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> We can expect the marginal cost to mine a coin to scale with price. This feels correct but I don’t think it is. For example gold has decreased by $200/oz rec

by soared 6y ago

> We can expect the marginal cost to mine a coin to scale with price. This feels correct but I don’t think it is. For example gold has decreased by $200/oz recently - it definitely didn’t just get cheaper to mine. I know mining is different and it’s not a great comparison, but costs don’t scale immediately, miners don’t make decisions entirely based on the price of btc now, etc. Economic principles like supply and demand meeting on an agreed price are very muddy.

graeme 6y ago
No no bitcoin mining and gold mining don’t have the same economics. Gold mining average costs are determined by the actual physical costs of mining. Marginal costs will rise in marginal mines if the gold price goes up. But that won’t affect average gold mining costs in existing mines. But in bitcoin average costs have to work out to marginal costs. When more mining power enters mining gets harder to compensate and mining costs rise.
- pilord8 6y ago
  That makes a lot of sense. On the other hand, that also suggests that if the price of bitcoin were to rise rapidly, mining costs would take some time to catch up, no? The connection between mining costs and price is an economic one (that can be in temporary disequilibrium), right?
  - graeme 6y ago
    Depends how rapidly. You can buy the hardware as a commodity, and connect to the power grid. Existing miners prob have expansion plans too they can accelerate. So the market may move pretty fast. Though I read an analysis that there were surplus profits in the 2017 bubble.
samvher 6y ago
You say "it definitely didn't just get cheaper to mine", which sounds obviously true, but in a way I'm not sure it is. If the price of gold decreases by $200/oz, that probably makes a bunch of mines unprofitable, leading them to close down (or at least pause) their operations. Which in a way would mean that (on average) gold got "cheaper to mine". And it seems to me that the Bitcoin mining market works basically the same in that sense.

by soared 6y ago

graeme 6y ago

No no bitcoin mining and gold mining don’t have the same economics. Gold mining average costs are determined by the actual physical costs of mining. Marginal costs will rise in marginal mines if the gold price goes up. But that won’t affect average gold mining costs in existing mines. But in bitcoin average costs have to work out to marginal costs. When more mining power enters mining gets harder to compensate and mining costs rise.

pilord8 6y ago
That makes a lot of sense. On the other hand, that also suggests that if the price of bitcoin were to rise rapidly, mining costs would take some time to catch up, no? The connection between mining costs and price is an economic one (that can be in temporary disequilibrium), right?
- graeme 6y ago
  Depends how rapidly. You can buy the hardware as a commodity, and connect to the power grid. Existing miners prob have expansion plans too they can accelerate. So the market may move pretty fast. Though I read an analysis that there were surplus profits in the 2017 bubble.

samvher 6y ago

You say "it definitely didn't just get cheaper to mine", which sounds obviously true, but in a way I'm not sure it is. If the price of gold decreases by $200/oz, that probably makes a bunch of mines unprofitable, leading them to close down (or at least pause) their operations. Which in a way would mean that (on average) gold got "cheaper to mine". And it seems to me that the Bitcoin mining market works basically the same in that sense.