Fundamental Analysis of BTC, is BTC overvalued?

[cloud9]

Assuming all else stays proportionally the same as the status quo the following is an attempt at an evaluation of BTC value:

- Total current network hash:  3.913 Thash/s  (Source: http://bitcoincharts.com/ )
- Assume typical economical miner's hash :  300 Mhash/s (Source:  http://bitcointalk.org mining forums) - Stand to be corrected
- Assumed estimate of total economically mining machines:  3.913 Thash/s / 300 Mhash/s = 13 000 approximately
- Assume $1000 capital cost per economically mining machine, gives a total network capital cost of $13 million
- Depreciating asset capital cost depreciated over a five year term, gives $2,6 million capital cost depreciation per year.
- Expected Return on capital investment per year (assume 20% - high risk investment), gives $2,6 million return on investment cost.
- Running cost:  electricity, assume 0.5kWh power consumption per machine, at $0.15/kWh assumed average worldwide cost, gives 13 000 x 24 x 365 x 0.5 x 0.15 = $8,5 million total yearly electricity running cost
- Running cost:  rent, salaries, etc, assume just 100% (reimbursing the average miner on a machine only $1000!!! per year!!!! in salaries and rental space) yearly on capital cost, gives $13 million
- Maintenance cost, assume 2% yearly on capital, gives $0,25 million.
- Bringing us to an assumed total yearly cost to business for the Bitcoin network of $26,95 million.  The network generates a total of 50BTC roughly every 10 minutes at present, thus 50 x 6 x 24 x 365 = approximately 2,628,000 BTC per year.  The total cost per BTC generated securely and maintaining the network at present will thus be approximately $26,95 million divided by 2,628,000 = approximately $10.25!!!!  Is it a small price to pay for the owner's rights to secure entries in a global digital cryptographic key accounting system - which subsequently allows the owner of the rights to transfer some/all of those rights securely?

Now this cost of $10.25 per BTC is for maintaining a network difficulty of 244139.48158254 ( http://blockexplorer.com/q/getdifficulty ) at present.  When more BTC mining machines are added making the network more secure and difficulty increases ( http://bitcoin.sipa.be/ ) but the bitcoin generation rate remains unchanged - this will result in an increase of BTC securing/generating cost.  Maximum difficulty never to be reached is 2^224 ( https://en.bitcoin.it/wiki/Difficulty#What_is_the_maximum_difficulty? )  
 

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[error]

Except that difficulty is 434882.7217497.

[tomcollins]

Except that difficulty is 434882.7217497.

Also, if it's too difficulty and not profitable, then miners will drop out and the difficulty will get lower.

[DarkLinkXXXX]

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[cloud9]

Except that difficulty is 434882.7217497.

Difficulty  and  network  hash  will  change  all  the  time,  if  you  want  an  updated  valuation,  you  will  need  to  recalculate  with  this  variable's  latest  value.  You  will  find  that  the  Bitcoin  fundamental  value  based  on  network  cost,  will  increase  as  difficulty  or  network  hash  increases.

[cloud9]

Except that difficulty is 434882.7217497.

Also, if it's too difficulty and not profitable, then miners will drop out and the difficulty will get lower.

Mining  is  sort  of  a  one-way  street.  Once  you  have  more  miners  committing  capitally  at  a  more  profitable  price  level,  a  downward  future  price  level  in  the  short  term  will  not  be  a  deterrent.  As  it  will  be  more  profitable  to  find  those  Bitcoins  and  hold  onto  them  until  prices  increase,  than  let  your  long  term  capital  investment  go  idle.

[cloud9]

Looks like the one-way street mining statement is afterall not true - network hash has decreased!!! - maybe some miners felt that they will rather use their capital equipment for other activities until the market reaches fair value for the network's efforts.  (Or maybe that teacher using his school's equipment got caught  ) Or maybe because deepbit mining pool might experience technical difficulties (not showing up on bitcoinwatch.com network hash pie chart at present?!?)

With the previous mentioned valuation calculation assumptions, the current decreased network hash of 3.459 Thas/sec translates to $9.06 / BTC, with market prices currently at $8.78.  The point where miners will start firing up their engines again, might indicate where the average miner feel fair value lie for there effort of maintaining the network.

[Dobrodav]

I am choose options - "No, it should be where it is,
becose, well, it is where it should be -
on open market.

[LathaSerevi]

I haven't seen the words "upper bound" used yet in this discussion, but the costs of coin mining can only place an upper bound on the value of BTC.  Not a strict upper bound, either, since speculation can go where it wants; more of a strong hint at one of many possible upper bounds.

If we're trying to pin down a fundamental value for BTC, we'd better develop a lower bound too. 

Smooth (post #6) mentioned some reasons for BTC to have value, primarily based on perceived value of the currency system as a whole.  That's a start.  However, I'm concerned with how weak our lower bound is right now.   

Question:  why shouldn't BTC be worth USD0.01 ?   Even if the currency system as a whole is valuable, maybe the system is just as valuable with a low price on the BTC.

One attempt at an answer:  at a price of USD0.01, all the coins that will ever exist would only cost 210k USD.  If that imposes undue risks to a highly valuable payment network, then its participants will likely put a floor on its value that is higher than USD0.01.  I'm a little vague on what those risks might be, though, and why they couldn't be reduced to zero in a way that doesn't require a lower bound on the BTC price.

I wish my lower bound were a lot better than this.

Cheers
Professor Latha Serevi

[smooth]

There is no lower bound.  

It all depends on how useful (or alternately desirable for non-utilitarian reasons) it is.

Thought exercise:  If the sun went out, how much would BTC be worth?  Answer = zero.  

Thought exercise #2: Some strictly-better crypto currency comes along and no one cares about BTC even as a collectable.  How much is BTC worth?  Answer = zero.

No lower bound.

[billyjoeallen]

the cost of mining does not determine the value of a bitcoin. The value of a bitcoin indirectly determines the cost of mining one bitcoin. Miners devote resources based on expected returns. Jesus, why isn't this obvious?

[LathaSerevi]

I'm looking for useful constraints from below, not guarantees against supernovas.

In one type of lower bound that I would find useful, some major stakeholders could publicly commit to placing a floor on the BTC.  Say, the EFF holds a small fund-raising drive and then uses the proceeds of 21k USD to place a floor on the BTC price in a sustained way via a set of bids and a public 20-year commitment.  Now we have a floor of USD0.001 or so.  Yay!

I was also thinking that an analysis of the constraints of the bitcoin system might shed some light.   Perhaps a certain market capitalization is required for the system to function for transactions of size X and rate Y, based on how quickly transactions can plausibly be processed?

If we can discover (or describe a way to create, at a reasonable cost) a plausible lower bound that's within a constant factor of a plausible upper bound, then we'd be getting someplace pretty good:  a degree of assurance that the system will continue to function as a medium of exchange.


Latha

[Insti]

If we can discover (or describe a way to create, at a reasonable cost) a plausible lower bound that's within a constant factor of a plausible upper bound, then we'd be getting someplace pretty good:  a degree of assurance that the system will continue to function as a medium of exchange.

Perhaps you might prefer one of the many different "Fiat currencies" which are assured by the Governments that issue them.
There are many to choose from.