Topic: Constant Downward Pressure Due To Miners? (Read 3682 times)

^There's no devil here.
ASIC manufacturers set ASIC prices.
Miners buy those ASICs & mine with them, increasing the hashrate.
The hashrate [and, thus, difficulty] grows to the point where the coins mined are worth less than the price of hosting [electricity etc.] to mine the coins.

It is the cost of mining that drives difficulty, not the other way around.

Devil is in the detail.

Difficulty sets the cost (in hashes per second) to keep the network running at the optimal speed.

The cost of those hashes, is a different thing.  The total network cost (monetary) is average cost (money) per hash per second across all miners multiplied by the target number of hashes specified by the diff.

The network cost to produce a block every ten minutes is controlled by the difficulty / target.

No.  ASIC manufacturers and electric companies set the cost of hashes per second.  Not difficulty.  What are you thinking?


If you are trolling, cudos, you got me.  If you're trying to make sense, re-read what you have typed and try to reshuffle the words until it makes sense.
ty

Difficulty determines the target hashrate to produce blocks at an average of 1 every 10 minutes.  It sets the cost in hashes per second to keep the network running.  If the difficulty goes up, the cost rises, if difficulty goes down, the cost lowers.

For every given combination of market price tag and transaction volume, there is a corresponding desired hashrate (and therefore difficulty) which keeps the network costs at a rough equilibrium.  If BTC goes up in price-tag, the hashrate and difficulty rise to find a new balance, conversely if price-tag lowers then hashrate and difficulty reduce to find a balance.

The difficulty/target is perhaps the most important metric in many respects.

I'm not sure how the difficulty figures into this.  Difficulty doesn't set the tx fees, miners (at least in theory) do.  It costs ~10%/yr to "keep the network secure" now.  This level of security will continue to cost 10% of Bitcoin's market cap, regardless of Bitcoin price or mining difficulty. 

Tangent:  It's hard to say the network is really secured when the majority of hashrate is controlled by a handful of people (megamines/pool operators).

Agreed. I have faith that the markets will find an equilibrium, transaction processing has a cost which can be approximated for the network at any point in time, and a diff that sets it, diff can lower or raise to change the cost of securing the network, since it's all variable, human forces will work to strike a balance over the very long time they have to do so

Let's not.  Blockchain.info tells me 219,555 BTC/day, so you're off by a factor of ~5
But wait, that's not all!  All transactions--including blockchain spam etc. are included here.  Spamming/advertising costs next to nothing, since tx fees are nominal now.  It's safe to assume these would not continue when tx fees become meaningful.

If we work on the 10% to secure basis: The average output volume per day is approaching 1,000,000 BTC per day, let's say 350 million per year.  Fees would need to be 1.4 million BTC per year to cover the 10% of CAP. Which works out to 0.4% transaction fee by todays values. 5-10x cheaper than paypal and visa, based on transaction fees only.  Obviously as usage increases (number of transactions and output volume per day) then that fee reduces accordingly.  With 10x the transactions and half the average value, then we get a 5 fold increase in volume and a 5 times reduction in required fees, under 0.1%. *

* This all depends on that 10% of CAP to secure number being correct.

Currently, Bitcoin's network security is costing over 10% of its market cap, yearly.
To maintain current level of security, 10% of Bitcoin's market cap would have to be spent yearly.*
When tx fees become miner's sole source of revenue, this will translate to tx fees being 10% of each transaction.
The most expensive way to do business ever

*Starting with the assumption that mining costs approach the price of the coins mined (according to Satoshi).  Bitcoin price going up or down doesn't affect this--if you buy a 1 dollar lock to protect $10, you should buy a $10 lock to protect $100.)

False.  Mining is the service which secures a block chain, proof of work is designed to be expensive, it's the monetary expense which keeps a chain secure.  Eventually fees will cover mining costs, until then currency supply is emitted over time to subsidise mining and distribute supply broadly.

ASICs are efficient transaction securing and processing machines, more efficient hardware is a good thing, the investment in mining hardware and the running costs are what keep the whole thing secure, and allow us to base an alternative monetary system on it.  Without these improvements and investment, chains will be insecure, and the system would have limited usage due to being insecure.  Those who treat mining as a service business and work to become more efficient are sensible, and those who secure our chains.

Coins which are tailored to preclude ASICs and focus on CPU and GPU may be fun or seem to give the little guys a chance, but really what they preclude is having a secure future.  Mining as a commercial service and commodity where it's possible to become more efficient over time adds longevity to a coin, and investment to an economy.  Mining on a whim with repurposed hardware does not bode well in terms of longevity.  If there's no real cost (investment/maintenance), and cost is that which secures a chain, we can conclude that costless chains will be insecure and have no real future.

Short term price reversals mean nothing.
If miners are still operating, it means their marginal costs are being covered.
Once the price increases, they will start reaping profits.

^ In short, every ASIC miner every created was simply to be a money printing machine... What makes you guys think they won't keep printing money, why would they keep digital coins when there bills are in fiat currency. Why would they keep having faith when the price drops 70% and now even miners are dropping out of bitcoin?
Who will run this "currency" system after more and more people drop out completely???

There is a little more to it.

The difficulty of a coin to mine sets the production cost, if the hashrate falls quickly due to a price drop, either:

A: the diff does not change quickly (btc/btm/ltc) and blocks are created much slower, emission of coin supply is slowed, which dampens the effect on the markets, allowing a new equilibrium to be found, or allowing demand to catch back up with supply. The less liquid the market, the more dramatic the effect, you can see a coins supply slowing to 1/50th of what it should be, which whilst a nuisance to transaction processing, is a saviour to the price-tag and value of the economy on the whole.

B: the diff changes quickly (perhaps KGW/DGW is used) and blocks are created "on time", emission of coin supply remains constant whilst production cost is lowered. Surplus supply is created, and production cost just keeps lowering to match the market price, driving the price in to the ground.  Transactions are processed quickly, but the economy collapses under the weight of the ever increasing supply of ever cheaper to produce coins, to literally 0.

More often than not, it is this factor which accelerates the death of an alt coin's price tag.

Remember that a large number of alt coins were created as money printing machines, some to benefit miners with legacy hardware which was inefficient on large cap coins against asics, so the business decision was made to keep printing "free money" at whatever price as long as there was any demand (buy orders) at all, this is where fast diff change and kgw/dgw came in, it allows production cost to fall as market price does, rather than putting miners back in the position of mining at a (perceived) loss.

In short, constant downwards pressure is not due to miners or traders (unless it's a scam coin), constant downwards pressure commonly is due to production cost constantly matching market price tag on down turns, rather than supply slowing / reducing when demand slows.

If you'd like to see the economics of this in action - as LTC and BTC have not shown case A as yet - then take a look at the all time chart on BTM with a moving average line over it, demand decreased and production decreased accordingly, price-tag has plateaued whilst we work to lift demand again, rather than price plummeting to zero with surplus supply.

After the next halving of the block reward, the downward pressure from miners will go down drastically.

Hence we will continue to go lower and lower and lower and lower and lower.......

yes inflation is too high and it affects the market in a very negative way. How long do you need to repeat dicussions on it? I do buy low inflation/ low volatility coins which are the solution while you are still analysing the problem.

Coins with lower inflation than bitcoin have a very bright future imo.

High inflation and miners selling causes speculators to sell causes miners to sell faster and everyone else to sell more - it's a negative feedback loop that is only accelarating itself.

yes it can.

Miners can get out of the mining business, but the price still can remain in a level that the profit for mining is low and most of BTC need to be sold in order to keep the mining.

Also if people think prices won't rise, they will dump the coin no matter the price.

There are many miners and their relative costs are rising. Only when the mining is so unprofitable for them that they have to stop their rigs, will they cease to dump. Right now, we are dumping miners, not bitcoin.

How many does it take to change it back? 42!

Q: How many ASIC miners does it take to change the block reward rate?

A: 42

It can and it will. There is no technological paradigm shift after asics on the horizon.

This time I know you are trolling and you know everybody who mined with gpus knows.

Miners have nothing to do with the price. If the allocation was not done in such a way, there would have been no incentive to adopt, no one would know about bitcoin, and I'd be worthless. Crying about miners is crying about bitcoin's fundamental implementation. It reeks of bitter late adopters.

It's not just miners. It's also individuals who are sitting on a ton of bitcoins from very early on, gradually selling off as they have bills to pay. It's anyone who's long made their profit and are now simply unloading what they have, living their lives, buying whatever they want.

the only reason we are not at 50k is because of new coins. It is 100% mining make no mistake. Bubbles come and go as adoption moves closer to value of new coins minted, if we fall too far behind the curve bam crash.

big adoption even has to happen to move against the new coins on the market every day.

If it is due to miners it can't last forever.

Shutting down miners would cause a decrease in production causing difficulty to drop not rise, decreasing the cost of production until it matched the price of demand. Assuming demand was roughly equivalent to the number of coins produced. Which it isn't.

Fair to say that in bitcoin's case downward pressure is not due to miners. As for alternative currencies, well supply outstrips demand on a daily basis, and when it doesn't it's usually because supply is being held back to artificially increase cost so they can be dumped for a higher return.

This is true, however doing this would also cause their machines to depreciate in terms of bitcoin as they will produce lower amounts of bitcoin as the difficulty goes up.

In reference to the OP, he is correct that there is some pressure on the price of bitcoin from sales from miners, however that has been outweighed by other demand for bitcoin. Miners in general will not sell all of their proceeds as their revenues exceed their "current" costs (electricity) and their "capital" costs are often paid in bitcoin (the miners).

It's funny because people have been saying this for around four years at this point. But it's something that people just don't want to hear. The idea of mining for profit is very attractive to certain people and if they can do it, despite whether or not they would be better off just buying, they just do.

Many miners confuse profit from speculation with profit from mining.  "If BTC goes down such that mining is unprofitable, we can hold the mined coins until it goes back up" is heard often.  But this is illogical.  Shut off the miners at that point and simply buy the coins you would have mined.  You will pay less than it costs to run the miners.  This will also serve to prop up the market such that the mining profitability point will serve as massive support line.

Miners are miners, not neceserly investors.

If they are smart, they would have known it would be cheaper to buy coin directly rather than to mine for it.

The miners would not sell on lose, at least the smarter ones, so we know that most of the miners are holding at least half of the mined coins for an eventual bubble.

Blaming miners is like blaming dollars for inflation. The price reflects the market. There is a supply, and a demand. Both move constantly, and the price is the intersection. 25btc/10 minutes affects the supply. That is all.

I think lots of miners have gone bust so to speak. Lots of people have been forced out of the mining market in the last year.

Bingo. Me too.

The only reason I'm still running my ancient BFL miner is that I haven't had to put the AC on yet and my miner acts as a bit of a dehumidifier since I turned the heating off. Being below grade helps.

I mine directly into a paper wallet. I wouldn't think of selling any coins now. That would just be crazy.

In other but sorta related news, the immense growth of the hashrate currently has the next halving occurring somewhere around half a year earlier than first predicted based on current growth rates.

Cha Ching.

Good analysis. I am quite surprise some of the BTC mining farm didn't go bust when the capital depreciation cost and operation cost is higher than what they mine.

you think a lower supply and higher demand causes a lower price? if difficulty increase, so will the price. you yourself cited cost of production as the reason miners don't hoard their coins. that cost will increase with difficulty increases.

Miners have operating costs (in addition to hardware amortization costs) . Small miners can cover them out of their income or savings, but professional miners cannot do this and they will sell at least the portion that is needed to cover their expenses on a regular basis. When difficulty rises and price does not match this rise, profit margins decrease and thus more has to be sold than before.

While 3600 BTC/day is largely inelastic, with the advent of ASICs we have experienced the last great technology jump we will have for a long time and pushed profit margins to heights unimaginable, which has lead to a supply shock because miners began hoarding that which has previously flown to the market. This is of course unwinding now.

Here is a a chart with the daily percentage growth of hashrate, which indirectly is indicative of the state of margin profits in the recent past. You can observe that it has been steadily decreasing since ASICs were widely introduced (even before bubble pop).



In short, mining is a business and it is not the business of price speculation.

Miners can only mine 3,600 bitcoins a day. That's not enough to put any pressure on the exchanges. Also, not every miner sell the mined coins. I am a miner but I hold on to 90% of mined coins. They're put into a cold storage. You have to be stupid to sell your coins at today's price. We know it's going to be worth much more in a year or two.

Yes. To a degree, the current stagnation is caused by selling pressure from miners. I have no way of quantifying how much of it is miners, how much of it might be due to large entities "guiding" the market (what conventionally is called "manipulation" in here, but really isn't) and how much of it is simply due to the larger user/trader/investor base being more interested in selling than in buying right now.

In any case, here's my (semi motivated) opinion on this matter:

- production cost is a price attractor. It neither means market price can never go _below_ that cost (enough momentum and selling pressure from other sources can certainly do that), nor does it mean that it cannot stay _above_ for long. It is good to keep production costs in mind, but there is no immediate way to derive the price from them (although I do believe that the production cost provides a strong point of price resistance, and overcoming it is not easy absent of strong pressure downwards)

- the concentration process of mining since the ASIC revolution has led to, I believe, higher overall selling pressure by miners, in the sense that mining became more professional, and as a result: less ideological about holding. A guaranteed small profit is usually preferable over a large speculative one. I don't want to claim miners throw everything on the market immediately, but I suspect the amount of coins sold vs. coins held for the "Bitcoin endgame" changed towards a higher selling portion.

- I also believe a substantial amount of the coins mined and sold are sold off-exchange, to large entities interested in building a position (like, for example, to launch an ETF). Opinions vary if this creates downward pressure on price or not. One position says that, since coins sold off-exchange are not part of the floating capital, they cannot affect price. I personally disagree: the market and its participants have come to expect certain amounts of fiat being moved to the exchanges and expect trade volume in USD to substantially increase as per coin price increases. If more of the large orders are filled off-exchanged, that fiat is perceived as "missing" and negatively affects the price.

- Finally: opinions differ on what the production cost per coin is currently. I personally think that a number of calculations are too "bullish" in the sense that they overestimate production cost, because they tend to think from the perspective of small to mid sized miners, ignoring that a decent part of current hash power comes from large farming operations that operate on a different cost basis than smaller scale miners. My own calculations arrive at an _absolute minimum_ of around 470 USD per coin, for mining operations that can utilize electricity and employ mining hardware at a greatly reduced cost compared to smaller scale miners.

Bitcoin rate of inflation is about 11% p.a. at present. USD rate of inflation is harder to measure. But let's assume 3%. Thus there is a net annual downwards pressure on BTV value relative to the dollar of about 8%.  This will fall to 2.5% (5.5% - 3%) when the block reward halves in 2016. Of course this assumes no changes in the demand for BTC up or down, which is entirely unrealistic.

No, when difficulty rises. The same miner that produce 1 BTC might produce only half BTC. So the selling pressure should go lower.

I don't think its the miners. More of the news (we were at 800 comfortably until gox collapsed). Then China FUD, now news of the auction.

Looking at a 1 yr chart you will notice that Bitcoin constantly get's beaten down since December 2013.
For your convenience: http://bitcoincharts.com/charts/bitstampUSD#rg360ztgSzm1g10zm2g25zv

The November 2013 rise to $1,200 also caused an immense rise in hashing power and difficulty (because mining suddenly was so profitable).
So this correlates.

There is no free lunch, somebody has to pay the immense mining network (electricity, hardware, etc).
It looks like the Bitcoin holders do, because I'm sure that miners have to sell a large portion of mined coins on a daily basis just to cover electricity.
And that's exactly what the charts are reflecting.

Looking at it this way, the downtrend will only accelerate as difficulty rises?