Bitcoin Hash Rate Rapidly Growing Despite Price

https://cryptoslate.com/bitcoin-hash-rate-rapidly-growing-despite-price/

by deegles • 8 years ago

106 73 8 years ago

Is mining equipment purchased and paid for in advance? If so, this sounds like a few years ago in oil and gas. Prices dropping but quantities supplied rising due to sunk costs in drilling contracts.

herendin• 8 years ago

That advance investment in infrastructure must be a very important part of this effect. Those sunk costs probably are most important thing here. ASIC lead time is months and not the only advance investment.

But betting on future price, speculation, also is important.

Also there maybe could be influence from changes in energy pricing.

kuroguro• 8 years ago

Yep, major ASIC sellers require up front payments in some cryptocurrency, last time I checked.

rcxdude• 8 years ago

Generally yes. I would expect most bitcoin mining operations would continue for a while after they stopped making a return on investment, until they were no longer making a profit on the cost of electricity. However, electricity is a fairly large part of the cost of mining, and there is a treadmill on the hardware side as well as better ASICs are developed (the ASIC developers skim the cream of this as well, units sold to customers have likely already been used, sometimes heavily).

JumpCrisscross2• 8 years ago

mining operations would continue for a while after they stopped making a return on investment

Marginal return. The ASICs could have been bought for $10 with the expectation of making $1 a year and paying out 50¢ for electricity (a 5% yield). Now it’s making 51¢ a year (a 0.1% yield). Not enough to make economic sense, but enough to keep running the rig; 0.1% is more than zero.

Broadly, I was pushing back against the author’s inchoate claim that “the continued growth in hash power demonstrates a strong, continued belief in Bitcoin by miners worldwide.”

oh_sigh• 8 years ago

Profits aren't even required if you're laundering money. You might pay a 30-50% fee for any laundering scheme, so if you can only lose 15% of your money by running in the red rigs you're still accomplishing your goals

ballenf• 8 years ago

And the delayed effect of R&D into better ASIC design has an even longer delay than purchasing or manufacturing of existing designs.

An article about an ASIC startup that made HN mentioned an 12-24-month lag, IIRC, between design and mass production at scale.

So we're not even past the point of seeing the effect of the peak bitcoin value.

maerF0x0• 8 years ago

Also this article seems to miss that you can take illegal money, buy hashing equipment and launder it via mining... I'm sure having crypto in the news has got more crime bosses' attention? Obviously I have no proof of this being the case.

magnetic• 8 years ago

If you can buy hashing equipment with your money, doesn't it mean you've already "cleaned it"?

If not, what kind of business provides you with hashing equipment from dirty money?

mattnewton2• 8 years ago

I have no idea what I am talking about, but I imagine you can exaggerate the returns and downplay the costs on an operation like bitcoin mining to squeeze in your dirty money. Like they would with any cash heavy business where it is hard to determine the actual costs and revenue.

thaumasiotes• 8 years ago

You don't need to admit that you own the hashing equipment you bought with dirty money. You might have gotten lucky.

fareesh2• 8 years ago

I guess it depends on what you mean by "hashing equipment"

For example, if you go to Ritchie Street in Chennai, India there are plenty of stores that will sell you a top of the line GTX 1080 GPU for cash. No record of the transaction, and no taxes. A lot of stores will probably even accept USD.

You wouldn't be able to launder boatloads of cash this way, but with enough motivation you could do this on a regular basis and offset some cash.

leakybit• 8 years ago

I believe that business is called Bitmain

sonnyblarney2• 8 years ago

"If not, what kind of business provides you with hashing equipment from dirty money?"

That part is easy. Other businesses don't know if your money is dirty, the issue is transactional, i.e. buying without a receipt in the tax domain you're in.

So, if you can somehow take 'dirty USD' and buy ASICs anywhere outside of America, it will probably work.

The purpose of Money Laundering is to get money into a bank account that the government will recognize as legit, but 'dirty money' can still be used for whatever reasons for nefarious purposes, a lot of it even from 'good businesses'.

Buying a few ASICS in cash from individual stores will not raise eyebrows like walking into a Ferrari dealership with cash might.

gammateam• 8 years ago

hm, so first the new mining operations run the entire fabrication line, so they have factories in Shenzhen or Scandinavia and create the mining hardware and start mining. if you have the whole production line you can pay for costs in cash or straight from the illicit source to people without ever passing through a reportable system

secondly, when you do buy mining hardware or buy hashrate (cloud mining), most manufacturers and service providers ONLY take bitcoin, so if the money was dirty it still never passed through a reportable system. when you pay for invoices with cryptocurrency there is no billing address or any other information about the buyer. if you funds came from a botnet, a hack or even drugs but stayed in the system, there is no necessity to link your identity to anyone. you can ship your hardware to any address, or straight to a data center, and even if you think that will reveal your identity even the mining proceeds can go to any random address recipient and this is all new money.

instead of trying to reveal the flaws, try imagining it as if you had five million dollars in bitcoin to launder and i2p/TOR and see how you could remain anonymous without messing up your OPSEC on either the blockchain or from your other activities.

nwsm• 8 years ago

If you are able to safely buy expensive things there are definitely faster / more profitable ways to turn it into cash than mining bitcoin.

craigc6• 8 years ago

Care to provide some examples? Are you talking about buying things in order to rent them out to other people?

bufferoverflow2• 8 years ago

No, you still would have to explain where the equipment came from in case of an audit.

HashBasher2• 8 years ago

In the past, only bitcoin users were criminals. Now miners too!??! Only groups left are developers and businesses.

ttoinou• 8 years ago

   At Bitcoin’s peak, a single block was worth almost a
   quarter million dollars and miners may view the current
   market as a way to accumulate more Bitcoin at lower prices

Don't understand that last sentence. They create money via using electricity and amortizing ASICs, not the other way around

snarf21• 8 years ago

My take was that if they already bought the ASICs, mining may make sense at break even for electricity so they can continue to accumulate and hold bitcoin if they think it will pop to 20K+ or more in the future.

downrightmike• 8 years ago

The miners are more than likely expecting that the future value is worth much more than the electricity today. Bitcoin went from 1k to 20 k inside of a year. If that happens again, or more, they would be able to sell at 10x the electricity cost.

thewizardofaus• 8 years ago

Speculation. Might go closer to zero as well.

tatersolid• 8 years ago

If that happens again...

It won’t. It’s a bubble. No real commodity or currency increases 20x in value in a year. It’s funny-money, Just like the dotcom Boom in the late 1990s.

Bitcoin is basically unused as a currency except by criminals, and has no functional advantages over other payment systems for honest people. Just like stock of pets.com in 1998.

tboyd472• 8 years ago

Halving is scheduled for 2020. Miners probably have lots of dormant equipment they already purchased and are gradually turning on. They must increase hashpower if they want to maintain the same return, but it's in their best interest not to do it all at once to keep difficulty low for as long as possible. Price is probably not a big factor in the short term.

cdiddy2• 8 years ago

I sort of doubt that, you would want to use the mining equipment as soon as you get it because more efficient equipment would/could come out between now and then making your profits a lot less or even your equipment obsolete

tboyd472• 8 years ago

This is true. They could also be mining a different coin or chain then switching over. All speculation I guess.

bufferoverflow2• 8 years ago

Miners would be insane not to run their mining equipment. It gets obsolete rather quickly.

pastor_elm• 8 years ago

Simplest explanation: Big players are willing to operate at a loss to gain marketshare. Then when bitcoin hits $100k you're dominating the market and bringing in the big bucks.

nwah1• 8 years ago

Simpler explanation: computing power per dollar is continuing to improve.

craigc6• 8 years ago

I don’t think that explanation makes sense. It isn’t about regular computing power, it is about the hash rate of the mining hardware. They use specialized hardware (ASICs), and if you look on this page you can see a breakdown of the hashrates:

https://en.bitcoin.it/wiki/Mining_hardware_comparison

The top one (other than the Dragonmint miners which are not listed) is the Antminer S9 which you can see was released over two years ago.

If you are aware of some new mining hardware that is much faster please let me know.

vkou• 8 years ago

If you're spending $1 of electricity to mine $1 of coins, why not just spend $1 to buy the coins outright?

gomox• 8 years ago

Freshly mined coins have a premium because they are clean (i.e. you are 100% sure they haven't been robbed before, which can create problems) and untraceable (i.e. there's no way to link them to the original assets used to purchase the miners).

Other than that, a person might not have access to the equivalent volume of BTC but have easy access to energy/miners. Additionally, depending on how you predict hash rate and BTC price to evolve, mining might have a better ROI.

1996• 8 years ago

Indeed I noticed too. Profitability halved compared to 4 weeks ago. There are various possible causes, such as miners having to use equipment they ordered before, but 6 months after the peak, and given the costs of power, it seems unlikely. Mining remains widly profitable. A side effects is that it increases the security of the network.

My best explanation is that we are noticing the runup to another peak.

Money can't buy enough coins through mining equipment anymore, and therefore will eventually buy existing coins directly, causing another peak.

craigc6• 8 years ago

What I would love to see is a breakdown of locations of miners over time. I wonder if the increase is in places where electricity is cheaper and/or subsidized.

I do not believe the increase has anything to do with better mining hardware since the top mining hardware has not really changed much in over two years.

My guess is either:

1. Most people have already invested in the hardware and are therefore okay mining at a loss with the hope that the Bitcoin price will rise again in the future.

2. A lot of miners are using renewable energy in which case it wouldn’t make sense to stop. For example, if you are using wind or solar or hydro energy, then the energy is still going to be available even if you turn off your mining hardware.

scotty79• 8 years ago

For example, if you are using wind or solar or hydro energy, then the energy is still going to be available even if you turn off your mining hardware.

That's only true if you can't sell the energy for more than bitcoins mined for that energy.

And buy bitcoin for that money ... :)

craigc6• 8 years ago

Good point. I was assuming that it would be a surplus of energy that you are not able to sell.

212• 8 years ago

Or:

3. VCs invest in miners, and the investment money is used to pay the costs until the price rebounds.

garmaine2• 8 years ago

It would be cheaper and significantly easier to just buy coins though.

Symmetry• 8 years ago

I was interested to learn in the recent indictment that the Russians were using bitcoin as essentially a means of money laundering. The Russia government uses it's budget to mine some bitcoins and used those to buy the servers used to hack the DNC. I imagine criminals and people looking to evade currency controls have similar interests.

craigc6• 8 years ago

I would be very surprised if mining was the sole source of the funding simply because mining hardware is so expensive, and it would take a long time to mine $90,000.

The Bloomberg article says

the defendants conspired to launder the equivalent of more than $95,000 through a web of transactions

So while they may have done some mining, I think the majority came via other sources.

That is certainly an interesting perspective though – that the increase in hash rate is due to people wanting to evade traditional currency systems to fund their illicit activities. It would not surprise me at all if some governments were involved in this too.

nobrains2• 8 years ago

> 1. Most people have already invested in the hardware and are therefore okay mining at a loss with the hope that the Bitcoin price will rise again in the future.

It doesn't make sense to mine at a loss, as in that case they can buy more bitcoins at market price, rather than mining them.

HashBasher2• 8 years ago

Bitcoin hashrate is a lagging indicator. It takes months to get the equipment and set it up. This is probably a result of the Dec boom.

CydeWeys• 8 years ago

Also, mining equipment is continually getting better. Large scale parallel ASICs like these are still a relatively recent field, with lots of remaining room for improvement. It's far less stagnant than current x86 processor speed. Mining is very much a red queen's race.

api• 8 years ago

I've heard repeatedly that in some cases Bitcoin is mined at a loss. This can be done to get money out of countries with capital controls or to launder money. They don't mind taking a haircut... it's the cost of doing business.

ur-whale2• 8 years ago

One of my theories to explain this phenomenon (actually discussed in a previous thread) is that bitcoin mining might very well be a roundabout way to launder money, or at the very least a mechanism by which you can circumvent capital movement control: use local money to buy mining h/w + power, get clean, freshly minted BTC from that.

If that is actually the case, then the "operating at a loss" part is not really an issue: I suspect all means of money laundering have a sizable built-in cost.

[edit]: both theories are discussed at length in other comments below.

lancewiggs2• 8 years ago

Supply has going up (many producers), and demand has fallen relative to that - as evidenced by the price falls and margin collapse for miners.

In the real mining industry we see the same effect, where there is a commodity price (for say Nickel or Iron), and the suppliers, faced with very high capital costs, will continue to produce until their marginal cost is underneath the marginal revenue. At this stage they slow or mothball mines, smelters and refineries. That comes at a huge cost.

The last mines left are the ones with the most efficient costs/tonne, which is combination of access to ore, the type of ore, the closeness and efficiency of smelters and refineries and so on. A big part of it is the scale of the operation, and how up to date the equipment is, but also how well it is all operated.

Aluminium refining is particularly relevant, as electricity is one of the main input costs. We have seen refineries close down and sell their power back during extended periods of high electricity prices and relatively low aluminium prices (e.g. when Enron dove up Ca. prices). Newer/larger aluminium plants are fr more efficient, but the price of electricity is everything.

(I've led turnarounds at very large nickel and alumninium smelters/refineries and helped others with their turnarounds on mines/operations)

In the case of bacon mining the main factors are, once the computing equipment is acquired, the price of electricity and the conversion efficiency per kWh.

antiphase• 8 years ago

Tell me more about this bacon mining.

bwbw2232• 8 years ago

I’m interested too- it sounds like something I might try this morning...

AtlasBarfed• 8 years ago

Hash rate increases are great. I wish they'd do a massive jump that takes miner profitability out of reach even if it were 100k/coin.

The amount of power used on bitcoin miners isn't good for the world, unless it funds alternative energy infrastructure that eventually gets repurposed for other reasons, but I doubt that is the case.

nobrains2• 8 years ago

I think the reasons are as follows:

1) The supply of the miners are usually delayed by a month or two in some cases. So people buying miners when bitcoin was 18,000 to 12,000 in Jan, would be receiving their miners in March or later.

2) Prices of miners have fallen because of the price of bitcoin. You can buy an s9 miner for just USD 600 right now (https://shop.bitmain.com/product/detail?pid=0002018062817430...) which might have resulted in people increasing their investment in miners, increasing the hashrate.

Bitcoin Hash Rate Rapidly Growing Despite Price

Related Stories