Topic: relationship of bitcoin prices and mining price (Read 3994 times)

Nobody said that the price will rise. Probably if the coin lost all of it interest, goes right to our cryptocemetery.

When you have bitcoins for the speculation, the only things that count is the current price and the future price. What you paid for the coins, is no longer relevant.

Historic prices may be, for chartists, only a help in considering the future price.

Basically, you can just forget what you paid for them. If you have a coin you paid 1000 for, you are in the exact same position as someone else with one coin, who paid only 200.

Since mining is a business venture, the same considerations apply as that of a factory or a service business. They need to buy capital or rent (a building, the miners, the power) and hire labour to install and run. Importantly, there is a time factor - from the moment of decision to a running mining farm, there is a time lag. The investor has to speculate on the future prices of all his input cost, and the value of the output (the coins). Including to continue to produce for less than total cost, as long as the cost to run, disregarding the capital cost, is less than output (the sunk cost concept).

So mining needs investment, and speculation of all relevant future prices. That means the investor might overinvest based on current prices, because he wants to be in position with mining power when, as he might think, the bitcoin price rise in the future. Some win, some lose. But as time goes by, the mining cost has to continously close in to bitcoin price.

Slight difference - for people who bought bitcoins at $1000, it is a sunk cost. So if their view is that Bitcoin is going down further, the right thing to do would be to sell bitcoins for their current price. People losing money on investments is different from people making investments that are definitely going to lose money.

yeahh im newbie, and i want to know it too

People bought bitcoins at $1000 each a while back -- how could they sell them for less? Yet, they do. People frequently lose money on investments, selling them for less than they cost.

A smart miner whose operating costs are greater than the value of the mined coins will simply stop mining so they don't have to sell at a loss.

so in some weird was bitcoin price is related to electricity prices?

Ah, think about it a little bit more.  here's a little example. If electricity would cost 10 usd/hour and for miners would mine a btc in like 50 hours how could they sell it for less than 500 usd? And in this case we can't even speak about breakeven

Yeah, but that means we need to increase the block size no?

And if we dont that just means we`ll have transactions to be clogged up or taking way too long for even non-daily stuff. Like any purchases etc.

It is always a very interesting thing to discuss the interaction between mining cost and market price

Labor theory of value is true when demand > supply. This theory worked many centuries when most of the products are insufficient

Because mining is the lowest possible cost to get coins, smart buyers will first seek to mine bitcoin if they want serious amount of bitcoin. Only when mining production can not keep up with the demand, the price will surge, otherwise the miners will quietly accumulate coins at a price close to mining cost

If demand << supply, then the first thing we will notice is that the mining difficulty will drop, means investors are scaling back of their mining operations due to less demand in bitcoin. So far this has not happened, means the demand is still strong

If demand >> supply, then we can expect that the mining difficulty will rise quickly. It does not matter it is caused by technology shift or more people joining mining, as long as difficulty is rising, we will know for sure that the competition is getting tougher. As a result, cost will rise, market price will also rise

If demand = supply, then the price will stay flat, most of the demand is satisfied by mining

A very fast price rally is caused by an anticipation of dramatically increased demand. Because the daily supply is fixed, those demands can only be satisfied by market order, which will drive up the price

Currently about half of the daily coin supply are generated through mining, after next reward halving, the mining will get less coins, so the serious demand can only turn to market and purchase, which will raise the price

There's no relation between Bitcoin prices and mining prices.
Bitcoin prices are based on market trading volume and on the mood of Whales.
But the mining prices are based on network difficulty.

it's marginal cost and marginal product, so it's irrelevant if it's consumed or stockpiled or whatever. Oil, wheat, silver, rubies, lithium etc. What only matters is the marginal cost - which is the cost of producing the next unit regardless of how many units may already exist or have existed or will exist in the future.

And what do you mean every holder is a producer? Only miners are producers of new bitcoins. Whoever obtains them afterward (presumably because miners sold them in the first place) are not producers they are just owners. Please clarify.

For the second point the miner isn't stockpiling, he is offering one unit higher and shuts down production in the meantime. In reality he will also sell that one unit at a loss. For semantics when I say the miner offers $300 that does not necessarily mean he has a unit for sale, but would offer that price if he did. Perhaps a better phrase is he "would offer" instead of imply that he actively does offer it.

You can't compare oil and wheat markets with bitcoin markets because oil and wheat are consumed and bitcoins are not. In the bitcoin market, every holder of bitcoins is a producer, not just miners.

Thank you for your recommendation, but I am well-versed in economics. I am not disputing, "marginal cost = marginal product = selling price, always and everywhere." I am simply pointing out that selling price determines marginal cost for miners and not the other way around because miners have no more control over prices than anyone else.

As to the second point. If the current price is $249 and the miner offers it at $260, they are by definition holding their coins, waiting for a better price.

It is irrelevant if miners are only a small percentage of the stock of bitcoins, because it is only producers who consistently offer them to the market at all times. oil producers are only a small part of the oil market. wheat farmers are only a small part of the wheat market. And yet marginal cost = marginal product = selling price, always and everywhere. Read an economics text book if this still confuses you (it is hard to wrap your mind around, I know!). I can give you some good recommendations.
Your second point point about not sitting on them is precisely why they offer them for sale in the market as they are produced. They are not speculating, they are in the business of producing them and immediately selling them. I never assert that miners hold on to coins waiting for a better price.


So let me be more clear as to why I think you see a contradiction. There are two forces at work here, one manifests itself in scenario 1 and the other scenario 2.

[1] in a world where there are heterogeneous miners, some with different efficiency or energy costs etc., then as difficulty (cost) increases, it will weed out all but the most efficient miners. Why? Let's say there is a point at which Miner A has a break-even of $250 and Miner B has a break-even of $300. Miner A & B will both offer $300, but for B this will be his absolute minimum. Nobody pays $300, so Miner A will offer $299 but miner B will still offer $300. Miner A will offer $298 but miner B will still offer $300. And so on until miner A's offer is $250 and miner B still offers $300. Assuming there are many like Miner A they will all be in competition with each other driving the offer quickly down to their $250 limit. This is individualistic competition not a cartel.

[2] in a world where the majority of miners are subject to the same efficiency (largely homogeneous), say now most miners are all like miner A, and nobody is able to increase their efficiency or lower their electricity cost any further. Their break even now is $250 and so they offer $250 in the market. Another miner adds his hashpower to the network so now all of their break even price rises to $251. Nobody offers $250 anymore, they all offer $251. Another dozen miners join the network, increasing the difficulty even more. Nobody offers $251 they all offer $260. This is not a cartel, this is each individual looking out for their own self-interest. The invisible hand somebody once called it.


Going back to scenario 1. say the market offer is $250 and nobody is willing to pay $250. The best bid is $240. Will a miner sell $240? probably not unless his breakeven is $240 or lower. But a speculator, trader, market maker etc. just might sell $240s. However, once those have been sold @ $240, the best offer will soon return to $250 after those lower offers have been cleared.

Next, if bitcoin is indeed currency, most people enter the market to buy bitcoin. They then "sell" their bitcoin by spending them on goods or services and do not ever offer them in exchange for dollars, so offers will be lifted. If my job is to produce and sell bitcoin I do not speculate on their price (just as oil companies do not speculate on the price of oil, they make it and sell it). So if my cost is $249 and I can sell $250, I will do that all day long. But why not raise my offer to $251? Because if I am competing with many other producers to sell my bitcoins and they also have a cost of $249 they can offer $250 and nobody will take my $251s. So I will have to at least match - or even improve if I can - that best offer. If the world price for oil is $40 a barrel and I am offering $41 nobody will buy my barrel of oil. If it cost me $41, well I am just out of luck - there must be a lower cost producer out there it turns out.

Finally, this mechanism happens over time. There will be periods of time, days, weeks maybe many weeks, where spikes in demand may drive up the price or spikes in supply may depress the price at levels well above or below the cost of production price. Extrinsic value drivers will tend to keep the market price, in fact, above the avg. cost of production.

You have contradicted yourself. First you wrote that if the cost rises, then miners stop mining. Then you wrote that if the cost rises, they continue to mine but they hold the coins, waiting for a higher price.

I agree with your first statement, that if costs exceed value, miners will stop mining.

But, your second statement assumes that miners are operating as an informal cartel in which they agree to restrict supply of bitcoins in the market. I hardly think this is a realistic assumption. First, mined bitcoins are only a small part of the market. A mining cartel would have very little influence on the price. Second, miners have to pay their bills regardless of what happens to the bitcoin price. Many miners don't have the luxury of sitting on their coins waiting for a higher price.

Miners don't control the market, they are controlled by it.

That was Satoshi's vision.. that at some point when bitcoin has mass appeal and wide use with orders of magnitude more transactions per day than today, that at some point the tx fees will surpass the block reward for "total miner reward per block". Maybe this will be when the block reward is 6.25 or 3.125.. It is certainly possible in the future when the block reward is 3.125 that fees might equal 10 BTC per block = 13.125 total miner reward ! (right now total miner reward is averaging around 25.13 BTC per block).

There should always be enough miners because of transactions fees.

first we must agree that as producers of bitcoins, miners (on average) sell what they produce each day in the market. Same way oil producers sell their oil or farmers sell their wheat. It is important to understand that not every miner needs to do this, just enough of them to keep a steady supply offered in the market each day. Just like in oil or wheat markets there are also non-producer participants such as speculators, investors or other users. All those other users, however, do not have a new consistent and steady supply each day to offer to the market. This is why in all competitive commodity markets, marginal cost = marginal product = selling price.

second we must agree that any producer (of bitcoin or anything else) will never consistently operate at a loss.

if the cost of mining increases sufficiently (difficulty increases, electricity $ increases, etc.) then ultimately a miner will spend more money in electricity per day than the value earned in bitcoins produced per day. Rather than produce at a loss every day, they will simply stop producing. Then as miners turn off their rigs, the difficulty should fall... right?

The issue is hardware energy efficiency is increasing. So if you have a 1.00 W/GH/s rig and I have a 0.5 W/GH/s rig, and we both have the same electricity cost, there will become a point where the mining difficulty is high enough to make you drop out of mining, but I will still keep going. Through competition, more and more people will abandon their inefficient rigs and deploy newer, more efficient hardware.

And what if the efficiency does not increase or reaches a limit, yet more miners join the network and difficulty increases? Well, then producers will have to offer their bitcoin at increasingly higher prices in the market just to break even. This is how prices are caused to rise.

Of course there could be holders of bitcoin who are not miners who want to sell, but these people generally do not have a steady supply of bitcoin since they are not producing them. Therefore, after they dump their holdings the price may be temporarily depressed but when they are done selling, it is the producers left who will only offer prices that will leave them with a profit (or at least break-even).

Please explain how it puts a lower limit on the price. If the cost of mining is higher than the value of the mined coins, what exactly causes the price to rise? How does the cost of mining prevent people from selling for a lower price or encourage people to pay more?

exactly, and that is why that cost of production (mining cost) could be an intrinsic value estimate. A value has both intrinsic and extrinsic value. The extrinsic value is sometimes called the premium added on to the intrinsic value and is made up of many factors, including excess demand, a speculative premium and so forth.

The fact that there IS an intrinsic value (or lower bound in price) based on its cost of production is important since many people (incorrectly) assert that bitcoin has no intrinsic value at all! So if the cost of production model estimates that a Bitcoin should be $225 and the market price is $275, the extrinsic value composes $50 and the intrinsic $225.