Your understanding of economics is quite bad. Leaning on the thoroughly debunked labor theory of value to calculate the "price" of something that is literally not sold is so far gone that I'm not sure where to throw the rope so that it might be within your reach.
The most salient points;
1.) Bitcoin mining is paid completely through inflation. Nearly any fee above zero is acceptable to miners. There is no "price" for mining.
2.) "Prices" are a function of supply and demand. Labor, work, and difficulty have exactly nothing to do with the price of a product except insomuch as it inhibits supply.
3.) There is no such thing as “intrinsic value”. There are only intrinsic properties that are subjectively valued by people.
Detonating the logic bomb;
According to your paper, the price of a product gravitates towards it’s production cost. You essentially argue that as the cost of producing Bitcoins approaches zero, the price must also approach zero. This would be true if you totally ignored the supply side of the Supply and Demand graph.
Since the amount of bitcoins increases asymptotically, the cost to create more bitcoins always necessarily approaches impossible, and by your own premise, also approach infinite price, not zero. QED.
Topic: Research paper on Bitcoin Fundamental Value & Decision to Mine - page 2. (Read 2214 times)
February 10, 2015, 03:37:01 PM
February 10, 2015, 03:06:39 PM
[I don't want to make this a microeconomics lesson -- but very briefly:
Sorry. I wasn't clear, or perhaps my point is subtle. You claim that the value depends on the cost of production. I disagree -- the cost of production depends on the value. You claim that as the efficiency rises, the price will fall. I claim that as the efficiency rises, the difficulty rises and the cost of production is unaffected (assuming the price is constant).
No no. The causation is certainly cost of production confers value. Competition amongst producers will create innovation and lower the cost of production. This is classic economics and it occurs in every competitive commodity market. The difficulty rising does not affect the rate of production- the rate of production will always be one block every 10 minutes on average.
In the Bitcoin industry, increased efficiency does not lower the cost of production because competition causes the difficulty (and thus the cost of production) to rise. Miners with higher efficiency will increase their hash power, which results in a higher difficulty and a higher cost of production. Miners effectively bid for a fixed quantity of bitcoins. The factor that limits their bids is the price of the bitcoins they produce.
Producing bitcoins is not like producing any other commodity. Name another commodity in which the total production quantity is fixed regardless of production cost.
Yes and no. I see what you're getting at--
the value of bitcoin = $cost of electricity used per day per GHs/how many bitcoins you can mine each day per GHs.
If the difficulty increases, the denominator gets smaller meaning the value will go up.
If the energy efficiency increases, the numerator gets smaller and the value will go down.
So both forces will be at work, true.
But as the energy efficiency increases, the 'break-even' difficulty also rises- meaning that the efficiency factor is more influential on the price than the difficulty. If the efficiency increases twofold, the breakeven price drops 50% AND also the breakeven difficulty rises 2x.
In reality the difficulty increase will serve to stabilize the fall in value but it will not outweigh it.
February 10, 2015, 02:51:47 PM
[I don't want to make this a microeconomics lesson -- but very briefly:
Sorry. I wasn't clear, or perhaps my point is subtle. You claim that the value depends on the cost of production. I disagree -- the cost of production depends on the value. You claim that as the efficiency rises, the price will fall. I claim that as the efficiency rises, the difficulty rises and the cost of production is unaffected (assuming the price is constant).
No no. The causation is certainly cost of production confers value. Competition amongst producers will create innovation and lower the cost of production. This is classic economics and it occurs in every competitive commodity market. The difficulty rising does not affect the rate of production- the rate of production will always be one block every 10 minutes on average.
In the Bitcoin industry, increased efficiency does not lower the cost of production because competition causes the difficulty (and thus the cost of production) to rise. Miners with higher efficiency will increase their hash power, which results in a higher difficulty and a higher cost of production. Miners effectively bid for a fixed quantity of bitcoins. The factor that limits their bids is the price of the bitcoins they produce.
Producing bitcoins is not like producing any other commodity. Name another commodity in which the total production quantity is fixed regardless of production cost.
February 10, 2015, 12:25:37 PM
[I don't want to make this a microeconomics lesson -- but very briefly:
Sorry. I wasn't clear, or perhaps my point is subtle. You claim that the value depends on the cost of production. I disagree -- the cost of production depends on the value. You claim that as the efficiency rises, the price will fall. I claim that as the efficiency rises, the difficulty rises and the cost of production is unaffected (assuming the price is constant).
No no. The causation is certainly cost of production confers value. Competition amongst producers will create innovation and lower the cost of production. This is classic economics and it occurs in every competitive commodity market. The difficulty rising does not affect the rate of production- the rate of production will always be one block every 10 minutes on average.
February 10, 2015, 12:23:06 PM
[I don't want to make this a microeconomics lesson -- but very briefly:
Sorry. I wasn't clear, or perhaps my point is subtle. You claim that the value depends on the cost of production. I disagree -- the cost of production depends on the value. You claim that as the efficiency rises, the price will fall. I claim that as the efficiency rises, the difficulty rises and the cost of production is unaffected (assuming the price is constant).
February 10, 2015, 09:56:26 AM
I'm a bit skeptical on whether the next block reward halving expected to take place in late 2016 may have profound effect of eliminating all but the most efficient miners but I'm very sure the following halving will really make the difference. I've given myself another 5 years for bitcoin.
It probably will, and thats bad because we allready practicaly only have industrial mining, eliminating little guy.
And that also means majority of money will go onto mining equipement instead market cap, so once again the man selling shovels is going to earn more than the one digging gold.
imo it was best when there were gpu-s only, ever since asics were introduced its not the same.
February 10, 2015, 09:22:11 AM
I read your paper. It is concise and well-written. You do a good job of describing the economics of mining.
You claim that the intrinsic value of bitcoin depends on the production cost, but nowhere in the paper do you actually present any arguments to support your claim.
These are interesting statements because they contradict your claim that the intrinsic value is the marginal cost. You imply here that if the cost rises beyond the break-even value, then the miner should stop mining (because it exceeds the value of the product), yet if the value rises to equal the cost (as you claim), then there would be no reason to stop.
Quote
The intrinsic value of a bitcoin should therefore be the marginal cost of mining, or more abstractly the (computational) labor value of mining. ... I argue that computational labor power confers value to digital currencies such as bitcoin, and present a way to model that intrinsic value.
You claim that the intrinsic value of bitcoin depends on the production cost, but nowhere in the paper do you actually present any arguments to support your claim.
Quote
These equations are useful in application. It informs miners at which price they should undertake or give up mining. It also informs miners when to stop and start mining given changes in mining difficulty and in electricity costs.
These are interesting statements because they contradict your claim that the intrinsic value is the marginal cost. You imply here that if the cost rises beyond the break-even value, then the miner should stop mining (because it exceeds the value of the product), yet if the value rises to equal the cost (as you claim), then there would be no reason to stop.
I don't want to make this a microeconomics lesson -- but very briefly:
-the arguments for cost theories of value exist and go back to the time of Adam Smith, there is no need to restate centuries of theory in a small paper on a specific topic, if you are interested you can educate yourself there are a ton of resources for that.
-along the same lines, it is basic econ. theory that marginal cost = marginal product = price. All 3 equal each other in a competitive market. Marginal simply means the cost of the last unit produced. So it is the production on the margin that matters and not what has been produced in the past, for example. The break-even price is not the market price, the market price will fluctuate all the time do to imbalances in supply and demand.
-the value will only rise or fall based on the average cost for the network. That means there will always be some producers with lower than average costs that will earn excess profits and some who operate at a loss. Over time, the ones operating at a loss drop out of the market and the average efficiency tends to increase with those out of the picture. This will LOWER the value of bitcoin, not raise it since the average cost of production for the network will have decreased.
February 10, 2015, 08:29:30 AM
I'm a bit skeptical on whether the next block reward halving expected to take place in late 2016 may have profound effect of eliminating all but the most efficient miners but I'm very sure the following halving will really make the difference. I've given myself another 5 years for bitcoin.
February 10, 2015, 04:37:59 AM
I read your paper. It is concise and well-written. You do a good job of describing the economics of mining.
You claim that the intrinsic value of bitcoin depends on the production cost, but nowhere in the paper do you actually present any arguments to support your claim.
These are interesting statements because they contradict your claim that the intrinsic value is the marginal cost. You imply here that if the cost rises beyond the break-even value, then the miner should stop mining (because it exceeds the value of the product), yet if the value rises to equal the cost (as you claim), then there would be no reason to stop.
Quote
The intrinsic value of a bitcoin should therefore be the marginal cost of mining, or more abstractly the (computational) labor value of mining. ... I argue that computational labor power confers value to digital currencies such as bitcoin, and present a way to model that intrinsic value.
You claim that the intrinsic value of bitcoin depends on the production cost, but nowhere in the paper do you actually present any arguments to support your claim.
Quote
These equations are useful in application. It informs miners at which price they should undertake or give up mining. It also informs miners when to stop and start mining given changes in mining difficulty and in electricity costs.
These are interesting statements because they contradict your claim that the intrinsic value is the marginal cost. You imply here that if the cost rises beyond the break-even value, then the miner should stop mining (because it exceeds the value of the product), yet if the value rises to equal the cost (as you claim), then there would be no reason to stop.
February 10, 2015, 01:59:45 AM
Not only does this develop a model for the intrinsic value of bitcoins based on cost of production ...
Bitcoins are produced at a fixed rate and are not consumed. The cost of production has no effect on their supply or demand, so it has no effect on their value.
Take a look at Stellar, NXT, and Mastercoin. These three coins have the 2nd, 5th, and 8th highest market caps, and yet their production costs are 0.
Bitcoin is consumed, many people buy some coins and hold it for at least 10 years, and in these 10 years they are disappeared from the network, just like a house bought
Of course from a long term perspective they might get spent some time later eventually, but just like central banks' gold reserve, they could also accumulate more and more and never get spent in generations. A large amount of reserve can serve many other purposes, security for example
If there is a demand for the coin, people will always select the method with lowest possible cost to get coin, which will make the exchange rate very close to the mining cost
February 10, 2015, 01:31:10 AM
Very true, to the end, it is the electricity cost decide bitcoin's value. After a certain degree of consolidation, only the miners without equipment cost (means the equipment cost is already paid back) can stay in the network and mine. Any new equipment investment will cost too much and have too little hope of ROI due to extremely low income (barely make back the electricity), unless they are much better in efficiency. A 20% increase in efficiency will not motivate the upgrading due to equipment cost
At beginning of 2012, bitcoin exchange rate is $5, hash rate is 8TH, for a general GPU miner at 2MH/W, the whole network consumed 4MW
At beginning of 2015, exchange rate is $200, hash rate is 320PH, for a general ASIC miner at 2GH/W, the whole network consumes 160MW
So the exchange rate jumped by 40x and the electricity cost also jumped by 40x
However, since the coin per day now is only half of 2012, it can mean two things: Either the current price is too low and should bounce back to $400, or the daily coin supply on market has not changed too much despite the daily coin generation has been cut by half (Due to more sell-off by centralized mining farms)
At beginning of 2012, bitcoin exchange rate is $5, hash rate is 8TH, for a general GPU miner at 2MH/W, the whole network consumed 4MW
At beginning of 2015, exchange rate is $200, hash rate is 320PH, for a general ASIC miner at 2GH/W, the whole network consumes 160MW
So the exchange rate jumped by 40x and the electricity cost also jumped by 40x
However, since the coin per day now is only half of 2012, it can mean two things: Either the current price is too low and should bounce back to $400, or the daily coin supply on market has not changed too much despite the daily coin generation has been cut by half (Due to more sell-off by centralized mining farms)
February 09, 2015, 11:06:59 PM
Not only does this develop a model for the intrinsic value of bitcoins based on cost of production ...
The cost of production has no effect on their supply or demand, so it has no effect on their value.
Value and price are different things. Supply and demand forms price. Cost of production forms value. Read the paper it discusses the difference.
February 09, 2015, 10:36:43 PM
Not only does this develop a model for the intrinsic value of bitcoins based on cost of production ...
Bitcoins are produced at a fixed rate and are not consumed. The cost of production has no effect on their supply or demand, so it has no effect on their value.
Take a look at Stellar, NXT, and Mastercoin. These three coins have the 2nd, 5th, and 8th highest market caps, and yet their production costs are 0.
February 09, 2015, 02:50:24 PM
Many of the miners already know most of this stuff, but it's still a worthwhile read.
Not only does this develop a model for the intrinsic value of bitcoins based on cost of production, but also cautions that with increasing efficiency lowering the cost of production (i.e. lower watts per GH/s), the value of bitcoin may also decline. The block reward halving in late 2016 may have the effect of eliminating all but the most efficient miners.
https://www.researchgate.net/publication/272022750_The_Decision_to_Mine_for_Bitcoins_A_%28Computational%29_Labor_Theory_of_Intrinsic_Value
Not only does this develop a model for the intrinsic value of bitcoins based on cost of production, but also cautions that with increasing efficiency lowering the cost of production (i.e. lower watts per GH/s), the value of bitcoin may also decline. The block reward halving in late 2016 may have the effect of eliminating all but the most efficient miners.
https://www.researchgate.net/publication/272022750_The_Decision_to_Mine_for_Bitcoins_A_%28Computational%29_Labor_Theory_of_Intrinsic_Value
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