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Bitcoin is an energy arbitrage
- zitterbewegung 9y agoThis 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.
- js4 9y ago> The only thing I could think that might be another thing to consider is cost of moving money or the inability to do so. Good idea!
- notahacker 9y agoThe 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.
- UncleEntity 9y ago> 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.
- tantalor 9y ago"Market" is not a fancy word.
- droopyEyelids 9y agoIt means as many things to as many people, and serves the same role in many discussions, as the word "God."
- mistercow 9y agoCan you give three examples of different meanings?
- js4 9y agoTo my wife it means "stock market".
- TeMPOraL 9y agoThe 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.
- raverbashing 9y agoJust 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).
- TSiege 9y agoIt 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-companies-still-make-aluminum-in-iceland.html https://www.nytimes.com/2017/07/01/us/politics/american-comp...
- crdoconnor 9y agoA) 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.
- js4 9y agoGood point. And yes the difficulty is going to be a related to the exchange rate -which isn't linear at all.
- fiatjaf 9y agoOld fallacies that keep coming back.
- kindfellow92 9y ago> If you take $10,000 USD in cash and put it in the freezer, in a year it would be worth $9,700 of today’s value. > Yep you read that right. Holding USD means the cash will be “worth” less next year. This is because of a 3% inflation rate. USD inflation is effectively dead ATM and has been since at least the early 2000s.
- stu2010 9y agoHow do you reconcile this with the extreme cost increases since the mid 2000s in education, healthcare, and housing (rent, at least).
- saalweachter 9y agoThose things are considered a problem because they are increasing faster than inflation.
- kindfellow92 9y agoThose things are not related to inflation. Look at the CPI.
- jtmarl1n 9y agoHow has inflation been "dead" since the early 2000s? https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=p... https://www.statista.com/statistics/244983/projected-inflation-rate-in-the-united-states/ https://www.statista.com/statistics/244983/projected-inflati... http://www.usinflationcalculator.com/inflation/historical-inflation-rates/ http://www.usinflationcalculator.com/inflation/historical-in...
- kindfellow92 9y agoSigh, compare the trends in the last 17 years to the trends in the previous 17 years and the 17-year periods prior to that. “Effectively dead” does not mean 0.0%
- Roodgorf 9y ago
- svara 9y ago> 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.
- Retric 9y agoIn 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.
- js4 9y agoBut the question is why aren't people taking advantage of the perceived opportunity to profit? The only time this would happen is if something about the underlying economics changed --like energy got more expensive.
- dia80 9y agoLimits to arbitrage, same reason GBTC the bitcoin trust trades at 100% premium.
- Glyptodon 9y agoI 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?
- Dwolb 9y agoThis 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).
- merloen 9y agoThis article is enormously confused, even by bitcoin standards.
- merloen 9y agoInvestopedia: "Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price." Deciding to mine bitcoin where energy is cheap is just bloody obvious. > 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. So buying bitcoin from a base in Antarctica, where energy is scarce, is a better deal than buying it in Dubai? That doesn't make any sense whatsoever.
- js4 9y agoIts a deal because you cant produce the Bitcoin at the same costs.
- Pharaoh2 9y agoHe 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.
- merloen 9y agoThat's not arbitrage, just basic investment. Arbitrage is buying X at place A and selling X at place B. Energy arbitrage means buying energy where it's low, and selling where it's high. The latter is missing here.
- Pharaoh2 9y agoYep, that was the whole argument of the article... I do really agree with the article but at least we can agree on what the article is claiming...
- ejfinneran 9y ago"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." http://articles.latimes.com/2002/may/09/business/fi-scheme9 http://articles.latimes.com/2002/may/09/business/fi-scheme9 Worked great for Enron. Also, China's energy is cheap because 75% of their grid is powered by burning coal. He doesn't mention climate change at all in this article.
- xyzzyz 9y ago> Also, China's energy is cheap because 75% of their grid is powered by burning coal. What? Most Bitcoin in China is mined using cheap excess hydro power, using coal power would most likely be uneconomical.
- ForHackernews 9y agoI keep hearing this notion repeated, but I've never seen a citation. Do you have any evidence that: a) Most bitcoin in China is mined using hydroelectric power. b) That the generation capacity in question is "excess" (i.e. it would not have been put to productive use except for bitcoin mining) It's also worth noting that damming rivers for hydroelectric power is enormously damaging to the surrounding ecosystem, even if they aren't carbon-emitting: https://en.wikipedia.org/wiki/Environmental_impact_of_reservoirs https://en.wikipedia.org/wiki/Environmental_impact_of_reserv...
- scottnyc 9y agoFully agree. Following suggest coal is still the main source of energy for Chinese miners. https://qz.com/1055126/photos-china-has-one-of-worlds-largest-bitcoin-mines/ https://qz.com/1055126/photos-china-has-one-of-worlds-larges... https://www.bloomberg.com/news/articles/2017-12-15/turning-coal-into-bitcoin-dirty-secret-of-2017-s-hottest-market https://www.bloomberg.com/news/articles/2017-12-15/turning-c...
- jettybrew 9y agoChina's bitcoin mining firms essentially get state-subsidized power by giving kickbacks to local officials for below-market rates.
- LawnDart1 9y agoHard to take him seriously when he thinks 1/6 of an hour is less than 1/7th of an hour...
- deleted 9y ago[deleted]
- LawnDart1 9y agoHard to take him seriously when he thinks 1/6th of an hour < 1/7th of an hour
- doubleorseven 9y agoIf it used to take you 8.5 minutes to pick 2 apples and now it takes 10 then yeah, 1/6 < 1/7
- ForHackernews 9y agoExtra hard to take him seriously when he thinks inflation is a strange, novel concept he needs to introduce to his readers. > Yep you read that right. Holding USD means the cash will be “worth” less next year. This is because of a 3% inflation rate.
- js4 9y agoHonest typo. Doesn't change the point.
- thisisit 9y agoPut 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.
- UncleEntity 9y ago> 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.
- thisisit 9y agoWe do seem to be talking about two different things. How do you figure difficulty affects the price inflation?
- Spooky23 9y agoBitcoin mining is an energy arbitrage. The value of bitcoin once generated is about demand for moving cash-like instruments while bypassing capital controls.
- jpmoyn 9y agoDid this guy just finish up his first year of Econ? Pretty pseudo-intellectual article if you ask me
- ForHackernews 9y agoThis article seems silly to me, because it tries to conflate the wasted energy that went into "mining" bitcoins with their value. It's like an update of hoary old Marxist notions, but for cryptocurrency: https://en.wikipedia.org/wiki/Labor_theory_of_value https://en.wikipedia.org/wiki/Labor_theory_of_value
- jerf 9y agoYes, 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.
- kindfellow92 9y ago> If you take $10,000 USD in cash and put it in the freezer, in a year it would be worth $9,700 of today’s value. > Yep you read that right. Holding USD means the cash will be “worth” less next year. This is because of a 3% inflation rate. This math is wrong. The value in today’s dollars will be 10,000 / (10,000 * 1.03) * 10,000 ~= 9,708.74
- deleted 9y ago[deleted]
- vec 9y agoSo - 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?
- mlevental 9y agoyou pay your light bill.
- mrguyorama 9y agoDo you have a link to an energy provider who accepts bitcoin directly? As in not priced as it relates to USD, but instead lists costs in bitcoin?
- vec 9y agoI 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 $1.
- mlevental 9y agoarbitrage opportunities aren't two way? that would make zero sense. you pay less than a dollar to mine the bitcoin in china and then buy 1$ of electricity in the usa.
- vec 9y agoNo, 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.
- westurner 9y agoX-posting here from the article's comments: The price reflects the confidence investors have in the security's ability to meet or exceed inflation and in the information security of the network. Volatility adds value for algo traders: say the prices are [1, 101, 51, 101, 51, 201]: (101-1)+(101-51)+(201-51)=300 (201-1)=200 For the average Joe looking at the vested options they're hodling, though, volatility is unfriendly. When e.g. algo-traders are willing to buy in when the price starts to fall, they're making liquidity; which some exchanges charge less for. Enigma Catalyst (Zipline) is one way to backtest and live-trade cryptocurrencies algorithmically.
- westurner 9y agoIn 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.
- westurner 9y ago> 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% "Coal & Related Energy": 0.69% "Oil/Gas (integrated)": 8.01% "Power": 29.22% "Green and Renewable Energy": 26.42% [1] "Tax Rates by Sector (US)" (January 2017) http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/taxrate.htm http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...
- pravinva 9y agoNo, 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