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Bitcoin is Worth Less Than the Cost To Mine It (bloomberg.com)

Posted by msmash on from the closer-look dept.

The production-weighted cash cost to create one Bitcoin averaged around $4,060 globally in the fourth quarter, according to analysts with JPMorgan Chase & Co. With Bitcoin itself currently trading below $3,600, that doesn't look like such a good deal. However, there's a big spread around the average, meaning that there are clear winners and losers. From a report: Low-cost Chinese miners are able to pay much less -- the estimate is around $2,400 per Bitcoin -- by leveraging direct power purchasing agreements with electricity generators such as aluminum smelters looking to sell excess power generation, JPMorgan analysts led by Natasha Kaneva said in a wide-ranging Jan. 24 report about cryptocurrencies spearheaded by Joyce Chang. Electricity tends to be the biggest cost for miners, needed to run the high-powered computer rigs used to process data blocks to earn Bitcoin.

"The drop in Bitcoin prices from around $6,500 throughout much of October to below $4,000 now has increasingly pushed margins further and further negative for just about every region except low-cost Chinese miners," the analysts said, offering the caveat that their cost estimates may be skewed to the high side due to spotty data and conservative efficiency assumptions. The cost figures exclude equipment.

25 of 166 comments (clear)

  1. Sort of by onyxruby · · Score: 4, Interesting

    Bitcoin costs less than it costs to mine it - but only if your paying for the electricity. Own someone else's computer and you can happily mine without worrying about pesky things like electric bills. Hell, some websites will run a miner on your computer while your browsing their web page.

    https://99bitcoins.com/webmini...
    https://www.forbes.com/sites/l...

    The biggest problem with bitcoin is that there is no consideration as to the cost to the environment. Those that are dishonest can better exploit bitcoin than those that are honest.

    1. Re:Sort of by drinkypoo · · Score: 4, Interesting

      So... bitcoin takes less power than internet porn and internet games...both unessential things.

      Take those away and see how quick you get riots.

      Bitcoin is shit because there are better ways to handle that problem which don't consume nearly so much electricity, therefore that energy is purely wasted. You can't have porn and games without spending power on them, but you can have cryptocurrency while spending much less power, or by spending that power to do genuinely useful work.

      --
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    2. Re:Sort of by Brett+Buck · · Score: 2

      The biggest problem with bitcoin is that there is no consideration as to the cost to the environment. Those that are dishonest can better exploit bitcoin than those that are honest.

          The first is ridiculous, the second is correct. Correct to the point that you have to wonder if it wasn't designed that way intentionally. Already it has been shown to be vulnerable to the most obvious and blatant "pump and dump" schemes imaginable. Either the people who came up with it knew that and built it that way so they could rip a bunch of people off, or, they were so incredibly naive that it never occurred to them. Based on the comments here (basically, the target audience for pretend money, the Dungeons and Dragons crowd), I think it is probably the latter.

    3. Re:Sort of by Pseudonym · · Score: 3, Informative

      No environmental problem, as bitcoin consumption is actually negligible, on the order of a large city (not a country as those who misquote and misunderstand the IEEE article 'absurd cost' claim, that was projection for future)]

      At the risk of stating the obvious, there are plenty of countries with populations that are smaller than "a large city"; the population of New Zealand is roughly half that of Tokyo.

      I couldn't find reliable data in the time that I had to compare like with like, but a reasonable null hypothesis is that both claims are true. I can easily see how a large city could easily consume the same power as a modest-sized country.

      --
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    4. Re:Sort of by mamba-mamba · · Score: 2

      Perhaps. But if almost US$20k per coin was not enough incentive, then I am not sure how much incentive would be required. The system is actually not all that complicated. I certainly don't see how anyone can cheat other than be obtaining (by brute force) majority control of the mining operations.

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    5. Re:Sort of by mamba-mamba · · Score: 2

      The mining cost is a function of the difficulty, which automatically adjusts itself to maintain the long term mining rate at one block per 10 minutes. As unprofitable miners drop out, the difficulty will decrease, and thus the cost of mining. Right now, you get 12.5 coins per block mined (plus all transaction fees on the transactions contained in that block). Eventually that 12.5 will be cut in half, and longer term, it will be zero. But by that time, so the thinking goes, bitcoin value will be stable enough to insure that miners continue to operate the network for the sake of collecting transaction fees.

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    6. Re:Sort of by viperidaenz · · Score: 5, Interesting

      which automatically adjusts itself to maintain the long term mining rate at one block per 10 minutes.

      Which is just one reason why btc will never replace traditional payment networks.
      No one is going to wait 10 to 20 minutes for a transaction to be verified when they're at a checkout.
      Nor are they going to effectively bid to have their transactions accepted by miners in what is a global limitation of less than 10 transactions per second.

      Visa can process a peak or 56,000 transactions per second and regularly does 4,000 per second.
      Apparently Mastercard does even more than that.
      There's AMEX too, and many others. All of which operate simultaneously, as they're all methods of transferring fiat currency, not specific Visa Dollars or Mastercard Money. The customer's bank also deals with currency conversion automatically. I don't care that the thing I'm selling to a guy in Japan is paid for in Yen, I get my dollars in exchange, in less than a second. At most it costs me 2.5% in fees. Usually less.

      BTC fees can be upwards of $40.

      As a consumer, if someone steals my credit card number, there's a limit to how much can be taken, and most likely I'll get the fraudulent transactions reversed. Nothing lost.
      If someone steals my BTC wallet, I'm fucked. Every coin in that wallet is gone forever.
      If I lost it, I'm fucked, every coin in that wallet is lost from the network forever. In a network of finite coins. There are 5 wallets with more than 100,000 BTC in them. I'm will to bet someone just lost their private keys
      This guy: 1FeexV6bAHb8ybZjqQMjJrcCrHGW9sb6uF put 80 BTC in there back in 2011, and some minor deposits have trickled in over the years, but never a single withdrawal. Maybe it's a "please donate" address on some website somewhere and the owner has since died.

      So far ~10% of the total supply has been lost forever. An estimated 2 million btc are gone, mostly from the first few years.

    7. Re:Sort of by Cmdln+Daco · · Score: 5, Interesting

      Similar to how the people who made the real money in the 1849 California gold rush were the people who sold food and equipment to the miners.

    8. Re: Sort of by mamba-mamba · · Score: 2

      From the perspective of the system, mining isn't cheating (the only person who loses is the one paying for the resources). But if that was what the OP meant, then I concede the point. From a practical perspective, there is not much point in using PC's to do bitcoin mining at this stage. Without highly optimized hardware, you just don't get anywhere. You have to use dedicated miners.

      From my reading of the original poster, I though they meant something different than that. As far as I know, not one coin has ever been created except by mining it, and not one transfer has occurred except by signing the transaction with a private key. There is no way to cheat those mechanisms.

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    9. Re:Sort of by mamba-mamba · · Score: 2

      Let's not forget the original post.

      "A cryptocurrency powered by useful work won't actually work due to game theory; someone *will* find a way to cheat."

      My interpretation of this is that the OP thinks people will find a way to trick the system into awarding coin without doing the work required by the bitcoin system. That has never happened. Exchanges have defrauded customers. And in some cases, coins have been transferred because private keys were exposed somehow. People have run miners using power paid for by someone else. If that stuff is what the OP was talking about then, I guess the point stands. People will find a way to steal anything of value. But that is not a very insightful point to make.

      But nobody has figured out how to mine coins without computing the hashes required. Not a single transfer has been made (nor could it be made without destroying the system) that is not properly signed by someone in possession of the appropriate private key. The entire blockchain is public. Anyone can verify these facts for themself.

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    10. Re:Sort of by mamba-mamba · · Score: 3, Interesting

      I agree that bitcoin transfer method will not replace visa mastercard etc. If bitcoin ever replaces the dollar as the world reserve currency, people will still use visa (only they will be transacting in bitcoin). Buyer and seller will both trust visa, and visa will settle accounts from time to time on the bitcoin network as they see fit. However, except for the height of the mania, bitcoin transfer fees have not been anywhere near 40 dollars.Currently it is something like US$ 0.09 per transaction (which is much less than visa charges, but still, who wants to wait 10 minutes).

      https://bitcoinfees.info/

      It is unclear whether bitcoin will fail or continue to exist. But if an oil-producing nation unfriendly to the US decided to sell oil for bitcoin, that might be all it would need to be taken seriously as something with consistent purchasing power. Iran could achieve this single-handedly by promising to sell oil for bitcoin at price X for at least 3 months. That would peg bitcoin to the cost of crude. I think there is at least a 10% chance that bitcoin will replace the dollar as the world reserve currency some time in the next 10 years. If that happens, the value of each coin will be approximately ALL_THE_MONEY_IN_THE_WORLD / 20,000,000.

      But yeah. All good points that you are making.

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    11. Re:Sort of by jrumney · · Score: 2

      There are many countries that would have lower electricity consumption than a large city.

      ... In fact, 80% of the world's countries use less electricity than Los Angeles.

    12. Re: Sort of by Anonymous Coward · · Score: 2, Interesting

      Clothing, actually. Levi and Strauss, to be specific... sound familiar?

    13. Re: Sort of by Anonymous Coward · · Score: 2, Interesting

      Funny you should mention it, but looks like another 2,500 bitcoin just went out of circulation forever....
      https://gizmodo.com/crypto-exchange-says-it-cant-repay-190-million-to-clie-1832309454

      Guy with the keys died.

      The exchange holds roughly 26,500 bitcoin, 11,000 bitcoin cash, 11,000 bitcoin cash SV, 35,000 bitcoin gold, nearly 200,000 litecoin and about 430,000 ether

    14. Re:Sort of by iggymanz · · Score: 2

      I agree bitcoin is shit

      bad investment

      too iliquid to be money because of bottlenecked architecture

      now not even worth mining in most places

      plenty of things humans do are unnecessary, good food and booze, the frequent sex that effective contraceptives allow, etc.

      doesn't matter what anyone considers "useful work"

    15. Re:Sort of by sjames · · Score: 3, Interesting

      I think that was the meaning. Even if the OP didn't mean that, it is likely true.

      The work producing bitcoin is based on a rather narrow category of problem that is difficult to compute but trivial to verify. That trait is necessary to prevent cheating. You either did the work or not and it's trivial to determine.

      The problem is that that necessary characteristic isn't shared by anything useful.

    16. Re:Sort of by dryeo · · Score: 2

      Wasn't the original example country Iceland? Lots of cities larger in population then Iceland.

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    17. Re:Sort of by arth1 · · Score: 2

      Two problems with bartering precious metal and official IOUs. The economy expands faster then the supply of precious metal, causing a shortage or the supply of precious metal expands faster then the economy, causing inflation.

      No, that causes deflation, not inflation.
      Inflation: Your money decreases in value, so there's little incentive to save but instead spend it quickly.
      Deflation: Your money increases in value, so there's little incentive to invest money, only time and other resources.

      In a growing economy, mild inflation is generally beneficial, but in a stable society, mild deflation cements the stability.

    18. Re:Sort of by Lanthanide · · Score: 2

      Just look at XRP. It's less centralised than bitcoin and consumes 0.1 TW/hr per year to run.

    19. Re:Sort of by AmiMoJo · · Score: 3, Interesting

      You can't really use other people's computers to mine bitcoin, they are too slow to do any useful work. You need dedicated, application specific hardware. The various web based stuff focuses on lighter, easier to mine coins, most of which are just scams anyway.

      This story is good news. It might stop people wasting energy on bitcoin, and it means that there will be more cheap GPUs on the second hand market. You can pick up a cheap Geforce 1060 class mining card for $70 on AliExpress. It doesn't have any connections for monitors but with a simple modification to the driver you can use it along with an on-board GPU (e.g. Intel) with only a minimal performance loss, or even in SLI with another Nvidia card.

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    20. Re:Sort of by SeaFox · · Score: 2

      The biggest problem with bitcoin is that there is no consideration as to the cost to the environment. Those that are dishonest can better exploit bitcoin than those that are honest.

      Isn't this true about any form of currency? Or, to be more precise, about any wealth-generating activity? Using finite resources in an irresponsible/dishonest way is always more profitable than "doing the right thing". That's why we have issues with deforestation in South America, environmental devastation from strip-mining in North America, hazardous waste pollution in China, etc. More ecologically friendly ways of maintaining adequate farmland, removing mineral resources, and reducing/disposing of industrial waste would all have a negative impact on the profit/reward for the effort. Naturally, people who care nothing about these things and are able to do so with impunity are going to be at an advantage.

  2. That's cool - I can keep ignoring it. by RyanFenton · · Score: 4, Interesting

    Listen - I understand all the ideals of cryptocurrencies - from distributed power, to limited supply, to anonymity.

    They're a worthwhile idea to explore - but every virtue they hold has a vice - and for the same reason I find biofuels competing with food crops to be a bad tradeoff - I find expending fuel into the environment to be a similar bad tradeoff.

    That's hardly the only concern - but it's enough for me to consider it an idea that really needs to go back to the drawing board as a currency.

    That said, it's still a resource that will be speculated on - so good luck to those that care about that aspect, I suppose.

    Ryan Fenton

  3. Re:Feedback mechanism? by mamba-mamba · · Score: 3, Informative

    Not exactly. The feedback operates to adjust the difficulty of mining. The way it works is that if blocks are mined faster than once every 10 minutes (on average), the difficulty is increased slightly. If it takes longer than 10 minutes, the difficulty is reduced slightly. As machines go offline due to poor profitability, the difficulty will likely have to decrease to keep the mining rate constant. This has pretty much worked as designed over the inception of bitcoin. Despite all the hash power people have thrown at bitcoin, the rate of new block creation has stayed consistent on average. The difficulty is not updated super often. Here is a chart of difficulty vs time.

    https://bitinfocharts.com/comp...

    How much bitcoin you get for mining a block (the reward) is pre-determined by the implementation. It goes down by half every so often. Currently, the reward is 12.5 bitcoin. The "reward" represents the creation of new bitcoin. Once all bitcoins are mined, the reward will be zero. In addition to the reward, miners also collect fees from all the transactions contained in the mined block. Eventually, the only incentive to mine bitcoin will be to collect the transaction fees.

    If you haven't already read the whitepaper, I recommend it. It is not that long, and not that difficult to understand for people familiar with hashes and cryptography and whatnot. It is 9 pages.

    In my opinion, most coverage of bitcoin, even in the technical press, is woefully uninformed. The ONLY reason bitcoin takes so much energy to maintain is because the price rose so high, and the difficulty therefore increased. Now, as some of the mania is dying off, things should be a lot more sane, and non-profitable miners will bow out.

    https://bitcoin.org/bitcoin.pd...

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  4. The ultimate dupe by sootman · · Score: 5, Funny

    "The drop in Bitcoin prices from around $6,500 throughout much of October to below $4,000 now has increasingly pushed margins further and further negative for just about every region except low-cost Chinese miners," the analysts said, offering the caveat that their cost estimates may be skewed to the high side due to spotty data and conservative efficiency assumptions. The cost figures exclude equipment. "The drop in Bitcoin prices from around $6,500 throughout much of October to below $4,000 now has increasingly pushed margins further and further negative for just about every region except low-cost Chinese miners," the analysts said, offering the caveat that their cost estimates may be skewed to the high side due to spotty data and conservative efficiency assumptions. The cost figures exclude equipment.

    New Slashdot feature: rather than making readers wait a couple days for a dupe, dupes are now included in the initial entry.

    Rather than making readers wait a couple days for a dupe, dupes are now included in the initial entry.

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  5. That proverb about gambling... by Applehu+Akbar · · Score: 2

    It has been said that gambling is a tax on low IQs. Given the amount of Bitcoin that has been simply lost on discarded thumb drives, corrupted disks, forgotten passwords, and in stolen 'wallets', I would call Bitcoin a tax on people who are slack about IT security.