ASIC manufacturers going exclusively into mining is like the 51% attack. While completely possible, very less probable because of the negative impact. It will be more profitable for them to play it fair (aka sell to the public) than trying to go at it themselves.
By what reasoning do you come to this conclusion? Assuming at some point in the future, there is little to no demand for ASICs (as with GPUs / FPGAs now), they are losing what exactly by mining?
1) ASIC sellers create hardware
2) Buyers buy up ASICs
3) Difficulty reaches a point where demand begins to dry up for ASIC hardware (ROIs become less attractive)
4) ASIC sellers now sitting on money, fabrication equipment and connections, an established design specification no one else has (except by reverse engineering), and little to no demand for their product begin to produce ASICs at cost and mine with them.
I know this wasn't addressed to me but I'll chip in anyway:
The weakness I see with this argument is that by the time we're at point #4) is that the difficulty has got so high that even with a much discounted sale price there's little profit per unit to be made from them.
Now I know it is difficult to imagine it now with the difference in power consumption between ASICs and GPUs being so massive but by the time we get to this stage the cost of purchase of the equipment is less relevant to whether mining is profitable as the price of electricity to power them. If the ASIC seller kept selling them and lowering the price till it was not worth selling them then the profit margin on them would be so low that he doesn't really have that much advantage over his customers anymore.
Of course it could be argued they would stop selling and switch to mining before reducing the price too much. But if that's the case, if the plan was to make most money from mining they could have done that from day 1? As far as we know they haven't and won't (though I know some argue they will
before shipping the first sales but that's another argument).
But my main point is even if they did go into large-scale mining when you fear they will, with so much identical kit already out there mining, with at least some of it having already reached its breakeven point what is the mechanism by which you see them taking over or putting out of business their competitors? Unless they also locate themselves in cheap/renewable power areas I don't see them being able to gain any significant share of the market.
I'll break this one up because I'm losing track as well, and it's good to segregate points.
I believe you are saying that the sellers will keep reducing their sales margin until they are selling the units at parity with their costs? I don't ever see that happening, and I don't think there are any precedents for it happening in other products, so I'm not sure why it would happen here. Without a healthy margin of profit, a company cannot pay its' overhead (employees, lights, rental space, etc.) and other fixed costs, what would be their incentive to slash their own throats?
As to mining day 1, you forget the not-insignificant development costs that I mentioned in a previous post. It has been estimated in the hundreds of thousands to millions to develop an ASIC mask, and have a fabricator actually spend the time to produce it (fab time is not at all cheap). Lacking serious VC interest as you argue, the clever scheme would be to develop as much as you can on your own dime, announce the development of the project, and take pre-orders at a price point to cover these costs, which is perhaps exactly what happened (as mentioned in my first version that I restated). Breaking even, or profiting to the point where you no longer need further orders to pay for future orders then places you in a position to switch your business model from pain-in-the-ass vendor, to easy-money miner, and this can likely be done long long long before slashing prices to parity with cost. In fact, it may have already be near or at that point, but that is pure speculation.
The incentive the other way is fairly clear though, roughly $72,000 US fiat are generated via mining every day, any significant portion of that is a prize worth keeping in mind (imagine taking a 20% stake, you suddenly are generating $432,000 USD/month). With the halving of the generation rate, this will change in a way we can't predict, but most speculation reads towards the positive on coin pricing, so I imagine people feeling bullish about the future prospects as well.
-- I will start by saying that I know personally, and have contact with many other through secondary means, VCs. I will first admit that they likely come in many flavors, but that from my experience it is completely 100% false that the first concern of a VC is that they not lose any money. In fact, most of the VCs with serious money, know 100% for sure that almost every investment they make will lose money. BUT, they look for things that have the promise to make a big return, because when you have a lot of money, and you invest in 100 risky things, if 95 of them fail and you lose some/most/all your investment (rarely is it all or even most, usually just some) but 5 take off in a huge way, you've made way more than you've lost.This isn't to say that they are blase with their money, they keep tight control and strict track of it, but they do not invest only in surefire things (because there are no such things).
There may be some that do not operate by this principal, but this has been my experience, so I can verify that there are at least some (and I would venture as far as to say many) who do.
-- Admittedly the lack of patent or whathaveyou would be a deterrent to investment, from a Venture Capitalist perspective, I agree. In that regard I will admit that the interconnectedness is a barrier to large-scale investment directly in mining. It is not insurmountable however, many people invest heavily into obtaining portions (shares of stock for example) of successful money making ventures, without being able to monopolize it. In fact, this is more often the case than it is not (very few companies, such a Berkshire actively seek full control of the companies they invest in). This merely reflects the various types of investor out there, and furthers the idea that while not all investors would be interested, some could be.
To further this point, there have already been a number of successful "startup companies" in the mining world, where a manager by taking investment and issuing shares of stock, would set up, maintain, and run a mining farm, and the shareholders would receive voting rights, and dividends (in the form of bitcoins). This has been done on the small scale, there is no reason it can not scale up.
On this different opinion we have of the mindset of the typical VC: I did not mean to imply they are afraid to lose money. Of course they expect to lose out for a significant number of their ventures and maybe I did go too far in the other direction. My point is that risk v. potential gain is what drives it. When I'm talking about VCs I'm not talking about anyone with money to invest. I'm talking about serial investors whose profession it is to decide what to go for and what not to. They need to be able have a reasonable means of quantifying both the risk and potential return. What's more, they need to be in a situation where the venture can have increasing control over both factors with time. It is my opinion on this that a Bitcoin mining venture offers none of the above. I believe as I said in the OP that investors are in one of a number of positions: i) they know stuff I believe is unknowable at this point; ii) they are blinded by hope or iii) they acknowledge the high risk involved, see that there is a chance even a small one to make some money quickly and 'take a punt'.
Again, I disagree. I will give anecdotal evidence, since I don't have any science to give. When you talk about the future, everything is unknowable, that's just how it is. You make models, and forecasts, but until it happens, you're just guessing. People make models and forecasts about bitcoin, and you might argue the merits of the source, but it's really the same as any other venture.
Case in point, a friend worked for a startup that was developing tiny modular programmable interlinked wireless "things" (called motes). This was a UCBerkeley CS grad students thesis, which he patented, and then marketed to a team of VCs who invested millions. The product was new, untested, unproven. There was no existing market for them, and while the
potential existed for them to take off in a huge way as a breakthrough technology, there was absolutely no way to know whether they would ever sell product 1.
The risk was total loss of all money spent as salary, marketing, and other non-recoupable assets (things that couldn't be sold off), and it was as likely to happen as it was likely for the technology to be the next big thing. I don't know what models and forecasts they used or were sold, but they were all wrong (the product and company failed to deliver and ended up on the chopping block). I'm not sure where you get the sense that serial investors have some method of picking sure-fire things, or managing risk in some way that is better than anyone else. But again from my experience, they know that they are getting talked up about a number of projects, pick the ones that sound the best and let fly knowing that the few big things make up for the rest of the failures.
I would recommend reading
http://www.inc.com/cindy-padnos/insiders-guide-to-silicon-valley-investing-venture-capital.html -- I agree that no one knows how high and how far the difficulty spike will go, but that has always been true. It was true at the time of GPU minings beginning, it was true during the price bubble, it was true after the price bubble burst. In fact everything about bitcoin has always been unknown and in many ways, unknowable until it was there. I don't see why that is a barrier to centralization.
Again, it is these unknown and unknowable factors which will cut out any interest from serious investors, whether individuals, or institutions looking for ventures to add to their portfolios. They'll just take a quick look at the risk to potential gain combined with the total lack of control and will walk away - as I guess they have since this first hit the news. I'm not saying individuals didn't find friends/family to back them, nor that others managed to sell shares within the Bitcoin community. But I don't think it's because mining 'isn't big enough' that's the reason they stay away.
See above, I guess I should have included this part into my response. Sorry.
If we have a disconnect about what we mean by centralization...
...I already see one customer who has confirmed himself for 4 Minirigs (4x30000 = $120,000), multiple orders of 2 ($64,000), and probably more unaccounted for. And these orders account for a huge majority of the expected hashing power to come online. As I suspected, people not as risk-averse as you might think.
So from this we can guess the likelihood is a higher proportion of the ASIC hashing power will come from a smaller number of miners which as you say concentrates a higher percentage in the hands of fewer. But essentially everybody who is investing anything up to the maximum they can realistically afford (no matter how big) is in the same boat as you illustrate below:
Let's call the current network 1,000 HashingUnits. We have 2 hypothetical buyers, Big and Small. Big buys 100 HashingUnits, small buys 1 (these are both relatively large in comparison to todays actual network, but they are useful for round numbering). ASICs begin shipping, and they both receive their units when the network is at 9,899HashingUnits, they come online and the network is at 10,000HashingUnits, with Large controlling 1% and small controlling .01%. Over the next 3 months, the network increases steadily to 20,000HashingUnits (111HashingUnits coming online per day). Both large and small have recouped their money at this point, and control .5% and .005% respectively. They see the network has doubled, and they are making half what they were making before, and want to double up. Large buys 100HashingUnits small buys 1. They receive it when the network is at 20,555HashingUnits, come online and the network is at 20,656Hashing Units, controlling .97% and .0097% respectively. Spurred on by good ROI everyone else does the same, and after 3 months, the network is at 40,000HashingUnits (214HU coming online per day), .5% and .005% again. Neither one wants to invest as much as it would cost to double up again, and just sit on their investments.
After 3 months, the network is at 80,000HU, Large controls .25% (~$90 / day @ $10/coin), small controls .0025% (~$0.90/day). 3months later, 160,000HU, Large @ $45/day, small $0.45/day, at some point the returns are going to be so insignificant that small might feel that while it takes up a small amount of space, and a little bit of power, with little to no noise, it still is pointless to keep running, while large, with some more hassle and maintenance is still making a very significant return even after the network has increased its hashing rate 16x from where he started.
I only disagree with your conclusion. Because at the end of the day, relative to the amount of their investment according to these sums both the big investor and the small are exactly in the same situation. One has no more incentive or disincentive to switch off providing they own their own equipment/business. If anything it's the bigger one who may be in trouble if he's borrowed or has shareholders who are now looking at what they're earning on the amount they invested. Overall they've done OK but they're better off cashing out and finding something lucrative counting themselves lucky their equipment arrived in time to make something before profitability more-or-less disappeared.
Again, thanks for throwing these ideas around with me. tf
While mathematically the two are doing the same on a practical human level it's really not sensible to say that the average human being will be happy spending time and energy making sure their machine is up and running 24/7, checking that their wallet is working and accruing as it should be, getting on an exchange and converting to fiat for the equivalent amount of money a day that most people probably lose between their carseats after buying a drive-thru fast food meal. I just don't see it as likely that people are really that interested in pennies as dollars, but perhaps that's just my slanted view.
I hope I'm presenting these ideas in a concise clear manner, and don't come off too abrasive, in an idea slinging thread.
