The new pseudo-bubble: Bitcoin mining

It is with great interest that we observe the mining difficulty leap by 30%+ every 2016 blocks.

Considering the paucity of public ASIC delivery, it seems odd that the hash rate consistently punches through the ceiling on an ongoing basis.

So where is the hashing coming from? 

Perhaps, not all ASIC manufacturers are selling their hardware, but rather developing it on their own and mining in-house.

The simple reality is that most miners are not going to recoup their initial investment. But they keep on mining because their cost of electricity is less than their mining output. Obviously, the only reason ever not to mine, is when the cost of mining exceeds that of its rewards.

Consider 3 types of miners:

1) Those who have received ASIC miners early and will receive a positive ROI. Everything after that point is gravy.

2) Those who have received ASIC miners but will not recoup their initial investment.

3) Those who mine but spend more in electricity costs per month than they receive in the Bitcoin dollar equivalent.

The only reason to continue mining as somebody in the third category is to acquire Bitcoin conveniently. The choice is always evident: to buy or to mine. Those in the first category will benefit from the mining choice. Those in the second would have been better off just buying Bitcoin outright, as well as those in the third.

Those in the 2nd category will earn Bitcoin but at a premium rate. Instead of $120 per, they may end up paying $180 or $270… when accounting for electricity costs.

Those in the 3rd category should stop. And they will stop.

As the hashrate increases, miners in the second and third category will be peeled off, because Bitcoin mining is no longer a hobbyist’s activity. In the interim, Bitcoin fortunes have been amassed and mostly by adept crypto-savvy players. These players understand Bitcoin at its core and are willing to throw their entire portfolio at the next generation of ASIC miners: “In any gold rush the money’s in the shovels. If BTC is going up you’d be dumb not to buy, if it’s going down you’d be dumb not to sell. It takes a special kind of dumb to start buying up the shovel factories,” says one high roller who doubled down not once, but thrice on his bounty.

Somewhat magnificently, the protocol provides a feedback mechanism that entices yet warns potential miners. Because the difficulty increases relative to active mining, individuals can enter the game understanding their upside… and downside.

Despite the parabolic increase in mining difficulty witnessed during the last 18 months, eventually economic reality will come to play. More miners will be pushed into the third, unprofitable category, and will shut down their rigs, just as the CPUs which ran the Bitcoin mining software in 2009 no longer participate.

On the horizon, we only see incremental changes in ASIC chip technology, with the most advanced touting 28nm profiles. These efficient chips will provide the benchmark for the next year or so, as more diminutive profiles require extra technology to support.

To those who mine, in whatever capacity, take heed: Whatever goes up, must come down… maybe… but probably not. Sorry, it’s not really a bubble – more like an ascent.

 

Don’t spend them. Hold them tightly.

Let us engage in a philosophical exercise.

How do we value things? How do you know that your couch is worth $100? How do you know that it costs $15 in taxi fare to get from your house to the restaurant?

How do you know?

People tend to disrespect markets, because they equate them with capitalism. Capitalism has a bad rap right now, which is unfair. Most people can’t define capitalism. Can you?

Markets tell us what assets are worth, whether it be furniture, taxi fare, or sophisticated financial products. They tell us how much a barrel of oil costs, how much a babysitter costs; markets rule.

Do you know what the estimated world stock market value is? It is roughly $50 trillion. Do you know the value of the current global money supply? Of course not. Nobody does. But we have proxies. If you include M3, which is about the limit of useful money, then you are looking at around $50 trillion as well. No relation, frankly.

What is the value of all assets in the world? Well, it’s hard to say, but it is at least a few quadrillion dollars.

What does this all mean? To understand it properly you need to comprehend markets. Value does not equate to utility. Value is a crude instantaneous measure of what people will pay for something at any given point in time, multiplied by its inventory.

Taken to an extreme, two people can create an asset valued at $1 trillion. For instance, Joe and Rogan can take a bag of legos (let’s say there are 1 billion legos) and create an exchange. If Joe buys a single lego piece for $1,000, then the market value of the legos they own is $1 trillion. But of course this is absurd. Clearly the legos are not worth that much. But if Joe and Rogan refuse to trade with anybody else, then their loot is technically worth $1 trillion.

The point is two-fold: that little money can support a grand economy. For instance, Apple is worth about $400 billion at the moment, even though US M1 (a measure of highly liquid, or high powered, money) is only about $2 trillion. Is Apple worth almost a quarter of the US economy? Of course not. It is just one company. But because money moves, we have to look at something called velocity. Velocity is the speed and regularity at which money moves, and as it increases, the value of the monetary unit decreases.

The second point is that some assets serve as a store of value. Take gold for instance. The total market valuation for gold is around $12 trillion. Who uses gold? Nobody. Do you own gold? If you do, you are in a group that comprises less than 3% of the global population. Why is it that gold can maintain such a dominant valuation?

Many people wish to spread the good word of Bitcoin through spending them and introducing it to their friends. While the future of Bitcoin does rest upon its uptake; the number of people who adopt it willingly, its value does not.

Spread away, but remember that every expenditure increases the velocity and thus impacts the value in a negative fashion.

In conclusion, Bitcoin can thrive when those who own it decide NOT to spend or sell it, because spending is equivalent to selling. When you spend Bitcoin, you sell them for goods and services, which are indistinguishable from other currencies, such as fiat.

A rising valuation attracts people who would accept Bitcoin. There is no need to convince them that it is in their best interest.

Don’t spend them. Hold them tight. And watch the miracle of market valuation play its course. When the time is right, people will be begging for your Bitcoins. After all, Bitcoins are quite superior to legos.