Topic: The Bitcoin mining pie - an attempt to explain mining dynamics simply (Read 2770 times)

Thanks DobZombie.  It did feel at times when writing it that I was having to go round the houses to avoid using technical terms but I stuck to my original brief and think at least one post here on this topic that contains no technical terms might be useful to some.  I hope it reads a bit better now after the heavy editing than it did when you read it.

I think you've got the same kinda grasp as most of us.  you know that GPUs are awesome, but probably not for long. ASICs are coming in to change everything.

Thats about how I see it too

If you wanted to make it a more technical read, you could add a bit more detail (in brackets even) ?

Thank you DobZombie   I see a respectful reader-count though there is no guarantees that any of those got beyond the first few sentences!  For that reason I have edited for clarity so much it could be called a re-write.  I find writing such that something is clear on paper also 'tidies up' the concepts in my mind so it's always a useful exercise.

In the meantime it's good to know i) that you read it all and ii) that it seems reasonable to you.

Cheers for letting me know,

tf

Not bad

Having read up about mining on this forum and elsewhere I am here attempting to sum up without using Bitcoin terminology what the bigger picture looks like.  I've gone further and explained also how I've used this understanding to make my decisions with regards mining myself and how I'm looking at what I've spent.  If you spot something I've missed that invalidates my analogy (especially if it is an elephant!) please do tell me.

Overview

The Bitcoin algorithm is such that only so many Bitcoin may be mined every day¹

The total number of Bitcoin mined every day could be seen as a pie sliced to represent the reward going to each miner.  Although the size of the pie (the total Bitcoin mined per day) fluctuates, it will by design always tend towards remaining the same size².

It is the power of a rig³ as a proportion of the total power of all working rigs that determines the size of the slice of the pie it represents.

Someone increasing the power of their own rig by adding more hardware increases the size of their own slice of the pie by indirectly causing a reduction the size of everybody else's. (Bigger slice leads to bigger pie which leads to the pie shrinking which reduces everybody's slice).

In other words the overall cost of getting a bigger slice of the pie is the cost of the hardware for the individual and for everybody a decrease in reward per unit of hardware owned which is also a decrease in reward per Joule of electricity used.

The new powerful technology

A significant number of people bringing immensely more powerful kit into play⁴ may in the very short term substantially increase the size of the pie but in due course the pie-size will self-correct.  This is because whilst one person's brand new rig may be immensely more powerful than what it replaces - so is everyone else's and again, it's the proportion of the total of everybody's rigs that determines the size of the slice.

For those who pay normal rates for their electricity, assuming conversion rates to fiat remain as they are⁵ the reward coming from the greatly reduced slice of pie is likely to be such that it's cheaper to turn them off.

For anyone to retain the size of the slice of pie currently being enjoyed requires buying enough of the new powerful kit so that the proportion of total power remains as it was⁶.  The amount needing to be spent to retain the current slice-size may be more than can be justified based on reward⁷.

Kit-purchasing considerations

To buy old-technology kit now is either to gamble that new-technology is not forthcoming or to accept that the size of one's slice may very soon become so small it's less than bite-sized!

New-technology kit is not yet available.

To pre-order new-technology kit⁷ or to buy as soon as it is proven to work is to take a gamble on the slice-size being sufficient to justify the outlay on the kit⁸.  This gamble will pay only if mining starts before the pie-size self-corrects, if the eventual 'settled' slice-size brings in a reasonable amount or a combination of the two.

It appears to me there is not a big advantage in terms of power-per-buck to be had from buying big rigs so whilst increasing the size of order will of course increase in size of the slice the risk of return per buck is pretty much the same as for those buying smaller rigs.  Also, if everybody bought massive rigs the only beneficiaries would be the rig sellers because it makes no difference to the size of the pie!

My strategy

I like the idea of mining - of having even a tiny amount of Bitcoin available to spend or to save coming in on a regular basis and of knowing my mining activity is participating in making Bitcoin transactions work.

Buying old-technology kit is not attractive to me so I've gambled on a pre-order for new-technology.  Given that there is proportionally little to gain by buying loads I've gone for a small rig but not one for which I'll need to start opening up the PC it will be running off.

There is a chance I may mine more than what I spent on the kit - sooner if I happen to get my kit up and running whilst silly rewards are still around, much later if when everything settles down the reward from my slice in relation to the relative price of Bitcoin to fiat is good enough.  However I acknowledge and happily accept this is a long shot on so many counts.

The way I have decide therefore to look at the cost of purchasing my mining rig is not as an 'investment'; rather I have 'written it off' by adding it to and considering it as another cost that went towards the purchase of the all the Bitcoin I have bought to date.  To illustrate how this has greatly increased how much I have paid for each Bitcoin let's say I paid $1000 for 100 BTC including transfer costs etc. then spent another $1000 on kit I'd be looking at having paid $20/BTC.  

So with that as my baseline:  (i) If I buy more Bitcoin for less than my all-inclusive current price the price I have paid per Bitcoin will come down;  (ii) If and when I start mining and the overall number of Bitcoin I have acquired increases the price I paid per Bitcoin will come down; (iii) If either of these happens and/or if the Bitcoin price on the exchanges goes up then the difference between market value and what I paid will become less.  

The fun comes from not really having a clue as to whether any of this will come to be.  I am happy to concede that many here know much more than me about the technology and mechanics of Bitcoin and mining but I also have a suspicion that many of those shouting loudest here about what's going to happen have about as much of an idea as I do.  At the risk of sounding holier-than-thou the difference is that I would  rather not cheat myself (nor mislead anyone else) by convincing myself that I do know.  In the meantime, what an experiment

Thank you for listening

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Additional points:

¹ I acknowledge this is not strictly true.  The mechanism that controls the number available to be mined is reactive to the number of coins recently mined and will therefore fluctuate.

² For the purposes of the explanation the periodic reduction in reward is not considered.

³ By 'power' here I am referring not to its actual power consumption but how rapidly it can perform the calculations for mining.

⁴ I am of course referring to the forthcoming (if rumours turn out to be true) introduction of ASIC technology.

⁵  I have heard many apparently reasoned but conflicting assessments of the likely affect of forthcoming changes on exchange rates with fiat and have concluded I have no idea whatsoever what will happen over the next few months!

⁶ This is of course hypothetical.  I haven't heard of anyone who is deciding how much new-tech kit they're buying based on a guestimated calculation with the intention keeping their reward the same as they're currently receiving.

⁷ Terms like 'justify outlay' and 'ROI' are of course only relevant to those who look at their operation as a commercial venture.

⁸ An added factor is that the operations taking pre-order money may also, maliciously or through incompetence and irresponsibility, end up not being able to (or simply not) fulfilling the order so the gamble may be lost even before the kit turns up!

***Edited to improve clarity***