

See the many other threads on this issue; its based on some academic research and an actual SHA256 asic implementation.

[Paul Troon]

I'm trying to understand this and for me the arguments about what BFL, or any other ASIC maker, may or may not do is not important.  If you make an ASIC you will price it so as to maximize profit, and as long as there is profit there will be competition.  If the ROI for ASIC hashing devices is too low, then they will not sell and manufacturers will lower the price or go out of business if they are already selling at the lowest marginal price.  

Once ASIC devices, at the lowest cost to manufacture and highest efficiency possible are not economically feasible at current difficulty levels, the only thing that can make them feasible is an increase in the demand for BTC, difficulty levels dropping due to miners dropping out and/or miners willing to accept a lower ROI.  I would like to examine the ROI aspect.

As the risk of difficulty increases becomes more stable, miners should be willing to accept a lower ROI commensurate with the decreased risk to their investment; difficulty should still increase at some equilibrium rate but will be bounded.

As the demand for BTC becomes more stable, miners should also be willing to accept a lower ROI commensurate with the decreased risk of the investment due to currency exchange fluctuations.  Increasing BTC prices will also drive difficulty to increase.

So in general, difficulty will increase and ROI rate will decrease when the rate of difficulty increase is stable.  The primary factor governing the ROI rate will become demand for BTC.  When the BTC outlook is positive, it will make sense to increase investment in mining, and when the outlook is uncertain, demand for mining hardware will decrease.

Taking everything out to the extreme, at some point the ROI rate for new mining hardware will reach the lowest ROI rate people are willing to accept given the intrinsic risk from a steadily increasing difficulty rate and uncertain BTC demand (exchange risk).

Eventually demand for new mining hardware will disappear unless there is a stable increases in BTC demand.  Manufacturers of mining ASIC hardware that have paid off their non-recurring costs will probably stay in business but their fortune will be tied directly to increases in BTC demand.  Likewise, people who have invested in mining devices will only be able to justify increasing their investment when the outlook for BTC demand is increasing.

Perhaps someone with more analytic training can solve this equation: for some fixed estimated price per performance of an ASIC device (eg. $50 for 1GH/s) at what difficulty, difficulty increase rate and/or BTC dollar price can an average yearly return on investment of 20% be achieved.

For example, a device today priced at $600 for 800 Mh/sec, with a current difficulty of less than 2Mh and a BTC price of $5/BTC will yields at least .4 BTC per day, or around $2 per day.  If that could be achieved consistently it would yield around $700/year.  

The only way that this is not a fantastic investment is if difficulty increases (as is likely) or the BTC price falls (which is possible). You won't find 100% average yearly returns anywhere on wall street.  But adjusting for the risk, this is a well justified return.   What looks like 100% yearly ROI today, could easily become closer to 0% tomorrow.

But that said, as difficulty increases become more stable and predictable, the return on their investment a miner is willing to accept should become less also.

If ASIC mining devices lead to a decrease in volatility in difficulty increase, mining hardware will continue to sell, and difficulty will continue to rise until the point when any further increase in difficulty will decrease predicted returns below what you can get from a safer investment of your money.

[P4man]

If you make an ASIC you will price it so as to maximize profit

[..]

If the ROI for ASIC hashing devices is too low, they will not sell and manufacturers will lower the price or go out of business if they are already selling at the lowest marginal price.     
 

Agreed with those statements.

As the risk of difficulty increases becomes more stable, miners should be willing to accept a lower ROI commensurate

But this wont happen until ASICs are priced near marginal costs.  We will almost certainly start several orders of magnitude above that. Its the inbetween, that is the problem, at least for miners. And that inbetween could last pretty much forever, because its highly likely most asic miners will never make a positive ROI as prices drop and difficulty goes up in a race to the bottom; there is no point in turning off those asics either as long as they produce more than the electricity cost. IOW, I expect the market will get saturated even before prices have reached marginal costs. As a result, every asic customer will lose money, not operationally, but when you factor in their investment. So unless BTC exchange rates make some large and unforeseen jumps, profitable mining will be a thing of the past.