When will the hash rate level out?

What goes up must come down.

Despite the vicissitudes of the bitcoin price during the last 5 years, the hash rate of the network, the measure of brute force levered against the protocol to secure the fidelity of the consensual ledger, has risen by about 15% per month.

Bafflingly so, the hash rate continues to rise. Currently, the network is uncovering north of 50 million gigahashes per second. To put it in more digestible terms, collectively, Bitcoin miners, rather than seeking a needle in a haystack, are applying the equivalent of the power of the world’s 500 most powerful supercomputers to blow-torch a haystack the size of mount everest in their quest to uncover a needle-sized block reward.

There is a relevant term known as the “miner’s fallacy” which posits that a purchase of mining equipment is inferior to an outright purchase of bitcoin if the expected mining potential of a “rig” is less than the quantity of bitcoins which can be obtained for the same price. Nevertheless, the arms race of acquiring mining equipment entices both the adept and the average. In short, most miners will lose money.

However, the miner, although stuck with his rig (if he received it in the first place), now faces a new economic reality. Despite any disparity between buying bitcoin or mining equipment, the decision which determines whether to not to mine boils down to a simple equation: mining revenue vs. electricity cost.

This implies that an individual who spent 1,000 BTC on a 1TH mining outfit, who may only see 50 BTC over the course of his rig’s life, will continue to mine, provided that his monthly electricity cost is less than his BTC earnings (denominated in fiat). 

Only recently has the increased network difficulty risen to a level which pinches this ultimate barrier. Over the last 12 months many individuals have rued their acquisition of mining equipment instead of simply buying the world’s favorite crypto currency, but have continued to mine because it brought in more money than it costed.

It is difficult to call the top, but it will come. At current bitcoin prices we are certainly close. Electricity costs per kilowatt hour trend ever closer to the pooled mining rewards. The author personally knows an individual who plans to shut down a 30-rack of 10 GH mining units in the next 3 months. After all, they are noisy, and hot.

Absent a rise in the price of bitcoin, the attrition of borderline mining rigs will accelerate. Whether this manifests as a gradual decline or an acute one, its effects should be interesting to witness. Although the Bitcoin community has become accustomed to relatively fast transaction confirmations, it should prepare itself for the possibility of a steady march downwards in hashing power. Even though the difficulty will adjust accordingly, it will do so more slowly than it adjusts upwards.

That said, a downward trend in hashing power, although imminent, will probably be temporary. After all, we’re on a trip to the moon.

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For Bitcoin to succeed, the money that people use must rot. Coincidentally, it will.

Many people focus on the benefits of Bitcoin to the merchant and the customer as reasons for the ultimate success of the world’s favorite crypto currency.

Technically, it’s true, that by using Bitcoin properly, people can save money on transaction costs whether buying a sofa at Overtock.com or sending money to relatives in Mexico.

But practically, it’s not enough. Over time, a more efficient method of payment should find purchase, and succeed on its own merits, incrementally, but surely. 1% on revenue is a lot of money, particularly for intermediaries such as Amazon who play within the single digit profit percentages. Going from a 4% margin to a 3% margin is a big deal. And yet, somehow we are still uninspired.

The last 5 years has seen an explosion is payment processing innovation. From the handheld convenience of Square to the fee-less email transactions between Bank of America accounts, the world is making it easier and cheaper to send and receive money.

But the payment mechanism of Bitcoin is only half of the equation. The singular advantage that Bitcoin has over its contemporaries is that it uses a new and honest currency.

Regardless of how convenient, or fast, or fee-less, that companies can strive for, they are all at a large disadvantage: the currencies that they use are faulty.

Almost poetically, all of the world’s fiat currencies are already nearly 100% digital. There is little more than simple ledger accounting taking place as people sweat and toil to earn a higher number in their bank account, and equally so as it diminishes with each purchase of a car, or a roll of paper towels.

So as far as payment networks are concerned, Bitcoin faces stiff competition. Most of the infrastructures in place are expensive precisely because they haven’t had any competitive pressure to be inexpensive, but that tide has turned, and the consumer is benefiting from a collective race to the bottom of transaction fees.

The magic of Bitcoin won’t be truly recognized until these currencies start to misbehave. I speak specifically of the US dollar, the Euro, and the Yen. Even if prices remain constant, consumers are being robbed through inflation. Individual productivity has gone up dramatically over the past 50 years, and yet wages struggle to follow suit. Absent inflation, the prices of the common goods we all buy would have gone down: milk, petrol, electricity, copper. To the average consumer, this would have been a good thing.

Inflation hides the benefits of increased productivity and punishes the people who work every day to live, save, and provide for themselves and their families. Unfortunately, and insidiously, it steals from their wallets without taking out any bills.

Bitcoin may fail, but if it doesn’t, it won’t be because of incremental and steady progress due to its low-cost payment network. If Bitcoin succeeds, it will be amidst financial and monetary crises, providing a safe haven for those who have finally woken up and realized that the money they work for is shiny on the outside, but rotten to the core.

Like ashes in the fire, the illusion of debt-based money can disintegrate very quickly.

 

I’ve got a psychological disorder. It’s called hoarding bitcoins, and it’s making you rich.

Bitcoin is always more fun when it’s down in the dumps. When the price languishes for weeks on end and people start to question whether they should bail on the whole crypto-whatsit-mathingy, it is often the best time to take observations.

Prices are determined on the margin. What that means is that the price of something – anything – is relayed to the world in the market place, but that it is only a function of the interplay between buyers and sellers. Precisely, most salable items are not on the market, but they are still subject to the public perception contingent on prices paid for their contemporaries.

People don’t like hoarders. I’ve never understood why. A hoarder is a person you can trust; somebody with self discipline who is willing to sacrifice satisfaction today for greater satisfaction later. Hoarders are careful and risk averse. They don’t often bother people.

Today, price is important, because despite the echolalia of the “price is not important”-ists, price is both a trivial and profound matter. To most, the prices of items are somewhat… disgusting. Most people are consumers. To the entrepreneur, to the manufacturer, to the importer, to the investor, to the venture capitalist, the price of an item is a singular signal, an unobscured view into the substance of a good, a window to opportunity. The price doesn’t lie.

Because the price doesn’t lie, it makes fiddling with prices counterproductive. When central banks set targets for interest rates, they fix the price of the most valuable good on earth: money. With their help, prices can deceive even the most cunning mogul. 

Bitcoin is down in the dumps, relatively speaking. Obviously it depends on your timeframe whether you are looking at a 60% haircut or a 10,000% gain. To anybody who cares about the price, I encourage you to laud the hoarders, the people like me. Since 2011, I have managed to accumulate a portion of coins, lose 20% through terrible trading (for anybody who thinks it is easy, it’s not, and I was genetically engineered to be a trader), invest another 20%, 90% of which will be written off at a loss, and keep the rest.

This brings me to my psychological disorder. The coins I have, I cherish. I respect them. Other than a supremely alluring investment opportunity, few things can wrench my “bitties” from my hand.

Some criticize the “buy and hold” Bitcoiners. After all, they are riding on the backs of the entrepreneurs. They are enjoying a free lunch at others’ expense; they should be reprimanded for it, and it’s a shame. But the critics forget that the bitcoin price is set on the margin. The only reason that the companies being started have any chance of success is because people like me are willing to keep their coins off the market, safely tucked away – in some cases, indefinitely.

I have a psychological disorder. It’s called hoarding bitcoins, and it’s making you rich. That new Ferrari: I can afford it. The 10,000 square foot house on the waterfront: I can afford that too. But instead of buying these things, I’m going to take one for the team. To those of you who do not suffer from the same irregularity, rest easy. I’m making you rich, and you shouldn’t be ashamed about it.

We hoarders are a bit weird, but very determined, and – most importantly – abundant.