> What this all tells us is that we can watch the relationship between Bitcoin’s price and difficulty to see situations where Bitcoin is overvalued. These situations would be times where the difficulty rate stayed the same while the price continued to go up.
That seems backwards. Miners will adjust their costs until marginal cost equals marginal revenue. In other words, if the Bitcoin price goes up and the hash power does not follow suit, that doesn't mean Bitcoin is overvalued, it means that there's an opportunity to profit from running more miners.
In there is a large middle ground between profitable to add more miners and turning off existing miners to save energy is worth it.
Remember, capital cost payback depends on the long term value, so short term price spikes don't necessarily create enough value for long term purchases.
"One of their functions, which Wall Streeters call arbitrage, was to try to buy power at a low price in one place and sell it at a higher price somewhere else."
This is basically a post describing micro-economics (if I have capacity I’ll continue to produce as long as my marginal revenue exceeds my marginal cost). That’s fine and I agree those are the costs of Bitcoin.
I think the author is missing more pieces when it comes to fundamental value.
Namely, “I’ll pay x dollars to clear my transaction with the next block and “My holding costs are y” in the context of switching costs (i.e. using USD instead).
Yes, that was my thought too. For this to be arbitrage, we need to see buying something one market where it is cheap and selling the same something into another market where it is expensive. BitCoin miners certainly buy the energy, but where are they selling it? I can't take that $0.04 KW/h energy in the BitCoins and use it instead of my expensive power. (If I could do that, we wouldn't still be arguing about whether BitCoin was valuable, there would be an inarguable value to it.)
Manufacturing A that needs B where B is cheap isn't arbitrage, that's just manufacturing where costs are lower. It lacks all the fundamental characteristics of arbitrage and consequently all the effects. Unless I am grossly mistaken about what arbitrage is, the article is just wrong.
So - and maybe this is a stupid question - how do I go about converting my Bitcoin back to electricity?
Say 1 kWh costs $0.20 in the US and $0.04 in China. I am in the US, and I have a machine that requires exactly 1kW to run. How does Bitcoin mining in China allow me to run this machine for $0.04/hr? Or am I misunderstanding what "arbitrage" means?
I have $1. I use that $1 buy 0.0001BTC (not the actual exchange rate, but I don't think it matters). That 0.0001BTC took just under 25kWh to mine in China.
I go to my American electric company and purchase 0.0001BTC worth of electricity. They, being a forward-thinking utility company, are happy to accept my Bitcoin in exchange for 5kWh.
Am I missing something? Sure, $1 would let me get 25kWh in China, but I don't see how the existence of Bitcoin allows me to take advantage of Chinese energy subsidies to get more energy in the US than I could get for just the $1.
arbitrage opportunities aren't two way? that would make zero sense. you pay less than a dollar to mine the bitcoin in china and then buy 1$ of electricity in the usa.
No, I pay almost exactly a dollar to mine the Bitcoin in China. If I could mine it for substantially less than a dollar, then I could use 1kWh of Bitcoin production to buy more than 1kWh in the Chinese energy market, independent of international energy prices, which (assuming Bitcoin markets are even remotely efficient) would drive BTC prices down until the local arbitrage opportunity disappeared.
I still don't see how the existence of Bitcoin allows anyone, anywhere to exploit the difference in energy prices to come out ahead of where they would otherwise have been.
If it costs you $1 to buy a bitcoin from somewhere with cheap electricity but it takes you $2 worth of electricity to mine one bitcoin, it's a better deal for you to buy the bitcoin. I'm not actually sure what this has to do with it being an arbitrage though, but this is what I got out of the article.
"This means that if I buy Bitcoin from a Chinese miner, what the miner is really doing is wrapping up the difference between my energy cost and theirs ($0.16 /kWh) into a security and selling it to me."
"When I buy Bitcoin, as long as the energy used to mine the token is cheaper then energy I have access to, I’m getting a good deal. Which is the case almost every time thanks to subsidies and difficulty adjustment."
That's roughly what I got out of the article as well, I'm just not sure it actually holds water.
Sure, Bitcoin is less expensive to mine where energy is cheaper, so if I happen to want some Bitcoin anyway I should try and purchase it from a miner somewhere with low cost electricity. That still doesn't tell me why I should consider buying it at any price. Let me see if I can demonstrate my objection:
Kangaroos aren't very common here in America. In order to acquire a one pound box of kangaroo feces domestically, I would need to find a rare animal collector to negotiate with and may expect to end up paying, say, $100. An Australian, on the other hand, might well be willing to send me a box for barely more than the shipping costs, leading to a total cost to me of only $20.
I suppose I could choose to describe the shipper as wrapping up the difference between their kangaroo availability and mine into a security, but that doesn't by itself make paying $20 for a literal box of crap a "good deal".
Obviously Bitcoin at least appears to have some intrinsic value, since it's currently being actively traded. And obviously energy prices serve to set an upper bound on that value. I just don't see how energy prices could serve to also set a lower bound and, therefore, can't be the source of that intrinsic value.
Put in plain terms since minimum wage in the US labor market is $7.35, $1 USD is “worth” hiring a worker for about 1/7 of an hour. This means that for 1/7th of an hour you can get some “stuff” done. For instance you could hire someone for 1/7th of an hour to pick 2 apples from your Apple tree so you can have apples with dinner.
So really you could say that $1 USD is “worth” 2 apples.
This is whole example is so contrived to arrive at a simple point.
If we follow your point then the difficulty adds some degree of inflation to the price. I might mine x amount of BTC for y amount of power (hashes) but tomorrow I will be able to mine x-t for y power. This means today's bitcoin is more valuable than tomorrow's bitcoin.
There was an awesome derivative allowing people to bet on which might have clarified this difference but sadly it is gone.
> If we follow your point then the difficulty adds some degree of inflation to the price.
I think it's the opposite, difficulty is used to control inflation. Though we could both be talking about different things -- monetary inflation vs price inflation.
> This means today's bitcoin is more valuable than tomorrow's bitcoin.
Yep, all things being equal every time they mine a block every coin becomes that much less valuable due to the increase in supply.
This is an interesting way to try to figure out a way to value bitcoin based on a cost of a resource. The only thing I could think that might be another thing to consider is cost of moving money or the inability to do so.
The important thing to remember is that cost of mining BTC (plus an inconvenience and risk premium, which may be quite large) for the marginal person looking to acquire it is the ceiling on BTC value.
An awful lot of Bitcoin bulls are treating it as a floor.
Just because something was made at a certain energy cost doesn't mean you have the ability to exchange it for any quantity of energy, never mind an equivalent quantity of energy at higher energy prices.
> The important thing to remember is that cost of mining BTC (plus an inconvenience and risk premium, which may be quite large) for the marginal person looking to acquire it is the ceiling on BTC value.
Unlike what TFA claims there is no intrinsic value in a bitcoin but its value is 100% what someone will pay for it...like all goods coincidently.
I think what they're doing is falling into the cost-of-production theory of value trap.
> Just because something was made at a certain energy cost doesn't mean you have the ability to exchange it for any quantity of energy, never mind an equivalent quantity of energy at higher energy prices.
Which just goes to show it has no intrinsic value.
Bitcoin mining is an energy arbitrage. The value of bitcoin once generated is about demand for moving cash-like instruments while bypassing capital controls.
Just remember that those who last tried to arbitrage energy costs (Iceland with Aluminium) went bankrupt
I'm also skeptical that the difficulty scales linearly, it might be that as it gets more difficult it won't be as linear (we are probably getting to this point)
Also, you're obtaining coins with mining but you also need to do that work again to spend the coin obtained (or pay the fees, which are climbing).
It seems like Aluminum smelting in Iceland is booming as far as I can tell, and according to this Times article, in other regions with plenty of renewable energy as well. It also seems like Iceland is pushing it's cheap electricity to gain in other industries as well. https://www.nytimes.com/2017/07/01/us/politics/american-comp...
A) Iceland's financial issues had nothing to do with Aluminum. B) Countries that are free from external debts denominated in a currency they don't control can't go bankrupt.
I think this piece is more along the lines of establishing the supply curve without taking into account the demand curve. So perhaps production is indeed something of an energy arbitrage, but that's without accounting for demand. Though maybe meaningful demand has to be assumed for for the premise of functioning as a vehicle for arbitrage to hold at all?
In addition to relocating to where energy is the least expensive, Bitcoin creates incentive for miners to lower the local cost of energy: invest in renewable energy.
Renewable Energy / Clean Energy is now less expensive than alternatives; with continued demand, the margins are at least maintained.
> In addition to relocating to where energy is the least expensive, Bitcoin creates incentive for miners to lower the local cost of energy: invest in renewable energy.
We have lots of direct and effective subsides for nonrenewable energy in the United States. And some for renewables, as well. For example [1] average effective tax rate over all money making companies: 26%
No, no, no. The marginal revolution of the 19th century solved that question. Value is not determined by what it cost to do something. For eg. You can dig deep in south Africa to mine diamonds, but the bits of subterranean rock that emerges along with it doesn't have the same value. Value is always subjective. If you paint Monalisa it has a different value from the one in the Louvre
He is talking about mining bitcoins, not buying bitcoins.
Most bitcoin hash rate comes from places with low energy costs... its just basic economics.
The only reason this arbitrage is present is because the value of bitcoins is higher than the cost to mine them at the moment. Since the capital investment required to setup a (reasonable large)mining farm is rather high, it is unknown if the investment will pay off over the long term. But a lot of people are betting it will.
The physical or virtual place where people trade. An aggregation of people who trade there. An aggregation of the previous into a generic "market". The previous analyzed as system of feedback loops. Also, as used by some, a benevolent supernatural entity with an invisible hand, who magically solves all problems.
Those "crypto currency enthusiasts" are reliving the 19th and 20th in record time. They are trying everything that has already been tried in the last 200 years and will eventually find out why today's rules are in place.
Yeah, where did they get that number? As I understand it the FED hasn't met its target 2% inflation rate in years.
Edit: It seems I was somewhat mistaken: the FED set the 2% inflation goal in 2012[1] and hasn't met it since, but there are various ways to measure inflation, so it depends on who you talk to.
That seems backwards. Miners will adjust their costs until marginal cost equals marginal revenue. In other words, if the Bitcoin price goes up and the hash power does not follow suit, that doesn't mean Bitcoin is overvalued, it means that there's an opportunity to profit from running more miners.