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> If power goes up in value, it becomes more expensive to produce new Bitcoins as well as process transactions. Difficulty is adjusted every 2016 blocks based

> If power goes up in value, it becomes more expensive to produce new Bitcoins as well as process transactions. Difficulty is adjusted every 2016 blocks based on the timing of previous blocks. So in the long term, the rate of block creation stays constant, averaging 1 block per 10 minutes.

JumpCrisscross 8y ago
> in the long term, the rate of block creation stays constant Consider Bitcoin if there were a single miner running a single rig. They sink costs into the rig, and then run it, paying for electricity as it hums. The rig has to produce at least as much income to this miner as she pays out in electricity costs. Otherwise, it's more profitable to turn it off. So if electricity prices go up, income has to as well. If it doesn't, the rig goes off. This is fundamental to profit being equal to revenue minus costs. In a networked state, there are more interaction effects but the fundamental relationship holds. Every miner must pay, directly or indirectly, their electricity costs. (More than that, every user has to pay electricity costs. If electricity prices skyrocketed, an electronic currency--whether digital dollars or Bitcoin--becomes fundamentally uncompetitive relative to paper.) Constant-rate production dampens this effect, but does not remove it. At the end of the day, somebody is paying for the electricity the network consumes. Those somebodies aren't doing it for free.
- Zalastax 8y ago
  The thing is that the act of mining isn't actually providing any value, it just proves that you have wasted some amount of processing power. This is called proof of work and is a system set in place so that bad actors can't take control of the ledger without spending a large amount of money. The threshold for how much work you need to put in is adjusted automatically. If there was just a single machine in the system they could choose to mine very slowly and the system would eventually reach a very easy threshold. What that means is that the threshold would be about ten times lower if electricity prices were ten times higher globally. As you can understand, this is a big big waste - which is why alternatives to proof of work are researched heavily.
  - deleted 8y ago
    [deleted]
  - JumpCrisscross 8y ago
    > What that means is that the threshold would be about ten times lower if electricity prices were ten times higher globally This change in threshold would flow into pricing. Also, energy costs are a factor in equipment costs, network access costs and the cost to end users. One would be hard pressed to find a single priced good or service on this planet that doesn't respond to energy prices.
    - Zalastax 8y ago
      > One would be hard pressed to find a single priced good or service on this planet that doesn't respond to energy prices. You don't have to look further than Bitcoin. The cost of producing Bitcoin is primarily the cost of wasted energy - how much energy should be wasted is determined algorithmically. Too low and you get arbitrage opportunities; too high and people stop mining. Bitcoin pricing is not at all related to energy prices in the middle-to-long-run.
- Nursie 8y ago
  > So if electricity prices go up, income has to as well. If it doesn't, the rig goes off. This is fundamental to profit being equal to revenue minus costs. > Every miner must pay, directly or indirectly, their electricity costs. But they have no mechanism to pass this cost on. There is no change in the levels of production. They cannot increase fees as fees are voluntary and users only set them to improve their processing priority. If a miner finds that mining is not profitable, they must indeed switch off. The hash rate of the network falls. The remaining miners get a bigger share of the daily block payout. Users though, are entirely unaffected, and so is the open market. There is literally no mechanism by which mining costs can affect price in BTC. It's the other way around. Price affects the number of miners fighting for a share of the spoils. If it's no longer profitable, they stop. The hashrate drops, those left behind get more of a share. I'm not sure how else I can explain this to you - the cost of mining cannot add value to the system (other than securing it) because there is no mechanism to pass on higher fees, the supply is unaffected by the number of miners, the transaction speeds are unaffected by the number of miners... there's a complete disconnect in that direction.

JumpCrisscross 8y ago

> in the long term, the rate of block creation stays constant Consider Bitcoin if there were a single miner running a single rig. They sink costs into the rig, and then run it, paying for electricity as it hums. The rig has to produce at least as much income to this miner as she pays out in electricity costs. Otherwise, it's more profitable to turn it off. So if electricity prices go up, income has to as well. If it doesn't, the rig goes off. This is fundamental to profit being equal to revenue minus costs. In a networked state, there are more interaction effects but the fundamental relationship holds. Every miner must pay, directly or indirectly, their electricity costs. (More than that, every user has to pay electricity costs. If electricity prices skyrocketed, an electronic currency--whether digital dollars or Bitcoin--becomes fundamentally uncompetitive relative to paper.) Constant-rate production dampens this effect, but does not remove it. At the end of the day, somebody is paying for the electricity the network consumes. Those somebodies aren't doing it for free.

Zalastax 8y ago
The thing is that the act of mining isn't actually providing any value, it just proves that you have wasted some amount of processing power. This is called proof of work and is a system set in place so that bad actors can't take control of the ledger without spending a large amount of money. The threshold for how much work you need to put in is adjusted automatically. If there was just a single machine in the system they could choose to mine very slowly and the system would eventually reach a very easy threshold. What that means is that the threshold would be about ten times lower if electricity prices were ten times higher globally. As you can understand, this is a big big waste - which is why alternatives to proof of work are researched heavily.
- deleted 8y ago
  [deleted]
- JumpCrisscross 8y ago
  > What that means is that the threshold would be about ten times lower if electricity prices were ten times higher globally This change in threshold would flow into pricing. Also, energy costs are a factor in equipment costs, network access costs and the cost to end users. One would be hard pressed to find a single priced good or service on this planet that doesn't respond to energy prices.
  - Zalastax 8y ago
    > One would be hard pressed to find a single priced good or service on this planet that doesn't respond to energy prices. You don't have to look further than Bitcoin. The cost of producing Bitcoin is primarily the cost of wasted energy - how much energy should be wasted is determined algorithmically. Too low and you get arbitrage opportunities; too high and people stop mining. Bitcoin pricing is not at all related to energy prices in the middle-to-long-run.
Nursie 8y ago
> So if electricity prices go up, income has to as well. If it doesn't, the rig goes off. This is fundamental to profit being equal to revenue minus costs. > Every miner must pay, directly or indirectly, their electricity costs. But they have no mechanism to pass this cost on. There is no change in the levels of production. They cannot increase fees as fees are voluntary and users only set them to improve their processing priority. If a miner finds that mining is not profitable, they must indeed switch off. The hash rate of the network falls. The remaining miners get a bigger share of the daily block payout. Users though, are entirely unaffected, and so is the open market. There is literally no mechanism by which mining costs can affect price in BTC. It's the other way around. Price affects the number of miners fighting for a share of the spoils. If it's no longer profitable, they stop. The hashrate drops, those left behind get more of a share. I'm not sure how else I can explain this to you - the cost of mining cannot add value to the system (other than securing it) because there is no mechanism to pass on higher fees, the supply is unaffected by the number of miners, the transaction speeds are unaffected by the number of miners... there's a complete disconnect in that direction.