The problem with Bitcoin miners

https://paulbutler.org/2022/the-problem-with-bitcoin-miners/

by paulgb • 4 years ago

436 492 4 years ago

Excuse me, I'm a crypto noob, but how much BTC could I make if I bought a dedicated mining rig for, say $2000 and let it run nonstop for two years? Would my investment be worth it? Could I cash out my earnings to fiat and have more money than my initial investment or otherwise generate a profit?

Marazan• 4 years ago

No.

speedgoose• 4 years ago

Do you produce your electricity? (solar panels, windmills, coal factory…) If not you have to guess the energy price in your area over the next two years.

You also need to estimate the Bitcoin price over the next two years.

And you probably need to estimate the bitcoin hash rate over the next two years.

Good luck.

WJW3• 4 years ago

It is entirely impossible to say. First off, your electricity price will determine how much (if any) profit you'd make. Most bitcoins mines are in areas with very low electricity prices for this very reasons and if you are not, it might be outright impossible to profitably run a mining rig.

Obviously, the price of bitcoin over those two years would be very important to your income and assuming a price of 60k (where it was a few months ago) would result in a very different outcome than the same calculation with the current price of 30k. Bitcoin has been very volatile since basically forever, so it is very difficult to predict of your scheme would be profitable.

nradov4• 4 years ago

This is why Bitcoin miners located in Kosovo where electricity is "free". They're supposed to pay, but due to the political situation the power company can't disconnect deadbeat customers.

https://balkaninsight.com/2021/05/12/in-north-kosovo-mining-...

Canada2• 4 years ago

First off, your electricity price will determine how much (if any) profit you'd make.

No it wouldn't. The electricity cost is a factor, but it's not that significant compared to the capital cost of the equipment, the price of which fluctuates depending on the expected profit.

You can also see this with GPUs, but it's far more pronounced with Bitcoin mining hardware which has no other use.

_fat_santa• 4 years ago

This wholly depends on where you are getting energy and for how much. The "idea" around mining BTC is it's not free, you are exchanging Energy for BTC. If you live in Iceland where renewables are plentiful and cheap then you will likely make money, just about anywhere else though it's a gamble.

TL;DR: Just dont.

agoose77• 4 years ago

Ultimately you can do what you want ^^, but it's worth considering the environmental impact of what you're proposing. Say a mining rig uses 1kW - for 2 years non-stop that's 1kW for 17520 hours. If CO2/kWh is 0.85lbs, then that's 14892 lbs, or 6.75 tonnes! The average passenger vehicle emits 4.6 tonnes of CO2 per year - that's less than our hypothetical rig!

https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-t...

wyager4• 4 years ago

That's a lot of carbon you're helping remove from the ground and turn into plants!

seaman1921• 4 years ago

so as long as we are under average passenger vehicle its ok to do anything - great argument dude - justify an evil with a bigger evil

UncleEntity• 4 years ago

Other than those yahoos who recommissioned some coal-fired power plants not too long ago most mining operations are located in areas with surplus renewable energy methinks.

renewiltord2• 4 years ago

Pretty good argument that those who work from home have carbon budget for two mining rigs without being worse than a dual-car household.

Go get your mining rig, my dude. The median number of cars in American households is 1.88 so you have lots of room to play.

ipaddr• 4 years ago

This says nothing because electricity depending on the source can have none or more than your number.

humanistbot• 4 years ago

Add your hardware and electric costs and calculate daily/weekly/monthly profit at: https://minerstat.com/mining-calculator

But unless you can find free electricity (like at work or school), it usually isn't worth it. You also have to factor in the failure rates at keeping a computer running 24/7 at max cycles.

thombat2• 4 years ago

Stating the obvious, but if making money depends upon "free electricity" then it's an elaborate way to take money from whoever is paying that power bill.

matheusmoreira4• 4 years ago

free electricity (like at work or school)

Solar too. Solar powered miners let you literally monetize the sun.

mistrial9• 4 years ago

uhh - this is exactly "not systems thinking" .. it is an individual opportunistic thinking. Responses below link to broad societal effects, various environmental claims, appeals to morality and reason.. all of which intersect very little with the "I see food" diet implied by this question.

As an analogy, the sticky part of lottery tickets is, people will reliably participate with their own money; others complain; nothing changes as people do it again anyway. Opportunistic planners take advantage of the "I see food" people, make glossy lottery tickets and pay a premium to food store managers to sell those lottery tickets; more people complain.

Can we identify the systems parts in play here, to create enough context to actually decide what is important, what is unstoppable, and what might be a rational, thinking response to all of this going on ?

cowtools20• 4 years ago

Good points, but I think that if you want to consider the "ethics" of cryptocurrency mining, you have to acknowledge that currently there is a lot of hype around crypto that will eventually go away. There are a lot of irrational actors.

If you want to make a statement about the nature of bitcoin, I would consider an "equilibrium" situation where:

* The cost of specialized hardware is stable (e.g. what are the economies of scale as t->infinity ?)

* The price of bitcoin in terms of energy (BTC/watt hr) is stable

* Miners are rational actors

It seems to me like the most concerning aspect of cryptocurrency mining is that the hashrate is dependent on externalities like the price of bitcoin, rather than the necessary hashrate to defeat a 51% attack.

wussboy• 4 years ago

Based on the replies you got, it seems pretty clear that the answer to all three of your questions is “no”.

ntoskrnl3• 4 years ago

Any company that could build hardware capable of turning a profit would use it themselves, instead of selling it to the public. Don't try to buy a money printer. Life isn't that easy.

amelius4• 4 years ago

Solar panels are money printers. Yet no company is offering to put them on my roof at their cost.

vikingerik• 4 years ago

There is arbitrage. It's possible that a hardware company might be located where electricity is expensive, or in an unfavorable regulatory or tax jurisdiction, such that they wouldn't directly profit from running the mining equipment, but someone in a better environment could. But yeah, this would be a small minority of situations.

paxys• 4 years ago

Going by that logic, why does any company sell anything that can be used to make money?

jabits• 4 years ago

Not so sure, what about a machine like a slot machine? I think you make money making something you know how to make

bee_rider• 4 years ago

The companies could be located in an area where electricity is too expensive to turn a profit (and they might be relying on the fact that the end users are individuals, and distributed, so maybe they expect the end users to slip between the cracks and find subsidies not intended to go to bitcoins).

Also, if one company was making the majority of bitcoin ASICs, they'd be at risk of gaining the ability to do a 51% attack, right? Which would reduce confidence in the network I guess.

I don't own any of this stuff because bitcoin seems fundamentally bad for the planet and a pain to manage, but I don't think we should assume these things are necessarily irrational purchases just because we don't like them.

redox997• 4 years ago

People have been saying this literally since the first ASIC came out. And guess what. People have made a lot of money buying these money printers.

andy813• 4 years ago

You'd be competing against others who steal their electricity or have it subsidised (including pollution, resource depletion, regulatory arbitrage, financial crime and other externalities).

If you can take advantage of some of those and don't mind that the money isn't being generated so much as taken from other people then it's a great idea.

mirceal6• 4 years ago

there are multiple variables here.

one is the cost of the hardware. 2000$ is not enough for latest generation ASIC miners. It just isn't. You want the latest generation ones. We are probably talking 10k+ for something decent.

The second one is the cost of power. People like to talk shit about the environmental impact of bitcoin and stuff, but the reality is that the bitcoin you mine is worth less than the power you are using in most places around the world. Bitcoin mining is profitable in areas where the cost of power is heavily subsidized (it's free real estate meme) or you can easily generate power yourself (solar, wind, thermal, etc). So, if the cost of power is > value of mined bitcoin, it does not make sense to mine it

The third part is mining pools. You can build all the rigs you want, but the reality is that most bitcoin is mined by mining pools. So you will have to join one of those pools if you want to have a steady guaranteed small income.

So to answer your question: depending where you are for an investment of X this could be profitable (medium/long term) but you need to understand more about the cost of the hardware, cost of power and dynamic of mining pools to actually pull this off (so for a noob, you're better off just buying 2000$ of BTC, holding for 2 years and selling. sorry noob. The wild west era of bitcoin mining is long behind us)

scotty79• 4 years ago

If you don't have a super cheap source of electricity then most likely you wouldn't break even.

cowtools20• 4 years ago

Mining is always a rat race against the rest of the network. Although this article makes me hopeful for alternative PoW solutions like RandomX[1] that seek to combat the advantages specialized mining hardware altogether.

[1] https://github.com/tevador/RandomX

andy813• 4 years ago

Specialized mining hardware is an environmental disaster but it does make 51% attacks more difficult.

With POW on general purpose CPUs, anyone can rent cloud processing to mine for short bursts in a way that's just not possible for attacks on bitcoin.

cowtools20• 4 years ago

That is a good point, but consider the following:

1. If a cryptocurrency is dominated by specialized miners, then you have a centralization effect as the majority hash-rate can be more controlled by monopolies that can take advantage of their economies of scale. Because mining is mostly done by companies at scale, it is easier for governments to impose regulations on miners and control the type of transactions that are allowed to be verified.

2. Vendors accepting cryptocurrency can always choose their own level of risk by deciding how many blocks to wait before accepting a transaction. This allows them to "wait out" temporary attacks.

I would say that the permanent miner takeover as described #1 is an order of magnitude more threatening than the temporary attacks as you've described. But it is still quite an issue.

Specialized hardware will depreciate if it is tied to a cryptocurrency that has been attacked. So miners are incentivized not to attack, lest they devalue the resell value of their hardware. Note that this advantage doesn't really apply to GPU-mined cryptocurrencies.

nuclx• 4 years ago

Botnets are playing a big role in CPU-based mining as well.

latchkey2• 4 years ago

Worse, it incentives botnets.

once_inc2• 4 years ago

How is specialized mining hardware an environmental disaster? In what way is the bitcoin mining industry more harmful to the environment than a steel smelter, an aluminum factory, or wash dryers? How is it an environmental disaster if most of the hash rate is from green energy and it is also actively suppressing methane release?

I've noticed a trend on HN where people say mining is bad for the environment, but can often poorly articulate the details. This, in my opinion, means they are just rehashing the same disinformation in articles that all point to the same sources (cambridge or digiconomist).

Quotes like "Bitcoin mining uses more energy than [country X]", "That green energy could be used for other things", and "It provides no intrinsic value" have all be waylaid years ago, but keep getting brought back up.

tromp3• 4 years ago

RandomX makes for a poor PoW though, as its huge complexity and high cost of verification run counter to the design principles for a good PoW.

cowtools20• 4 years ago

I disagree, those are relatively minor tradeoffs.

RedBeetDeadpool17• 4 years ago

The entirety of evolution and social progress is a neck to neck rat race run against a red queen. Blaming mining (of any kind, gold, diamonds, rare earth metals, oil, bitcoin) for being a rat race is like blaming you for being a mammal that uses oxygen. Yes you are a mammal that uses vital oxygen. So are all the other animals out there.

cowtools20• 4 years ago

Cryptocurrency mining isn't analogous to Gold mining in this way. The purpose of cryptocurrency mining isn't to produce cryptocurrency, but rather to secure cryptocurrency transactions by making the order of transactions hard to reverse by any attacker. Mining produces cryptocurrency merely if it is designed to reward those who secure the network.

Mining specialization is against the purpose of cryptocurrency mining because it gives specialized attackers (a centralized group) power over the rest of the stakeholders (not just owners, but users).

woodruffw5• 4 years ago

This is a really excellent summary of just one among many sufficient reasons why bitcoin’s economics are fundamentally untethered from reality. Just the last points alone are condemning: no legitimate scheme in history has seen its executives cash out real money against such a small proportion of expected future earnings (in scrip).

paulgb6• 4 years ago

Thanks! FWIW, this is a follow up to an older article that covered a number of other issues with bitcoin's economics: https://paulbutler.org/2021/betting-against-bitcoin/

repomies69• 4 years ago

This article has really nothing to do with Bitcoin itself. It is just a story how stupid investors are pouring money to companies that have the Bitcoin in its name, without really going through the business at all.

These companies have been ridiculously lousy investments. Borderline scams, when you look at executive compensation.

catlifeonmars3• 4 years ago

This article has really nothing to do with Bitcoin itself. It is just a story how stupid investors are pouring money to companies that have the Bitcoin in its name, without really going through the business at all.

How do you figure? Much of the (featured) article is centered around hashrate to bitcoin production ratios over time. Literally one the central features of bitcoin.

woodruffw5• 4 years ago

It has "nothing to do with Bitcoin itself" in the sense that it's about the economics of mining, which has everything to do with bitcoin and its valuation.

MuffinFlavored• 4 years ago

Given all of the "problems" surrounding BTC/crypto, when will they actually matter enough to make BTC/USD stop being $30k and go to $10k or $0?

It dropped to $25k for like... what feels like a split second and people are still FOMOing into it, running it up to $30k (unless it's some kind of manipulation by whales to trap people's money... who really knows?)

woodruffw5• 4 years ago

This is the eternal problem with all scams: the music doesn't stop until it stops, and anybody with accurate information about when is unlikely to be on "your" side.

mirceal6• 4 years ago

bitcoin’s economics are fundamentally untethered from reality

are they thought? What's untethered from reality is the understanding of how bitcoin work. Everyone wants to throw in 100$ and wake up to millions in 5 years. That just does not work anymore.

One can model all costs involved when it comes to mining and can make a decision based on cost vs expected profit. Bitcoin (and cryptocurrencies) are not vending machines. The math to model this is harder and there is a lot more uncertainty. Can it be done? Probably. Will we have winners and losers in the mining game? of course.

woodruffw5• 4 years ago

are they thought? What's untethered from reality is the understanding of how bitcoin work. Everyone wants to throw in 100$ and wake up to millions in 5 years. That just does not work anymore.

Economics is a social activity, not an abstract property of an asset or instrument. If the body of people using or interacting with bitcoin are fundamentally misguided about its economic properties, then the economics of bitcoin itself are fundamentally misguided ("unreal").

As I read it, the article's point was this: the economics behind large mining initiatives are bunk (it would be more profitable to simply buy bitcoin at current prices using the same capital). Simultaneously, it is true that bitcoin's mining activity is a supporting factor in its valuation. In other words, bitcoin is doing the economic equivalent of the toothpick trick: two supposedly supporting factors are actually mutually vulnerable to the same outside pressure (the availability of gullible investors, or lack thereof).

wyager4• 4 years ago

This should probably be titled something like "the problem with an accounting strategy that I made up, which some people might be using, I'm not sure".

gitfan862• 4 years ago

Sure, maybe the books of these companies are not as cooked as implied in the article, but the question remains:

How does a company who spends 31k mining BTC that is currently worth 30k and pays their executives tens of millions in compensation work out in the long run?

mirceal6• 4 years ago

here is the thing. there are good investments and bad investments. good execution strategies and bad execution strategies. i have no doubt that a lot of these companies will go belly up. happens in every new domain where there is a lot of uncertainty and FUD.

So the question is not: how does a company ... work out in the long run? the question is: which company actually does things in a sane manner and will survive to be a dominant player in the space once the dust settles?

wyager4• 4 years ago

If you're confident in your analysis you should take a short position.

salmonlogs3• 4 years ago

Operating cashflow and depreciation curves are the most basic accounting principles out there, the author did not make anything up - he is applying a logical analysis to publicly available data.

mirceal6• 4 years ago

sorry, but what works for the printing press does not work for ebooks.

If someone were to talk to you about the cost of printing and distributing books and how much X costs and depreciation over 10 years, you as an ebook seller would laugh them out of the room. Sure there are things that still apply across all businesses, but people seen to dance around the fact that the reason why depreciation model does not work for bitcoin mining is that it's highly correlated to advances that were made in the mining hardware + the huge role the cost of power (geographical location in the end) has on the whole profitability of things.

wyager4• 4 years ago

A flaw in GAAP is not Bitcoin's fault. The OP has no idea if people are actually using shitty GAAP accounting principles to evaluate these miners.

benreesman2• 4 years ago

I think this is what we call “self-limiting”. Maybe miners are subsidizing their mining by BTC appreciation (though, it seems it’d be easier to just buy BTC), and if they are then some people are going to find new jobs when the price changes slope.

Problem solved.

woodruffw5• 4 years ago

“Self-limiting” is a game-theoretic property, not an economic property. The point of the post is that there’s a fundamental economic unreality in how these mining companies are valued, and all signs (such as hearty executive bonuses) point to the fact that their leadership is aware and is emptying the bag before leaving others holding it.

mdoms2• 4 years ago

This is covered in the article.

andreyk• 4 years ago

The post makes this exact point actually, so seems the author agrees.

benreesman2• 4 years ago

I mostly agree, my little TLDR is a matter of emphasis.

This article should be like a tweet: “Watch out for MinerCo, their depreciation schedule looks wonky, I’m short!”

And then maybe footnote if it’s not obvious.

But it’s Movie Trailer Voice: “The Problem with BitCoin Miners”.

Wait there is one problem that so exceeds in importance all the other pros and cons that it’s The Problem?

Oh no you’re short some companies and want people to sell them. Jim Cramer’s got to retire someday.

doomroot• 4 years ago

TLDR people are throwing capital at mining companies because they want traditional financial access to bitcoin gains. Mining companies will reach their proper evaluation when a bitcoin spot ETF is available to investors.

henvic• 4 years ago

As of writing, there are 1,960,775 bitcoin remaining to be mined.

There will be more: https://henvic.dev/posts/bitcoin/#scarcity

They'll find a way to convince more suckers to adopt the shitcoin.

ntoskrnl3• 4 years ago

Sorry, is that link arguing that bitcoin is not scarce because each bitcoin can be divided into smaller units?

everfree• 4 years ago

Looks like it is.

If you subdivide something, that doesn't make more of it.

smnplk2• 4 years ago

In the future, BTC could be more abundant, because devs in bitcoin core can increase the upper limit of max bitcoins ever mined.

intabli16• 4 years ago

What renders this whole calculation wrong is that it doesn’t account for transaction fees AND transaction fees growth which was also supposed to be growing exponentially, had Bitcoin not been artificially limited to ~ 2 MB blocks every ten minutes.

On an actually uncapped Bitcoin instance, Blocks (Block size) and transaction fees will grow exponentially, rendering all such “Bitcoin is environmentally terrible” and “Miners aren’t profitable” calculations absurdly wrong.

Other instances exist that are chugging along flawlessly and are set to help miners grow their revenue with on-chain transaction fees growth: DYOR.

Of course, BTC Maxis lead by companies set to profit from such an artificial limit on Bitcoin (hint: they often peddle L2 solutions) would hate for you or anyone to understand and study those facts.

mdoms2• 4 years ago

So in a fantasy universe that doesn't exist this analysis doesn't make sense. Ok?

intabli16• 4 years ago

These uncapped forks do exist, they’re the reason the whole community split in 2017; so when those “analysis” articles ignore them and ignore the fact that the white paper and Bitcoin’s creator explicitly called for on-chain growth and scaling, they’re being either dishonest or ignorant.

It’s like someone saying “Look at how wasteful this car limited to 20MPH is! All cars are wasteful!”. No, not all cars, especially that the original design explicitly said to scale the engine as more speed is needed.

kelseyfrog• 4 years ago

I've seen this pattern play out online and offline countless times. A perennial favorite is dialog patterned like so

    "Ethereum is ok because proof of stake will solve problem X."
    "Is proof of stake currently in use?"
    "Well, no, but it will be soon/someday/eventually."

I call it crypto-wishful thinking, but only for lack of a better name.

cowtools20• 4 years ago

What renders this whole calculation wrong is that it doesn’t account for transaction fees AND transaction fees growth which was also supposed to be growing exponentially, had Bitcoin not been artificially limited to ~ 2 MB blocks every ten minutes

I agree that bitcoin should use an adjustable block size, but I'm not exactly sure that this logic follows. Can you explain this to me? If the network could handle more transactions per block, wouldn't the fees per transaction just decrease?

intabli16• 4 years ago

Correct, the fees would decrease, but when when you can only process 200k transactions every ten minutes, there’s an upper limit of how much people are willing to pay before it becomes absurdly expensive. This reached almost $100 in the 2017 rush. It’s unsustainable and renders the network unusable for most of the planet.

When you on the other hand can process millions of transactions every block (and scalable as needed), you’ll charge far less per transaction while still allowing miners to generate a huge (and ever growing) revenue, while also enabling most of the planet to transact next to free.

From an environmental perspective, if you divide the hash rate environmental impact on a mere 200k transactions every ten minute, the carbon foot print per transaction would seem absurdly high. Do the same calculating for millions of transactions every ten minutes, and you’ll arrive at a far better environmentally friendly figure.

FabHK12• 4 years ago

Blocks (Block size) and transaction fees will grow exponentially

Currently, the blockchain is 405 GB and grows by about 5 GB per month. In your proposal, that will go up exponentially?

intabli16• 4 years ago

My proposal? I won’t take credit for Satoshi’s work, it was his proposal:

https://satoshi.nakamotoinstitute.org/posts/bitcointalk/485/

imtringued3• 4 years ago

If it doesn't, then Bitcoin is dead. It has no future.

PragmaticPulp• 4 years ago

On an actually uncapped Bitcoin instance, Blocks (Block size) and transaction fees will grow exponentially, rendering all such “Bitcoin is environmentally terrible” and “Miners aren’t profitable” calculations absurdly wrong.

This doesn't make any sense.

If anything were to make mining more profitable, we would see even more miners come online.

There is no scenario in which Bitcoin mining becomes less environmentally terrible by paying more money to miners. Those payments incentivize more miners to come online and, if significant enough, would encourage miners to bring older, less efficient equipment online relative to today's rates.

intabli16• 4 years ago

If transactions scale enough for you to be able to shut down most bank branches, end commutes for all banking and central banking employees, shut down all credit card companies and their offices and terminals, turn off ATMs, end printing physical paper money and minting money, just to mention a few, I think the environment will be way, way better off.

That’s the argument behind unlimited on-chain transactions.

brian_cloutier• 4 years ago

It's not possible to have an uncapped block size. As blocks get larger they take longer to propagate through the network. Longer propagation means more forks, which means more work is wasted on forks which do not become canonical, which lowers the effective hash rate of the network and therefore the threshold for a 51% attack.

2MB is far too small, but it would be a gross mistake to overcorrect by removing the cap entirely.

See, for example: https://www.gsd.inesc-id.pt/~ler/docencia/rcs1314/papers/P2P...

On an actually uncapped Bitcoin instance, Blocks (Block size) and transaction fees will grow exponentially

Transaction fees would drop to zero. The fee is a bid in an auction for scarce block space. If block space is not scarce then the winning bid is always zero.

intabli16• 4 years ago

Uncapped is a pseudo name for “capped just in time”. It’s never really uncapped.

If you’re interested in some work being done on such larger blocks, you’ll enjoy this presentation:

https://m.youtube.com/watch?v=5SJm2ep3X_M&feature=youtu.be

bseidensticker3• 4 years ago

I managed a Bitcoin mining operation a long time ago. We made machines that made 50% of their BTC in the first month of their operation, and the remaining 50% over the next 5 months. After that they cost more to run than they produced.

The accountants wouldn't believe us when we told them that the machines were worthless after only 6 months.

chucknthem2• 4 years ago

How long ago was this? The rate of improvement on ASICS as well as new entrants to mining hasn't been this intense in a long time.

bseidensticker3• 4 years ago

2013

amelius4• 4 years ago

Worthless? Did you use ASICs?

andy813• 4 years ago

Bitcoin mining is almost entirely ASICs. GPUs aren't much good at the algorithm used.

VHRanger2• 4 years ago

Necessarily so.

It's been over 7 years since mining on anything except ASICs is a guaranteeing a loss.

bseidensticker3• 4 years ago

Yes, we made our own. Our company was third to market.

yuvadam2• 4 years ago

Worthless? People still mine on S9s released in 2017.

threeseed• 4 years ago

Replace worthless with unprofitable.

And we don't know if it's unique to his situation or for any miner at a certain scale.

rtkwe• 4 years ago

You can mine on worse machines if you have lower power costs or are valuing the BTC higher than the electricity costs (ie you're long/bullish on BTC or you're doing it somewhat altruistically or alternatively not doing the math on how much it's costing.)

pelasaco• 4 years ago

Well, I managed as well some hardware and in the long run, they paid themselves. I started to mine with FPGA and then with asicminers. I mined in total, 23 BTCs. Then I stopped and kept the BTCs, (sold some), sold my hardware via ebay (which helped to return almost all my investment). I then got the BTCs doubled when bitcoin cash was created, which I sold well enough too. So when I read this whole "it doesn't worth to mine, etc", i think that is relative. It worked well, even for me, running it in Germany.

vmception2• 4 years ago

Yeah publicly traded bitcoin mining companies are a very new phenomenom, and investors are undiscerning and being taken advantage of.

Its fine though, as long as those investors find new investors who only care about revenues. The actual company is a conduit, the revenues still occur but nobody had been asking what happens to the actual money. Lucrative game.

Good article, calls for nothing except FYI to investors.

dbv1• 4 years ago

How are the investors being taken advantage of exactly? Investors normally primarily care about profits, that’s not abnormal.

vmception2• 4 years ago

Investors care about corporate governance and management of the finances as well, corporate profits for share buybacks can accelerate investor profits

The article details this basically pointing out that c-suite payouts are high and this is currently being tolerated but maybe by ignorance

me_again• 4 years ago

I think it's abnormal for executives to get compensation > entire company revenue. I'm sure it happens in other industries from time to time but it seems like a sign of misinvestment to me.

josu2• 4 years ago

As explained in the article profits are frontloaded, so the company currently looks better than it should.

FabHK12• 4 years ago

Yes, and MARA has only been profitable in one quarter so far, if I read things correctly, and the author argues quite convincingly that even those profits are overstated insofar as the depreciations are understated, and things will quite likely turn worse. At the same time, extravagant salaries are being paid. That is how investors are being taken advantage of.

zionic2• 4 years ago

While I have heard a myriad of arguments against PoS, my opinion is that the ecological benefits alone are worth switching as soon as possible. We can continue to iterate on it to improve the negative sides, but we can’t afford to wait for a “perfect” replacement forever while PoW does such extreme harm.

tylersmith6• 4 years ago

The main feature of PoW over PoS is being completely objective and uncensorable. There will always be networks using it because of this even when most are using and better off with PoS.

zionic2• 4 years ago

How is PoS easier to censor than PoW, specificity ETH 2.0’s implementation.

redox997• 4 years ago

How is PoW more objective or uncensorable than PoS? Both are vulnerable to 51% attacks. And in my opinion PoS is safer. If a malicious group gets 51% of PoS ETH you can fork the chain to a new one that removes the malicious actor stake. With PoW the most you can do is fork to something with a new mining algorithm. But that really only works against ASICs and to a certain extent. You're pretty much fucked in that scenario.

kayamon2• 4 years ago

The electrical costs are not there to do harm. They are there to ground the economy in reality.

Energy is expensive. That's the point. A functioning world economy can't just exist in magic-computer-land, where it's just made up numbers in some madman's COBOL database. It has to have a tie to reality to work properly, and achieve worldwide consensus on the true price of energy and thereby other assets.

Heston• 4 years ago

I propose we move to a new system. Proof of Wasted Electricity

jagger274• 4 years ago

That's the current system.

hypertele-Xii• 4 years ago

That's the joke.

thfuran• 4 years ago

Then how about proof of steak, based on holding beef call options?

toss1• 4 years ago

Yeah, but maybe we could do something more spectacular with the electricity - maybe run giant Tesla coils and reward who can create the longest / most durable / most spectacular / etc. sparking events . . .

hammock5• 4 years ago

Goes to show you that energy is the real base metal of the world. Whether you are mining bitcoin or gold, or drilling oil - the power rests in the hands whoever controls the energy to pull it out of the ground/air.

RedBeetDeadpool17• 4 years ago

Exactly. You could use anything as currency. Prisoners use cigarettes or ramen. Its not about the product being mined so much as work being done, and therefore work being stored.

Replace any currency with any power generation you want.

In prison, its the work of smuggling that stores economic value in cigarettes. In a gold based system, its the work of mining elements out of the earth that stores economic value in base metals. In a peer to peer network, its the work of electricity(of any kind whatsoever, clean or polluting) that stores economic value on a fair distributed ledger.

Money is about storage of work, and quite frankly the weaker the money used to store energy, the more lethargic and rusted the whole economic system gets. Fiat, i.e. "proof of wasted energy" just does a lot of work and lets it evaporate in economic terms leaving the entire society that uses it in constant need of more and more fiat because that energy, that work done, keeps dissipating.

It doesn't matter what money is: seashells, carved rai stones, arrowheads, cigarettes, ramen, non-livable apartment homes sold solely for wealth storage, luxury cars, art, gold, printed paper with your uncle sam's face and "guarantee" stamped on it, centralized entry in a private database, decentralized entry on a public blockchain. Society needs money in order to achieve higher levels of cooperation. Might as well use the strongest form of money that exists. And as far as I know, it aint proof of wasted electricity, i.e. fiat.

Thorentis• 4 years ago

Energy has always been the real measure of wealth, whether that be in the form of human Labor: number of slaves or peasants you owned, number of workers you employed, amount of power you can generate from coal, and so on.

marvinblum• 4 years ago

I really like that they use Energy as currency in Stellaris (the game made by Paradox). I think it shows what really matters.

snovv_crash4• 4 years ago

The problem with cryptocurrency, unlike eg. gold, is that you can't melt it down and get the energy back somehow. It's just wasted entropy somewhere.

This means that when the music stops, someone ends up holding a big bag of nothing, since there's no backstop.

prox• 4 years ago

Aren’t you just describing “labour” ie “work” , which is indeed energy.

RedBeetDeadpool17• 4 years ago

You mean fiat?

Thats not new at all. We've used it for decades now it only leads to boom and bust cycles, while pushing the power of work done into the hands of people who didn't do the work.

ben_w7• 4 years ago

Fiat is more of “proof of a monopoly on the use of violence”. You may not like the idea of relying on such a proof, but it has the important feature of still being both necessary and sufficient regardless of what system you use with it. That it isn’t present in Bitcoin is actually a reason why Bitcoin is a bad idea as a currency, because you can’t get your money back when you’re scammed.

MetaWhirledPeas• 4 years ago

Let's call the coin "Entropy".

angusturner• 4 years ago

Isn't this just proof of work?

fredgrott• 4 years ago

I once explained the same points to someone who use to pop in here when his name was mentioned Calacanis when he bought some mining rigs several years ago.

You see there are some valid economic reasons why CBOT and several other exchanges allow the shorting of bitcoin without making those contracts tied to bitcoin.

If any of you want to bet anyway on bitcoin do not buy mining rigs, think of it this way it represents a business we all are familiar with...

Buy domains to speculate and base the business model paying for it on ad revenue off of the websites with each domain name buy.

Its the same dam economic trends and same long term bad result

hn_throwaway_998• 4 years ago

Proof-of-work is so obviously, undeniably, mathematically guaranteed to be a crypto dead-end, that I'm gobsmacked we're still having discussions like this.

Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin. It's really just simple arbitrage: if the value of Bitcoin goes up, but the electricity cost doesn't, then you have essentially 2 different prices for 1 good, which should attract more miners to spend more money on electricity. And, indeed, this is exactly what has happened.

The problem, of course, is that if it takes an Argentina's worth of electricity to run Bitcoin now, how does the world manage if Bitcoin has a 10 or 100 times greater market cap? Obviously it can't, and world governments would rightly shut it all down before the majority of our electric output went to mining BTC.

There is simply no way around this issue if you're on a proof-of-work system, and given that, it's so easy to see that BTC is guaranteed to fail at some point. It's like we're on a train rushing towards a bridge that's out, and everyone can see the bridge is out, but somehow we've convinced a large number of people that we'll "jump the gap" when we get there.

peyton• 4 years ago

You’re saying that as the price of Bitcoin has risen, the price of electricity has risen? I think something’s missing from your argument.

tiagobraw• 4 years ago

I think he meant that if the price of 1 bitcoin rise, the energy cost of mining 1 bitcoin should also rise in proportion

yuvadam2• 4 years ago

You are making very bold statements ("of course", "obviously") on a topic that has been deeply analyzed over the years without any decisive conclusions.

For one example, I really appreciate Lyn Alden's analysis [1]

[1] https://www.lynalden.com/bitcoin-security-modeling/

hn_throwaway_998• 4 years ago

I'm making bold statements because I've read reams and reams of treatises on the topic, and every single one ignores some basic, simple, fundamental truths that are inherent to a proof-of-work system. I certainly don't believe I'm particularly smarter than average, and there are definitely other people saying the same thing I am, and certainly much smarter people than I have realized this issue and are transitioning other cryptocurrencies to other proof systems, but I have come to believe that many people are content to keep the music going, even if they know it's going to stop at some point.

When it comes to mining BTC, it really doesn't matter much how miners are paid: through block rewards, transaction fees or some other sort of "security fee". Miners spend money on electricity, and get BTC in return. Furthermore, it's, again by design, a competitive system: those who are able to mine faster (i.e. are spending more on electricity, on average) will win the "block contests" faster and get more BTC.

All other arguments are just "yada yada yada" unless you are somehow arguing that electricity spend is no longer proportional to chance of mining a block, at which point I'd argue that's probably no longer proof-of-work.

This is not a hard concept. If I'm an idiot (which is totally a valid proposition), somebody should be able to explain how a proof-of-work system can get around this "arbitrage problem" very simply - it shouldn't take pages and pages and pages of circular argument.

madacol• 4 years ago

the electricity value expended on mining is proportional to the total market cap of Bitcoin

That's not true, it's at most, equal to the printing rate of bitcoins (coinbase transactions)

cowtools20• 4 years ago

Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin.

This is mostly true, but I think you're conflating a couple different things here. At market equilibrium, you would think it would look like the cost of power + hw depreciation = crypto price * (block reward + fees).

if it takes an Argentina's worth of electricity to run Bitcoin now

It might be justified if bitcoin could replace the traditional financial system (think about how inefficient that is), but I do not think it can.

how does the world manage if Bitcoin has a 10 or 100 times greater market cap?

I don't think bitcoin's market cap can multiply by a factor of 10 or 100

remper• 4 years ago

It might be justified if bitcoin could replace the traditional financial system (think about how inefficient that is), but I do not think it can.

Bitcoin is already way more inefficient than the current financial system. Just compare cost per transaction between Bitcoin and Visa, for example. People seem to think that Bitcoin will somehow replace the entirety of the financial system when it's not even designed to do that and only really handles transactions.

tromp3• 4 years ago

the electricity value expended on mining is proportional to the total market cap of Bitcoin

That would be the case if price doesn't vary much over time. But marketcap is current supply * current price, while the large majority of current supply was mined when bitcoin was WAY cheaper and thus much less electricity was spent on it.

buzzin_4• 4 years ago

Here you are confusing "total amount of electricity Bitcoin used trough history" and "amount of electricity Bitcoin miners are currently using".

The second is proportional to the current Bitcoin price, the first one, who cares.

Geee4• 4 years ago

You're wrong. Block rewards halve every 4 years. Next halving is in 2 years. This means that electricity use funded by block rewards trends to zero. Miners earn also transaction fees, which will gradually replace block rewards in the long term. Transaction fees are revenue from utility.

It's a well designed incentive system; it will keep Bitcoin running as long as people find it useful, and it won't eat the world.

Retric5• 4 years ago

The issue is total transaction fees must be kept high enough to avoid miners defecting into double spend attacks. That would be easy if people where using it as a high turnover currency, but if people want to use it as a long term store of value transaction fees can quickly become many orders of magnitude smaller than the value stored in Bitcoins.

It need not be illegal. Short Bitcoin, preform double spend attack between addresses you own, profit.

louloulou6• 4 years ago

Proof-of-work is so obviously, undeniably, mathematically guaranteed to be a crypto dead-end

Bold claim.

Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin

False statement (as it ignores the bitcoin emission schedule and transaction fees).

The problem, of course, is that if it takes an Argentina's worth of electricity to run Bitcoin now, how does the world manage if Bitcoin has a 10 or 100 times greater market cap? Obviously it can't, and world governments would rightly shut it all down before the majority of our electric output went to mining BTC.

Constructing an irrelevant hypothetical based on the initial false statement.

simply no way around this issue if you're on a proof-of-work system, and given that, it's so easy to see that BTC is guaranteed to fail at some point

More bold declarative statements with nothing to back them up.

Learn more here: https://en.bitcoin.it/wiki/Controlled_supply

datadata9• 4 years ago

mathematically guaranteed to be a crypto dead-end

Your argument is not mathematical at all. It assumes first that bitcoin needs to appreciate 10-100 times current value. And second, that political willpower exists to then shut it down purely because of energy usage. Neither of those conditions are mathematically guaranteed, nor are they even in the realm of mathematics. I won't even address the underlying assumption that energy usage is unilaterally bad.

One possible outcome, for example, is that bitcoin just hovers around its current price for a long time. If feels like every discussion on bitcoin is made of people who either think that it must either take over the world or must go to zero.

hn_throwaway_998• 4 years ago

OK, of all the comments I've seen trying to refute what I've written, yours is the only one I've seen that at least makes sense.

Yes, I totally agree, the crux of my argument is really just "in a proof-of-work system, it is undeniable that electricity spend is proportional to total network market cap", so if the market cap doesn't change, then things can certainly putter along.

That said, if the idea is that more and more of the world's economy will be represented by BTC transactions, which these days is pretty much what every person who owns BTC believes, then the market cap can't stay static. I also have a very difficult time believing that if the market cap did stay static for 10 years or so that people wouldn't start to realize "the jig is up".

But yes, I totally concede, if the market cap doesn't rise, current electricity spend doesn't need to rise either.

VHRanger2• 4 years ago

It would be very strange for the current situation to be a long term stable equilibrium for Bitcoin.

Bitcoin is a zero sum ecosystem, minus mining fees. So it's a net negative sum by some $20-30m per day in electricity and hardware costs.

Why would it stabilize around this particular value?

paulmd4• 4 years ago

Your argument is not mathematical at all. It assumes first that bitcoin needs to appreciate 10-100 times current value

Satoshi consensus doesn't care about the numeric value of Bitcoin at all. It cares about the value of the transactions conveyed by bitcoin.

Satoshi consensus is the observation that if the energy required to fork the network and roll back a transaction costs $X, then it's financially non-viable for someone to roll back a set of transactions that is worth less than $X. That's all. If the value transacted on bitcoin increases above $X, then it is potentially financially worth it to attack the network, unless the amount of energy expended increases accordingly. So the value of the transactions is directly tied to the (value of the) energy expenditure.

As a side note, there is no automatic mechanism built into bitcoin that ties these two values together. The assumption is that the value increases and the rewards decrease and it all sort of works out (especially if the network transitions to transaction fees instead of inflation-based block rewards). But there is no mechanism that it must, and if the value dropped really hard all of a sudden, for example, it might suddenly be more viable to attack the network. Attacker energy cost will significantly decrease as rational actor miners realize they're taking a loss and turn off their mining hardware, miner energy expenditure will decrease, which decreases the energy (and cost) required for attackers to fork and roll back transactions.

It's an interesting variation of the "frisbee on the roof" attack, like a "fire all the janitors and then shit on the floor" attack. Nobody ever wants to go back into that business because there's shit all over the floor, but without any customers there's no money to hire janitors either. The network now enters a terminally unrecoverable state, without manual intervention from outside actors.

wizzzzzy2• 4 years ago

What I don't understand though is once all bitcoins have been mined, doesn't that mean that transaction fees are then also required to be proportional to the bitcoin market cap and electricity usage value?

Geee4• 4 years ago

No, fee costs are based on supply and demand of block space. It's simple, miners just scoop the highest paying transactions into the next block. If there's congestion, people pay higher fees to expedite their transactions.

gus_massa• 4 years ago

The problem, of course, is that if it takes an Argentina's worth of electricity to run Bitcoin now, how does the world manage if Bitcoin has a 10 or 100 times greater market cap?

The amount of electricity is not proportional to the market cap. It's proportional to the difficulty. You can create a copy of bitcoin where the difficulty is keep very low and add a very big amount of transactions and be very easy to make fake blocks and forks and other nasty stuff. The difficulty is adjusted to keep the time to find a block somewhat constant.

One problem to handle a bigger marketcap is the block size. One solutions is to increase the block size, another is to use a secondary chain. I'd like to increase the size, but most people prefer the other.

Also, when you add the energy that goes directly from sun light to soy beans, I think that we are in Argentina still using a little more more energy than bitcoin.

lofatdairy• 4 years ago

The amount of electricity is not proportional to the market cap This misses the point of the argument, which is to say that if the market cap of bitcoin goes up, the marginal benefit of mining by definition goes up. This in turn drives up demand for electricity, until the marginal cost of additional mining units and associated power equilizes. That's not to say that there isn't a benefit to a more efficient proof-of-work scheme, as in theory if the scheme can support _all_ future and current transactions like the current banking system, then there's a cap on energy consumption. However, what OP points out is that the speculation and monetary utility of Bitcoin both act to increase power consumption due to basic economic forces.
Also, when you add the energy that goes directly from sun light to soy beans, I think that we are in Argentina still using a little more more energy than bitcoin.

This is a non-sequitur. The point of using Argentina is to illustrate that in verifying transactions, Bitcoin uses as much energy as millions of people lighting their homes, watching television, running air-conditioning, heating water, charging their phones, etc etc etc. Nobody is claiming that Bitcoin consumes more metabolic energy or solar energy, OP's just highlighting that Bitcoin's electricity costs are potentially unsustainable.

jallen_dot_dev2• 4 years ago

The amount of electricity is not proportional to the market cap. It's proportional to the difficulty.

But the difficulty is proportional to the amount of miners, which is proportional to the profitability of mining, which is proportional to the price, which the market cap is proportional to (i.e. price x supply). So electricity is indirectly proportional to the market cap.

One solutions is to increase the block size, another is to use a secondary chain.

Those solutions don't address the energy spent on mining, they just allow more people to transact. The former means more transactions (more fees), the latter means fewer but more expensive on-chain transactions (more fees). Either way I believe the block reward (and thus the amount of energy miners will throw at getting that reward) will be roughly the same, it'll be a function of how much people value and want to use bitcoin.

buzzin_4• 4 years ago

"It's proportional to the difficulty."

You just confused the amount of electricity it takes to mine one block, vs, the amount of total electricity all miners spend.

And the total amount of electricity is indeed proportional to the market cap. (with a constant of proportionality being halved every 4 years).

As the original poster said, it is ridiculous that we still have to debate this.

hkt2• 4 years ago

This is beautifully put, I'm saving it in my notes to remind myself of it later. The point about market cap was especially striking.

paulmd4• 4 years ago

Not only is there no way around it, but it's actually impossible to start new networks from scratch based on proof-of-stake due to the "nothing at stake" problem. If attackers don't care if their stake gets burned (because the value is low) then there's no longer an incentive for attackers not to validate on multiple chains at once (which is what staking is supposed to prevent). All new networks must go through a proof-of-work stage of evolution.

Further, the existence of proof-of-stake coins at all means that decentralized exchanges exist, which makes it impossible to ever kill proof-of-work in a legislative sense. Even if you killed fiat exchange for $SHITCOIN entirely, once there is a coin that has sufficient value, people will be happy to have bitcoin instead of USD, or trade to Bitcoin and then over to USD. You can either ban them all entirely, or you have to live with both PoW and PoS together.

Unfortunately, crypto is a memeplex, it's like a corporation, it's a self-reinforcing living entity that supports itself (maintains homeostasis) through a series of rules and incentives, and now that it's been created it can't be easily killed. Every individual is financially incentivized to keep playing their part, so everyone would have to collectively agree to not make money by taking part, and as people fall out the incentives become steeper and steeper to participate. Would you mine on your card for $100 a day? $1000 a day?

We will just have to live with destroying our planet, because now that it's been created it's virtually impossible to kill. That was the whole point. With apologies to Alien: it’s biologically engineered to be a survivor... the perfect predator (of certain other memeplexes - meaning, states and state-backed currencies, which are also self-sustaining memeplexes with their own rules and incentives). That was the stated goal of the design, and it works! There's no "off button", otherwise it would be trivial for "statists" to push it. There is no "oops we forgot to add a limit to the paperclip maximizer" or "don't kill the people who try to stop paperclip maximization" button either. People whose livelihoods depend on crypto are highly incentivized to come up with ways (like PoS) to keep it going even if the outcomes of the overall system becomes undesirable. The day it became legitimized by the SEC, it certainly became impossible to stop it. Now you will have Wall Street money fighting you too.

You wanted an unstoppable decentralized cryptopunk future with assassination markets, that's exactly what it does. It wouldn't be unstoppable if individual or collective action (like that of a state or other group of individuals) could stop it, and it was designed knowing that people would try to stop it. All according to keikaku.

(cue the gif from dr strangelove of general turgidson's horrified realization of what he's just said)

dropnerd3• 4 years ago

it's actually impossible to start new networks from scratch based on proof-of-stake due to the "nothing at stake" problem. If attackers don't care if their stake gets burned (because the value is low)

most new PoS chains do just fine because validators are owned by VCs that want to grow the network. whether they can successfully decentralize is an open question but the bootstrap problem is solved

HWR_142• 4 years ago

by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin.

You have to factor in the amortized cost of specialized hardware over it's lifetime, and a few other factors. But it's a good approximation.

BTC tried to solve this with diminishing rewards for mining. The problem is BTC's market cap doubled far faster than the rewards halved.

But I think you are wrong at the high end. If BTC was worth 100x tomorrow, the current miners cannot just push a button and draw 100x the power. I think governments would be far more likely to ban new rigs, but may let grandfathered rigs continue to operate. If that's the case, I can see miners becoming quite profitable.

freemint6• 4 years ago

I think governments would be far more likely to ban new rigs, but may let grandfathered rigs continue to operate.

This seems irrational given the ever increasing efficiency of hashes per energy.

webinvest• 4 years ago

After the each “halving” you should expect the energy expenditure would also halve by that same logic. The halving would could continue until the energy requirement is minor!

Haha, get it, minor?

HeadsUpHigh2• 4 years ago

The value of bitcoin needs to increase more than x2 indefinitely for the power consumption to increase.

redox997• 4 years ago

Fully agree with your analysis. Other's have nitpicked your exact words but your point is totally correct: There is a cap of how much Bitcoin price can increase, at least before multiple halvenings. If it increases above this cap, the mining power usage will become so absurd that external forces will come into play (regulations, and very negative perception once people realize that it's absurd).

That's why I don't believe in any crypto that doesn't at least have a path to switching to PoS (or some non PoW system).

jimmySixDOF• 4 years ago

The use of mining for hashes in general seems such a completely arbitrary thing to select for Proof of Work. It may have suited the academic cryptography/CS mindset back when the whole thing was an intellectual exercise on whitepaper, but now, as a victim of its own success, it is a threatening technical debit burden.

My working theory is that a system could be devised that re-defines Proof of Work to align with some demonstratable real world physical benefit like planting a tree or recycling waste or placing a renewable kwh on the grid. Yes there are tremendous process invention challenges on a Manhattan Project level scale but the stakes seem able to justify a Moonshot approach.

Mining under existing Proof of Work conditions is a weird arbitrage at scale of physical compute cycle cost/performance and raw electrical overheads measured against the perceived speculative value of the minting benefits returned.

Even reducing mining to a barebones fintech set of transactions would make sense at this point. A single Cash (as proof-of-work) account where each miner adjusts their relative position in real time in response to market conditions. An opensource code as law snapshot Lottery system that mimics the existing minting benefit and proportional voting rights distributions on chain. Yes it interrupts the purely distributed zero trust consensus mechanism, but, there are other compatible mitigation and trust designs, and, as an overall step change, the ability to grow without consuming nation state level power resources in this day and age is well worth the tradeoff -- if not absolutely mandatory.

Also on HN the other day [1]

frankenst1 reply to mondoveneziano :

START QUOTE > For Bitcoin, the most popular one, on the order of 100.000.000.000.000.000.000 of hashes get calculated to mine a single block, multiple trillion per second. Within ten minutes, only a single one of those 100.000.000.000.000.000.000 hashes is actually used, depending entirely on luck. The rest are thrown away entirely. They do not form part of the final hash or anything else, the energy spent on them is lost.

You need to dig through 1 million gram of ore to find 1 gram of gold, depending entirely on luck. The rest is thrown away entirely. The energy is of course not lost but was necessary to find something of value (which also creates a lower price boundary). In contrast to gold, Bitcoin mining ensures provably fair probability of winning, has a tremendously lower barrier of entry, provides incentives to be run on renewable energy and produces far less waste. END QUOTE

[1] https://news.ycombinator.com/item?id=31376647

karlzt• 4 years ago

Electricity generation could be different and better in the future.

hn_throwaway_998• 4 years ago

To emphasize, it does not matter. Let's say we have some great new technology that enables us to get electricity for a tenth of what it currently costs. It just means miners will be willing to use 10 times more electricity to mine for a given amount of reward (and, for the umpteenth time, block rewards, transaction fee, whatever, doesn't matter - the BTC they get in return for being the first to mine a block).

Indeed, this is the whole idea behind specialized mining rigs. These rigs essentially lower the cost of electricity for a given hash rate.

But assuming other miners have access to the same equipment, in the competitive system that is proof-of-work they will just bump up their usage of electricity until the point that, again, it no longer makes sense for them to do so because they'd be spending more than the rewards that they get in return.

lumost• 4 years ago

This is probably part of the appeal of BTC as a value store. Gold typically sits in a vault, it’s hard and energy intensive to mine.

BTC marginally improves upon gold as a value store, it’s trade able as a hard asset across national borders in real time.

Time will tell if BTC is as durable as gold.

textbookrental• 4 years ago

I think you are the first person I have read to say this, but I totally agree.

The cost to secure the Bitcoin network is a function of the market capitalization. If the market cap increases so will the cost of securing the network.

If Bitcoin market cap continues to increase, the resources required to secure the network will start to crowd out other economic activity.

I feel like we are seeing the first glimpse of this with the chip shortages.

jrm4• 4 years ago

Such a good point. I get that it's tempting for people to hold on to the idea of Proof-of-Work because it was 100% necessary to get the idea of crypto off the ground, but this is like people holding on to the idea of burning coal to run trains forever.

Bitcoin was the proof of concept, but it to me seems 100% obvious and inevitable that something else will replace it (if crypto continues to exist, which I believe it will) -- ESPECIALLY since the whole point of money is fungibility-in-practice.

javert3• 4 years ago

Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin.

This premise isn't true. Funny you have this big confident argument when you're wrong about the basics.

The electricity expended is proportional to the value of mined bitcoins plus transaction fees. Note that the mining rate goes down over time, approaching zero.

cryptica• 4 years ago

Agreed. This is obvious both empirically and analytically.

As BTC price goes up, the network starts to yield larger mining profits in total (in fiat terms) and this creates an incentive for people to launch new miners to absorb the surplus profits... The increased competition then causes an increase in mining difficulty which reduces the profit margins back to what they were before the increase but now there are more miners in the network with more total hash power which are consuming more electricity in total. The equilibrium point is the point where most miners are teetering on the edge of unprofitability.

One interesting thing to note, however, is that while increases in the price create an incentive for more miners to join the network, the Bitcoin network itself does not require so many miners to exist to support itself at those higher price levels. If you assume a hypothetical scenario were all governments around the world required a license to mine Bitcoin and limited the number of machines allowed in total, then price could keep going up without an increase in the total number of miners. This would be very convenient for existing miners as they would be able to earn more profits without having to buy more machines as the price increases.

The fact that this obviously negative-sum game has been profitable for miners in the long run is proof that our current monetary system is broken. If our monetary system was efficient and becoming more so, it would be unprofitable to run so many miners. Bitcoin profits from the inefficiency of monetary system whilst revealing to us the fiat system's negative-sum nature. As dumb and unethical as this all seems, it is the smartest investment to make in the context of our current system.

I suspect that Bitcoin saves more electricity than it wastes by turning the world economy into a giant squidgame... It attracts capital towards it instead of towards other economic activities which would end up consuming more electricity... Those other activities would certainly have made better use of the electricity (since, unlike BTC mining, they would have provided tangible value to people in return) but Bitcoin doesn't care about people's well being. It profits from the destruction of opportunities and the concentration of wealth. Poor people consume less electricity. Bitcoin saves electricity by ensuring that poor people stay poor by soaking up all the excess capital so that it doesn't get invested in real economic activities which would bring people out of poverty.

FabHK12• 4 years ago

Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin.

I'd amend that to read: Proof-of-work requires, by design, that the money wasted on electricity and electro waste is proportional to the total market cap of Bitcoin times the mining reward (currently 6.25 BTC per block).

pcthrowaway• 4 years ago

I agree 100%, though I am interested in chains which are doing "Proof of useful work". I haven't looked into it too much, but I believe Banano participants run folding@home (https://en.wikipedia.org/wiki/Folding%40home) to secure their network.

This seems like it could be an alternative to classical proof of work that at the very least, isn't actively harmful to society. But I'm unsure if it offers the same security guarantees.

hiq• 4 years ago

world governments would rightly shut it all down before the majority of our electric output went to mining BTC

They can regulate it otherwise, e.g. demand that miners use their own source of green electricity, and make other type of mining illegal, or demand that less than 1% of the total electricity production of the country is used in mining, outlaw the rest and fine illegal operations, etc. It doesn't have to be completely banned everywhere.

BTC is guaranteed to fail at some point

You'd have to define what "fail" means here, especially given that many proponents of BTC argue in its favor for different (and often contradictory) purposes. What's the failing scenario you're talking about, once mining takes all the electricity it can (be it 100% of production or whatever regulations still allow it to take)?

mercenario• 4 years ago

It's really just simple arbitrage: if the value of Bitcoin goes up, but the electricity cost doesn't, then you have essentially 2 different prices for 1 good, which should attract more miners to spend more money on electricity. And, indeed, this is exactly what has happened.

How is this different from any other good or service? Is it bad only for bitcoin?

The problem, of course, is that if it takes an Argentina's worth of electricity to run Bitcoin now, how does the world manage if Bitcoin has a 10 or 100 times greater market cap? Obviously it can't, and world governments would rightly shut it all down before the majority of our electric output went to mining BTC.

What is the problem with it? Do you know why oil has the price it has and why we built all the enormous infra structure to extract it? Because it is useful, and we can kinda measure it by its market cap. If the market cap of bitcoin is huge, that means that...... its usefulness is huge (or you can argue it is a bubble, but then it's a different argument). So the higher the market cap the more useful it is, and its a good thing. The profit and loss is what will tell if we are "wasting" resources or not, if it is profitable, then that means that people value bitcoin more than the electricity it uses, that is not a problem.

jmyeet3• 4 years ago

It blows my mind how well-known all the problems there are with crypto and yet it's become so huge while solving virtually no problem other than avoiding laws about the movement of money and capital.

The Bitcoin network in particular uses more electricty than Argentina. Defenders will point out that it's majority renewable. That's intellectually dishonest because Bitcoin is simply chasing cheap power and hydro power is among the cheapest. Bitcoin miners will happily use coal if it's sufficiently cheap. Also, use of certain renewables comes at the expense of other people. In the Hudson Valley, miners have raised the electricty prices for other residents in those towns.

Bitcoins transactions consume an enormous amount of electricity.

Defenders will also claim we'll move to Proof of Stake ("PoS") over Proof of Waste but this too is a myth. For one, Bitcoin's massive computational and electricity waste is key to defending the network. I don't know what happens when we run out of coins to mine. Also, if it's as simple as that, why haven't we simply moved to PoS for everything?

PoS ultimately is a rich-gets-richer scenario is why. It's really no different to the Luna anchor stakers getting 20% returns at the expense of everyone else who comes along later.

And for all of this waste we get what? Transactions that can only be guaranteed if they're entirely contained within the network because as soon as you want to include something outside of that (eg converting crypto to or from cash) you've just added the same trust issue that is intrinsic to every traditional financial transaction.

And what fuels this continued mass delusion is the fabric of American beliefs that every American is just a temporarily embarassed millionaire [1].

[1]; https://www.goodreads.com/quotes/328134-john-steinbeck-once-...

datadata9• 4 years ago

That's intellectually dishonest because Bitcoin is simply chasing cheap power and hydro power is among the cheapest. Bitcoin miners will happily use coal if it's sufficiently cheap. Also, use of certain renewables comes at the expense of other people. In the Hudson Valley, miners have raised the electricty prices for other residents in those towns.

If bitcoin miners are chasing cheap power (which I believe they are), then it shouldn't be possible for miners to increase the price of power in a fixed area, as they would immediately migrate elsewhere where power is cheaper. You can't have it both ways. Interestingly, the cheapest power is where supply completely dwarfs demand. Bitcoin miners should ultimately migrate to those areas of stranded power, and thus under optimal conditions bitcoin miners shouldn't compete with any other buyer of energy-- it would only be efficient to preform bitcoin mining for the lowest possible cost of energy where there is no other customer. It is largely looking like renewables would fit that bill, as the era of low hanging fossil fuels is long gone (aside from government subsidies).

rr8082• 4 years ago

the cheapest power is where supply completely dwarfs demand. Bitcoin miners should ultimately migrate to those areas of stranded power

There are lots of other uses for surplus power eg Aluminium smelters, desalination plants, decarbonization machines, cracking H20.

jmyeet3• 4 years ago

If bitcoin miners are chasing cheap power ... then it shouldn't be possible for miners to increase the price of power in a fixed area as they would immediately migrate elsewhere where power is cheaper

Um, no. That presumes there is somewhere cheaper to move, for one. If powers costs $0.08/kWh in one place and the next best option is $0.12/kWh then even if you assume no moving costs you've got all that headroom before it even makes sense to move.

But consider the concrete example of Pittsburgh [1] (emphasis added):

A few years ago, miners “descended upon” the city of Plattsburgh, New York, about a hundred and fifty miles north of Albany, which gets much of its electricity from hydroelectric dams on the St. Lawrence River. The power is relatively inexpensive, but, once Plattsburgh uses up its allotment, it has to purchase more at higher rates. Bitcoin mining drove up the cost of electricity in the city so dramatically that, in 2018, Plattsburgh enacted a moratorium on new mining operations.

[1] https://www.newyorker.com/news/daily-comment/why-bitcoin-is-...

anonymous_sorry• 4 years ago

If bitcoin miners are chasing cheap power... then it shouldn't be possible for miners to increase the price of power in a fixed area, as they would immediately migrate elsewhere where power is cheaper.

If that logic were sound, I struggle to see how the price of any fungible good could ever increase in response to demand. There is some energy price at which the profitability of mining becomes marginal. Won't the amount of mining grow until all the electricity cheaper than that is being wasted calculating hashes?

freemint6• 4 years ago

If bitcoin miners are chasing cheap power ... then it shouldn't be possible for miners to increase the price of power in a fixed area as they would immediately migrate elsewhere where power is cheaper

This would be true only if people and Bitcoin miners bid in the same market. They do not.

If a BitCoin mining company has x year contract with an utility at some fixed price then they get that electricity at that rate. This has an disproportionate impact on the price consumers have to pay. To meet consumer demands electricity suppliers buy electricity from electricity producers. If BitCoin miners have contracts for all electricity generated in a region cheaper then x cents per unit that means that electricity suppliers can only begin to meet their customers demand with electricity more expensive than x. This means it might be necessary to buy electricity from really expensive sources (for example far away sources) they wouldn't have to rely upon with the cheaper then x electricity was available.

The fact that the cheaper then x electricity producers could get more money if they wouldn't have signed long term contracts is in an environment with multiple such sellers a tragedy of the commons like situation which can not be fixed by the market alone. What makes it even worse is that perverse incentives exist where a company by selling all their cheap electricity to miners can keep assets which would otherwise be stranded (coal power plants) produce electricity at a premium rate because electricity supplies must meet the customer household demands.

ollieglass• 4 years ago

solving virtually no problem other than avoiding laws about the movement of money and capital

This is a tremendously valuable problem to solve for some.

jmyeet3• 4 years ago

But at what cost?

This [1] estimates the annual Bitcoin energy consumption at 145TWh. If the Bitcoin network were a country it would rank 25 in the world by energy consumption [2].

The cost of that electricity is hard to estimate but if you use a ballpark of $0.10/kWh that puts the cost of the Bitcoin network at almost $15 billion annually just for the electricity.

[1] https://ccaf.io/cbeci/index

[2] https://en.wikipedia.org/wiki/List_of_countries_by_electrici...

rodgerd• 4 years ago

Yes, it's certainly provided North Korea with a reliable flow of funds for their nuclear weapons program.

dlubarov4• 4 years ago

Also, if it's as simple as that, why haven't we simply moved to PoS for everything?

More modern blockchains do use PoS for the most part -- Solana, Cardano, Polkadot, Cosmos, Avalanche, NEAR, etc. Just Bitcoin in particular is unlikely to make such a major change.

PoS ultimately is a rich-gets-richer scenario is why.

In well-designed PoS systems, anyone can stake (perhaps with delegation) and access the same rate of return. If everyone stakes, noone is actually getting richer after we adjust for dilution.

AlexandrB• 4 years ago

In well-designed PoS systems, anyone can stake (perhaps with delegation) and access the same rate of return. If everyone stakes, noone is actually getting richer after we adjust for dilution.

This is fine in a vacuum where no one needs the money they make staking, but someone who is not rich is presumably staking to make money that they will spend on food/clothing/shelter. The wealthy can stake indefinitely.

influxmoment2• 4 years ago

Bitcoin will not change to PoS because it doesn't work and is only promoted by charlatans trying to sell tokens

HeadsUpHigh2• 4 years ago

PoS ultimately is a rich-gets-richer scenario is why.

Are you under the assumption that crypto is supposed to be socialist somehow?

SergeAx• 4 years ago

This is a great moment to remind myself that "markets can stay irrational for much longer than I can remain solvent".

t_mann5• 4 years ago

Some of the top-rated comments make me wonder whether the authors have even read the article. This isn't about whether PoW or cryptocurrencies as a whole make sense, but strictly about the economics of mining, and how standard accounting practices might obfuscate miners' true profitability. The author sounds like an investor who would be equally happy to hold long instead of short positions in those stocks if their prices were different.

wmf2• 4 years ago

Of course they haven't read the article and even if they did, most people won't discuss the details of something if they object to the fundamentals.

pennaMan• 4 years ago

So, wilful ignorance via political stance? Nice.

SilasX5• 4 years ago

On that note, I don't get why it doesn't mention if there are any other (standard) methods of depreciation accounting that are more realistic for this kind of asset. The author mentions that oil well already have this issue and so you could just see if their method works.

Wikipedia gives a list of the other ways: https://en.wikipedia.org/wiki/Depreciation#Methods_for_depre...

(I also vaguely remember a lot of people screaming bloody murder about how it's unfair to oil wells to get accelerated depreciation.)

josu2• 4 years ago

I don't get why it doesn't mention if there are any other (standard) methods of depreciation accounting that are more realistic for this kind of asset

Of course there are, and they should actually be using them. But then fundraising would be harder. They are cheating on accounting, in order to raise equity capital, and hoping that the price of bitcoin will go up in the future and cover the losses.

FabHK12• 4 years ago

if there are any other (standard) methods of depreciation accounting

IIRC, tax authorities carefully regulate how quickly you are allowed to depreciate. The reason is that with depreciation you reduce your profit, and pay less in taxes. There is thus an incentive for firms to tweak depreciation and pull it forward, to either concentrate it in relatively more profitable years, or generally push tax payment further back into the future.

To counteract that, tax authorities often specify an upper limit on how much you may depreciate every year. These limits often distinguish by type of asset, and allow for faster depreciation for shorter-lived assets, but I could imagine that the tax code makes no provision for ultra-short-lived crypto mining equipment.

anamax• 4 years ago

Depreciation is only relevant if you keep the asset.

If a crypto-miner becomes unprofitable to run, selling it for less than the "after depreciation basis" effectively accelerates the depreciation.

mattwilsonn8887• 4 years ago

What are you talking about!? You failed the simplest test of not reading the article! You didn't read the last line!

I don’t think it ends well.

That last line renders your whole point about the author simply being interested in the economics of mining for the sake of mining (rather than economic sustainability of the practice) inaccurate as well as making you a hypocrite!

t_mann5• 4 years ago

You seem confused - the it clearly refers to what he said in the previous para, namely that investors haven't been paying attention to what those companies actually do. That rarely ends well indeed, especially during times of rising interest rates.

hn_throwaway_998• 4 years ago

I have one of the other top comments where I argue that PoW is fundamentally unsustainable, and I assure you I did read the article.

What the article is saying is that standard accounting practices might obfuscate miners true profitability over the lifetime of depreciable hardware. My argument is basically that, as I believe PoW is guaranteed to be unsustainable in the long run, all of the miners who are eventually left "holding the bag" when the music stops (and by holding the bag I mean have invested millions in mining equipment that is suddenly worthless) will be unprofitable at that point.

To argue it somewhat differently: systems like Ethereum have essentially come to the same conclusion I have, and will be phasing mining out altogether for PoS. The reason Bitcoin isn't doing that is because miners have considerable more power over the direction of the protocol. Which might be fine if PoW we're long-term sustainable, but it's not.

SilasX5• 4 years ago

Fair enough, but I think the parent was right to object that the comments were not talking about mining in the context of the depreciation accounting issue that the article focuses on, but just giving their hot take on mining in general, and doing the latter (when the article's focus is something else) makes the forum worse.

davidgerard• 4 years ago

nice to see an article about bitcoin mining's shonky accounting, and not about PoW itself.

the other weird accounting thing: in 2021, bitcoin miners started stockpiling unsold bitcoin.

This was new behaviour. Miners didn't hold onto cryptos for ages in the ten years previously - maybe for a short time, but then they sold it.

I can find no sensible reason for this, except that there aren't enough actual dollars in the crypto market to sell the bitcoins without crashing the market.

(I ask coiners about this from time to time. Most answers are some more complicated version of "there aren't enough actual dollars not to crash the market." Some of them confidently state that miners have magically transmuted some time in June 2021 from uncompromising economic agents into bitcoin moon boys, who are sure it'll go to a million. I don't believe them.)

The miners have tended to borrow against the bitcoins - from other companies in the crypto industry. Because they all know they're all in this together.

paulgb6• 4 years ago

Thanks David, means a lot because I’m a fan of your work :)

One thing that will be interesting is what happens when they do start selling hoarded bitcoin (and unless a new source of capital appears, they will need to). RIOT already quietly sold $9M of cryptocurrencies in Q1 of this year. Given the mining hardware they have already ordered, I suspect they’ll be doing more of that into an already distressed market.

ttul• 4 years ago

Many of the same people who made millions swindling investors in copper mines and such have pulled the same truck in the crypto world. It seems there is plenty of dumb money around willing to play the same game over and over again. And yes, it never ends well.

rufusroflpunch3• 4 years ago

The comments are yet another endless proof-of-work debate. Here’s the truth: none of this debate matters. Bitcoin isn’t going away, and it’s not changing consensus algorithm.

Money is a network good, and Bitcoin has the best network. It will continue to grow whether you like it or not. Bitcoin isn’t like some other cryptocurrency that formed around a founder or company. There is nothing and one no one to attack. It just… exists and will continue to exist until something comes along that is 10x or 100x better.

The problem for those that oppose Bitcoin is that none of them are capable of building something better at the problems that Bitcoin addresses.

bb883• 4 years ago

Bitcoin isn’t going away, and it’s not changing consensus algorithm.

Well... until someone forks it to change the consensus algorithm, right? Or the programmers decide to make the change globally? Or the miners want a different consensus algorithm to make their mining more profitable? Or... Or... Or...

rufusroflpunch3• 4 years ago

No offense, but this demonstrates a lack of knowledge about Bitcoin’s history and nature. All of these things have been tried and failed. The core devs and the miners don’t control Bitcoin. The full nodes control Bitcoin. The only way to successfully fork Bitcoin is to convince all of the nodes to run the code.

Other cryptocurrencies get around this by being more centralized. This includes Ethereum. These other blockchains make it significantly more difficult and costly to run nodes, which means fewer nodes run, mostly by large corporations so that they can exert control and fork the chains all the time.

Bitcoin is different. Anyone can run a node on an old laptop. There are tens of thousand of public nodes worldwide, who knows how many private ones. If miners ran a fork to change consensus rules, the nodes would just reject the blocks and the miners just waste electricity.

mattwilsonn8887• 4 years ago

One fork always wins. Once it wins it has network effect and which brings massive security to the that fork and so it is not the nature of Bitcoin to split into obscurity as you seem to think.

d--b• 4 years ago

The article is about how bitcoin mining companies may go down mostly because there is too much competition in that space and because bitcoin’s price isn’t going up so fast anymore.

That sounds plausible. It doesn’t herald the end of bitcoin, just that at some point there’ll be less people mining it. Which sounds like a good thing.

rufusroflpunch3• 4 years ago

Yeah I was referring to the comments, not the article, because every Bitcoin article comments section devolves immediately into this no matter what the article is about.

mdavis68902• 4 years ago

It now dawns on me that we can stimulate massive investment and efficiency gains in any domain we want, if only we create a crypto on that domain.

E.g. Food. Create a new proof-of-food based crypto. Poof! Literally solved world hunger right there.

TheDong2• 4 years ago

I think this might be the survivorship bias talking.

The vast majority, like 99%+, of all crypto projects fail.

Anyway, so far there's: Foodcoin (https://coinmarketcap.com/currencies/food/), TE-Food (https://coinmarketcap.com/currencies/te-food/), and probably a dozen other scams.

Let me give you an analogy to what you said "After seeing that Google and Apple have market caps of a trillion dollars, it dawns on me that we can stimulate massive investment and efficiency just by making a publicly traded company focused on that thing. If we make a food-based public company, poof, world hunger solved".

Just because bitcoin has a huge amount of money in it does not mean all cryptos will succeed. Just because google has a trillion dollar market cap does not mean every publicly listed company will.

mdavis68902• 4 years ago

I don't think your examples are quite what I was talking about. I was talking about where the coins are mined based on how much food you are growing or have harvested. A bit like Chia Coin, but instead of rewards based on disk space, it would be harvested food or something like that. Like with each bushel of corn you harvest there's a random chance you get a FoodCoin.

And secondly I was joking, but clearly my attempt at humor failed as I also got at least one downvote.

Gatsky• 4 years ago

Disclosure: I hold short positions in companies mentioned in this article. This is not financial advice.

Hmm. Well, on the one hand, he is putting his money where his mouth is. On the other hand, this could be prime evidence of motivated reasoning. The author has also submitted his own article to HN it seems. Reading the analysis, it makes sense, but I'm not experienced in analysing company financials. Other people I respect/trust who have a good track record don't feel this way about the companies in question.

I think, in general, shorting volatile assets is a pretty fraught undertaking. There could be a Gamestop style short squeeze fueled by Crypto bros for example. There could be a purchase announcement that could spike the price. ARK could decide to buy a large stake. All these things could lose you a lot of money for 'no good reason'.

xmodem• 4 years ago

On the other hand, this could be prime evidence of motivated reasoning.

I find in cases like this it can be useful to go and check the primary sources. Of course, it's impossible to re-blind yourself having already read the analysis.

Last year, one MARA executive earned over $220 million in cash and stock-based compensation, in a year when the company’s total revenue was $150 million.

The author helpfully links the SEC filing they've taken this number from, and it would appear to be accurate, though one detail the author glosses over is that this is 99% stock. I'm not sure how that affects your analysis.

(I hold no position in this company)

Thorrez6• 4 years ago

I think, in general, shorting volatile assets is a pretty fraught undertaking. There could be a Gamestop style short squeeze fueled by Crypto bros for example.

I think most of the risk could be mitigated by holding bitcoin while shorting the miners.

polygamous_bat2• 4 years ago

I am curious, how would holding Bitcoin hedge the meme stock frenzy risk?

_0w8t• 4 years ago

Holding bitcoins to protect against unacceptable losses with shorts is a very bad idea. Such holding assumes that increase in stock price for mining companies may only come from bitcoin price increase. Yet the companies are exposed to many other externalities like local electricity prices or regulation changes that are independent in general from bitcoin prices.

A proper insurance to limit the losses in case of huge increase in the asset price should be implemented with options or other financial instruments specially designed for this.

mattwilsonn8887• 4 years ago

The obvious retort is that mining is competitive. If you are not taking advantage of cheap energy you are not a competitive miner. If you source your energy from high demand locations like cities you will fail.

The miners who profit will be the ones extracting energy from places where it is otherwise useless, or less in demand.

Also, if miners started selling equipment to buy Bitcoin it would simply make mining more profitable to the point where the average miner would profit again. It's a basic equilibrium and the ominous "I don't think this ends well," has less direct connections the arguments in the piece than it does the author's disclosed financial interest in seeing mining companies fail.

To be fair, it may be the case that mining is currently over allocated, but implying that the practice is going to totally collapse is about as hyperbolic as any NFT shilling crypto bro telling you his decentralized Pokemon card knock off is the epitome of finance type get-up this site is so apt to complain about.

shudza• 4 years ago

Based on the reported hash rate and operational costs in Q1, at a current global hash rate of 225 EH/s, I estimate that MARA has a cost per coin mined of $21,000 and RIOT has a cost per coin mined of $31,000.

I'm sorry but this is almost certainly wrong. I mine at home and my cost is 22k per btc mined. I have a 1 generarion older equipment than they do, and my electricity is probably 3-4 times the price they are having. You should redo your math and look for errors.

paulgb6• 4 years ago

It seemed wild to me too, but I double checked and I don't see any errors. Here's the data and calculations, annotated with sources. https://docs.google.com/spreadsheets/d/11hd-Q6KdkNETiRBs_JYw...

Keep in mind that these are companies that made a big bet when Bitcoin was in the 50-65k range that it would keep going up. They planned their expansion based on that scenario, so it's not that crazy that they allowed their margins to get so slim.

cs7022• 4 years ago

This analysis is incomplete, for four reasons:

1. The author fails to explain clearly that what we call mining "mining" is a distributed form of transaction processing, in which transaction fees are earned via proof-of-work. Currently most of the transaction fees come from block rewards, but transaction fees are in fact set by competition based on the marginal cost of computation.

2. By design, Bitcoin's block rewards have always been meant to be temporary, as explained by Satoshi Nakamoto in his/her/their paper. I mean, the rewards are halving on a fixed schedule, and everyone knows that eventually there will be no more rewards. The only purpose of the block rewards was -- and is -- to provide a temporary incentive for jump-starting Bitcoin's transaction processing network.

3. As the rewards go to zero, Bitcoin transaction fees will fluctuate. They will be determined by competition based on the marginal cost of computation. My expectation is that Bitcoin transaction fees will go up over time.

4. Many transaction processors, i.e., "miners," are convinced that Bitcoin eventually will have a market capitalization similar to that of gold (~$12T, give or take), so they are hoarding their share of block rewards. Many investors in these operations are convinced too. Some in fact are willing to lose money processing transactions to get the block rewards.

gregable• 4 years ago

1. The author points out that txn fees are tiny, 1% of the revenue. And they are unlikely to be significant during the depreciation period of the machines.

2/3. Sure, but see #1.

4. Sure, but the author is pointing out that the cost of buying BTC exposure via these companies is higher than just buying BTC by a lot. It almost seems like a short position of these companies combined with a long position on BTC is a solid bet over a long term horizon.

cs7022• 4 years ago

Sure, but the author is pointing out that the cost of buying BTC exposure via these companies is higher than just buying BTC by a lot.

The investors also get transaction processing infrastructure, including software and facilities, and a team, not just exposure to BTC. Perhaps they see future value in building that infrastructure now.

It almost seems like a short position of these companies combined with a long position on BTC is a solid bet over a long term horizon.

If you think that's a solid bet, you're of course welcome to go ahead and make it!

The problem with Bitcoin miners

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