26 ms·

The problem with Bitcoin miners

436 points by paulgb 4y ago

ttul 4y ago
Many of the same people who made millions swindling investors in copper mines and such have pulled the same truck in the crypto world. It seems there is plenty of dumb money around willing to play the same game over and over again. And yes, it never ends well.
DerekBickerton 4y ago
Excuse me, I'm a crypto noob, but how much BTC could I make if I bought a dedicated mining rig for, say $2000 and let it run nonstop for two years? Would my investment be worth it? Could I cash out my earnings to fiat and have more money than my initial investment or otherwise generate a profit?
- deleted 4y ago
  [deleted]
- Marazan 4y ago
  No.
- speedgoose 4y ago
  Do you produce your electricity? (solar panels, windmills, coal factory…) If not you have to guess the energy price in your area over the next two years. You also need to estimate the Bitcoin price over the next two years. And you probably need to estimate the bitcoin hash rate over the next two years. Good luck.
- WJW 4y ago
  It is entirely impossible to say. First off, your electricity price will determine how much (if any) profit you'd make. Most bitcoins mines are in areas with very low electricity prices for this very reasons and if you are not, it might be outright impossible to profitably run a mining rig. Obviously, the price of bitcoin over those two years would be very important to your income and assuming a price of 60k (where it was a few months ago) would result in a very different outcome than the same calculation with the current price of 30k. Bitcoin has been very volatile since basically forever, so it is very difficult to predict of your scheme would be profitable.
  - nradov 4y ago
    This is why Bitcoin miners located in Kosovo where electricity is "free". They're supposed to pay, but due to the political situation the power company can't disconnect deadbeat customers. https://balkaninsight.com/2021/05/12/in-north-kosovo-mining-for-bitcoin-on-free-electricity/ https://balkaninsight.com/2021/05/12/in-north-kosovo-mining-...
    - danans 4y ago
      Even "better", the electricity in Kosovo is almost 100% lignite coal-based: https://bankwatch.org/beyond-fossil-fuels/the-energy-sector-in-kosovo https://bankwatch.org/beyond-fossil-fuels/the-energy-sector-...
  - Canada 4y ago
    > First off, your electricity price will determine how much (if any) profit you'd make. No it wouldn't. The electricity cost is a factor, but it's not that significant compared to the capital cost of the equipment, the price of which fluctuates depending on the expected profit. You can also see this with GPUs, but it's far more pronounced with Bitcoin mining hardware which has no other use.
    - FabHK 4y ago
      Source? In fact, any breakdown of mining costs would be quite informative.
      - Canada 4y ago
        Source is doing it before, and being friends with people who have done it at scale. Just go ahead and try to do it. You will find that it's not possible to actually order stuff from bitmain when mining is profitable at their list prices. It's almost as if they just run the machines themselves when it's profitable, and deliver orders when that is more profitable than using them. So there is effectively a "spot" price for the machines where sellers who have inventory try to extract as much value as they can. Thus, the capital cost is more significant than electrical. (Obviously within reason, but paying 5 cents or 10 cents per kw/h is less relevant than capital cost) I should say though, after the 2018 crash S9s could be had in bulk for $100 each, where they were selling for over $3000 only months earlier. So maybe the flood of these out there makes my experience outdated.
- _fat_santa 4y ago
  This wholly depends on where you are getting energy and for how much. The "idea" around mining BTC is it's not free, you are exchanging Energy for BTC. If you live in Iceland where renewables are plentiful and cheap then you will likely make money, just about anywhere else though it's a gamble. TL;DR: Just dont.
- agoose77 4y ago
  Ultimately you can do what you want ^^, but it's worth considering the environmental impact of what you're proposing. Say a mining rig uses 1kW - for 2 years non-stop that's 1kW for 17520 hours. If CO2/kWh is 0.85lbs, then that's 14892 lbs, or 6.75 tonnes! The average passenger vehicle emits 4.6 tonnes of CO2 per year - that's less than our hypothetical rig! https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-typical-passenger-vehicle https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-t...
  - ipaddr 4y ago
    This says nothing because electricity depending on the source can have none or more than your number.
    - Snowworm 4y ago
      Yup. Just build a nuclear reactor in your back garden and it's easy passive income!
      - louloulou 4y ago
        Or solar panels on the roof
  - wyager 4y ago
    That's a lot of carbon you're helping remove from the ground and turn into plants!
  - seaman1921 4y ago
    so as long as we are under average passenger vehicle its ok to do anything - great argument dude - justify an evil with a bigger evil
  - UncleEntity 4y ago
    Other than those yahoos who recommissioned some coal-fired power plants not too long ago most mining operations are located in areas with surplus renewable energy methinks.
- humanistbot 4y ago
  Add your hardware and electric costs and calculate daily/weekly/monthly profit at: https://minerstat.com/mining-calculator https://minerstat.com/mining-calculator But unless you can find free electricity (like at work or school), it usually isn't worth it. You also have to factor in the failure rates at keeping a computer running 24/7 at max cycles.
  - thombat 4y ago
    Stating the obvious, but if making money depends upon "free electricity" then it's an elaborate way to take money from whoever is paying that power bill.
    - matheusmoreira 4y ago
      Not always. In my country, they incentivize solar energy generation but don't actually pay us any money for it. They give us "kWH credits" that expire within one year if not consumed. So it's much better to dump all that surplus energy into a miner so it can be converted into actual money. If the power company doesn't like it, they can pay me real cash instead of bullshit credits.
      - thombat 4y ago
        I guess if the network/power company can't/won't accept surplus power then it hugely devalues the financial case for domestic solar, since if your summertime production doesn't much exceed consumption then you have a big shortfall in the rest of the year. Here (Germany) there are limits on what the network will accept so people play elaborate games of trading off battery charging vs selling across the day, with one eye on the weather forecast. But in your case you're probably not so much making money from the "free electricity" as reducing the potential loss on the cost of installing and maintaining the system?
        matheusmoreira 4y ago
        > network/power company can't/won't accept surplus power Oh, they'll happily accept the power I'm generating... They just won't pay me for it. > your summertime production doesn't much exceed consumption then you have a big shortfall in the rest of the year Indeed, that's the case with most homes who invested into solar power. Most of them are planned precisely so they'll generate just enough energy to cover their yearly comsumption. Mine is set up to generate as much energy as possible. I just installed as many panels as possible. > Here (Germany) there are limits on what the network will accept so people play elaborate games of trading off battery charging vs selling across the day, with one eye on the weather forecast. That's interesting, I didn't know that. Everything I've read about the german solar power system made me think it was perfect: you could just generate as much power as you wanted and get paid for it. I had no idea people had to play those games. Why can't the network accept the power? > But in your case you're probably not so much making money from the "free electricity" as reducing the potential loss on the cost of installing and maintaining the system? In my case the equipment has already more than paid for itself. I generate more power than I consume almost all year long and my energy bill is almost zero. Maintenance costs have been minimal so far. When I generate more power than I consume, they give me expiring kWh credits. I don't want these credits to accumulate under any circumstances since I'm already generating surplus at almost all times. So it's in my interest to increase my energy consumption: anything else means giving them energy for free. So I set up a miner.
- mistrial9 4y ago
  uhh - this is exactly "not systems thinking" .. it is an individual opportunistic thinking. Responses below link to broad societal effects, various environmental claims, appeals to morality and reason.. all of which intersect very little with the "I see food" diet implied by this question. As an analogy, the sticky part of lottery tickets is, people will reliably participate with their own money; others complain; nothing changes as people do it again anyway. Opportunistic planners take advantage of the "I see food" people, make glossy lottery tickets and pay a premium to food store managers to sell those lottery tickets; more people complain. Can we identify the systems parts in play here, to create enough context to actually decide what is important, what is unstoppable, and what might be a rational, thinking response to all of this going on ?
  - cowtools 4y ago
    Good points, but I think that if you want to consider the "ethics" of cryptocurrency mining, you have to acknowledge that currently there is a lot of hype around crypto that will eventually go away. There are a lot of irrational actors. If you want to make a statement about the nature of bitcoin, I would consider an "equilibrium" situation where: * The cost of specialized hardware is stable (e.g. what are the economies of scale as t->infinity ?) * The price of bitcoin in terms of energy (BTC/watt hr) is stable * Miners are rational actors It seems to me like the most concerning aspect of cryptocurrency mining is that the hashrate is dependent on externalities like the price of bitcoin, rather than the necessary hashrate to defeat a 51% attack.
    - catlifeonmars 4y ago
      > currently there is a lot of hype around crypto that will eventually go away. What is the mechanism that will make this happen?
- wussboy 4y ago
  Based on the replies you got, it seems pretty clear that the answer to all three of your questions is “no”.
- ntoskrnl 4y ago
  Any company that could build hardware capable of turning a profit would use it themselves, instead of selling it to the public. Don't try to buy a money printer. Life isn't that easy.
  - redox99 4y ago
    People have been saying this literally since the first ASIC came out. And guess what. People have made a lot of money buying these money printers.
  - jabits 4y ago
    Not so sure, what about a machine like a slot machine? I think you make money making something you know how to make
  - vikingerik 4y ago
    There is arbitrage. It's possible that a hardware company might be located where electricity is expensive, or in an unfavorable regulatory or tax jurisdiction, such that they wouldn't directly profit from running the mining equipment, but someone in a better environment could. But yeah, this would be a small minority of situations.
  - amelius 4y ago
    Solar panels are money printers. Yet no company is offering to put them on my roof at their cost.
    - catlifeonmars 4y ago
      Why not?
    - betamaxthetape 4y ago
      This used to be the case in the UK. There were a few companies that would install solar panels on your roof, at no cost to you. You could use the electricity generated by the panels at no cost. The catch was that the companies took the feed-in tariff (the government subsidy for generating renewable electricity), and that you needed to commit to having the panels on your house for a minimum number of years (making it unviable if you rented, or planned to move in a few years). In the mid-2010s the UK changed how the subsidies worked, changing from the feed-in scheme where you were paid per unit of electricity generated (regardless of if you consumed that energy or sent it back to the electricity grid) to the Smart Export Guarantee, where you are only paid for the electricity that you sent back to the grid. According to Wikipedia [0] this caused many of the companies operating the "free solar panels" schemes to go out of business. [0] https://en.wikipedia.org/wiki/Feed-in_tariffs_in_the_United_Kingdom#Free_electricity_schemes https://en.wikipedia.org/wiki/Feed-in_tariffs_in_the_United_...
- andy81 4y ago
  You'd be competing against others who steal their electricity or have it subsidised (including pollution, resource depletion, regulatory arbitrage, financial crime and other externalities). If you can take advantage of some of those and don't mind that the money isn't being generated so much as taken from other people then it's a great idea.
- mirceal 4y ago
  there are multiple variables here. one is the cost of the hardware. 2000$ is not enough for latest generation ASIC miners. It just isn't. You want the latest generation ones. We are probably talking 10k+ for something decent. The second one is the cost of power. People like to talk shit about the environmental impact of bitcoin and stuff, but the reality is that the bitcoin you mine is worth less than the power you are using in most places around the world. Bitcoin mining is profitable in areas where the cost of power is heavily subsidized (it's free real estate meme) or you can easily generate power yourself (solar, wind, thermal, etc). So, if the cost of power is > value of mined bitcoin, it does not make sense to mine it The third part is mining pools. You can build all the rigs you want, but the reality is that most bitcoin is mined by mining pools. So you will have to join one of those pools if you want to have a steady guaranteed small income. So to answer your question: depending where you are for an investment of X this could be profitable (medium/long term) but you need to understand more about the cost of the hardware, cost of power and dynamic of mining pools to actually pull this off (so for a noob, you're better off just buying 2000$ of BTC, holding for 2 years and selling. sorry noob. The wild west era of bitcoin mining is long behind us)
- scotty79 4y ago
  If you don't have a super cheap source of electricity then most likely you wouldn't break even.
cowtools 4y ago
Mining is always a rat race against the rest of the network. Although this article makes me hopeful for alternative PoW solutions like RandomX[1] that seek to combat the advantages specialized mining hardware altogether. [1] https://github.com/tevador/RandomX https://github.com/tevador/RandomX
- andy81 4y ago
  Specialized mining hardware is an environmental disaster but it does make 51% attacks more difficult. With POW on general purpose CPUs, anyone can rent cloud processing to mine for short bursts in a way that's just not possible for attacks on bitcoin.
  - cowtools 4y ago
    That is a good point, but consider the following: 1. If a cryptocurrency is dominated by specialized miners, then you have a centralization effect as the majority hash-rate can be more controlled by monopolies that can take advantage of their economies of scale. Because mining is mostly done by companies at scale, it is easier for governments to impose regulations on miners and control the type of transactions that are allowed to be verified. 2. Vendors accepting cryptocurrency can always choose their own level of risk by deciding how many blocks to wait before accepting a transaction. This allows them to "wait out" temporary attacks. I would say that the permanent miner takeover as described #1 is an order of magnitude more threatening than the temporary attacks as you've described. But it is still quite an issue. Specialized hardware will depreciate if it is tied to a cryptocurrency that has been attacked. So miners are incentivized not to attack, lest they devalue the resell value of their hardware. Note that this advantage doesn't really apply to GPU-mined cryptocurrencies.
    - javert 4y ago
      There is no such thing as a "miner takeover" because miners don't vote. Unlike with proof of stake. The only powers they have are to censor transactions, conduct denial of service and (if they have over 50%) conduct a double spend attack. What you are describing in #1 is a government takeover of miners. Definitely a nit pick, but what are we here for if not for that?
RichardHeart 4y ago
- solveit 4y ago
  How does proof of wait deal with sybil attacks?
  - CipherThrowaway 4y ago
    GP is probably referring to HEX which is one of the more shameless Ponzi coins. HEX is an Ethereum token so its "proof of wait" mechanism is not actually a consensus protocol. The name is a marketing gimmick that merely apes (pun intended) the PoX terminology.
- cowtools 4y ago
  >proof of wait Care to enlighten us with a link?
- humanistbot 4y ago
  Link or GTFO
woodruffw 4y ago
This is a really excellent summary of just one among many sufficient reasons why bitcoin’s economics are fundamentally untethered from reality. Just the last points alone are condemning: no legitimate scheme in history has seen its executives cash out real money against such a small proportion of expected future earnings (in scrip).
- paulgb 4y ago
  Thanks! FWIW, this is a follow up to an older article that covered a number of other issues with bitcoin's economics: https://paulbutler.org/2021/betting-against-bitcoin/ https://paulbutler.org/2021/betting-against-bitcoin/
- repomies69 4y ago
  This article has really nothing to do with Bitcoin itself. It is just a story how stupid investors are pouring money to companies that have the Bitcoin in its name, without really going through the business at all. These companies have been ridiculously lousy investments. Borderline scams, when you look at executive compensation.
  - catlifeonmars 4y ago
    > This article has really nothing to do with Bitcoin itself. It is just a story how stupid investors are pouring money to companies that have the Bitcoin in its name, without really going through the business at all. How do you figure? Much of the (featured) article is centered around hashrate to bitcoin production ratios over time. Literally one the central features of bitcoin.
  - woodruffw 4y ago
    It has "nothing to do with Bitcoin itself" in the sense that it's about the economics of mining, which has everything to do with bitcoin and its valuation.
    - wallacoloo 4y ago
      it's about the economics of mining _using an external source of capital_. the more significant interaction is not between the ASICs and the bitcoin rewards, but the companies and their investors. in that sense, it's more accurate to say it has "everything to do with public stock markets". the author gives the oil analogy. the oil wells themselves have very similar economics to mining. it's the relationship between these similar operations and the investors which sets them apart more than the activity they're involved in.
wyager 4y ago
This should probably be titled something like "the problem with an accounting strategy that I made up, which some people might be using, I'm not sure".
- gitfan86 4y ago
  Sure, maybe the books of these companies are not as cooked as implied in the article, but the question remains: How does a company who spends 31k mining BTC that is currently worth 30k and pays their executives tens of millions in compensation work out in the long run?
  - mirceal 4y ago
    here is the thing. there are good investments and bad investments. good execution strategies and bad execution strategies. i have no doubt that a lot of these companies will go belly up. happens in every new domain where there is a lot of uncertainty and FUD. So the question is not: how does a company ... work out in the long run? the question is: which company actually does things in a sane manner and will survive to be a dominant player in the space once the dust settles?
  - wyager 4y ago
    If you're confident in your analysis you should take a short position.
    - gitfan86 4y ago
      LOL, Financial derivatives are the exactly problem with the markets today that I'm calling out. Everyone is trying to figure out how to make a "trade" that will make money. The last thing I'm going to do is enter into a financial contract that can be short squeezed and margin called.
- salmonlogs 4y ago
  Operating cashflow and depreciation curves are the most basic accounting principles out there, the author did not make anything up - he is applying a logical analysis to publicly available data.
benreesman 4y ago
I think this is what we call “self-limiting”. Maybe miners are subsidizing their mining by BTC appreciation (though, it seems it’d be easier to just buy BTC), and if they are then some people are going to find new jobs when the price changes slope. Problem solved.
- woodruffw 4y ago
  “Self-limiting” is a game-theoretic property, not an economic property. The point of the post is that there’s a fundamental economic unreality in how these mining companies are valued, and all signs (such as hearty executive bonuses) point to the fact that their leadership is aware and is emptying the bag before leaving others holding it.
- mdoms 4y ago
  This is covered in the article.
- andreyk 4y ago
  The post makes this exact point actually, so seems the author agrees.
  - benreesman 4y ago
    I mostly agree, my little TLDR is a matter of emphasis. This article should be like a tweet: “Watch out for MinerCo, their depreciation schedule looks wonky, I’m short!” And then maybe footnote if it’s not obvious. But it’s Movie Trailer Voice: “The Problem with BitCoin Miners”. Wait there is one problem that so exceeds in importance all the other pros and cons that it’s The Problem? Oh no you’re short some companies and want people to sell them. Jim Cramer’s got to retire someday.
doomroot 4y ago
TLDR people are throwing capital at mining companies because they want traditional financial access to bitcoin gains. Mining companies will reach their proper evaluation when a bitcoin spot ETF is available to investors.
deleted 4y ago
[deleted]
henvic 4y ago
> As of writing, there are 1,960,775 bitcoin remaining to be mined. There will be more: https://henvic.dev/posts/bitcoin/#scarcity https://henvic.dev/posts/bitcoin/#scarcity They'll find a way to convince more suckers to adopt the shitcoin.
- ntoskrnl 4y ago
  Sorry, is that link arguing that bitcoin is not scarce because each bitcoin can be divided into smaller units?
  - everfree 4y ago
    Looks like it is. If you subdivide something, that doesn't make more of it.
  - smnplk 4y ago
    In the future, BTC could be more abundant, because devs in bitcoin core can increase the upper limit of max bitcoins ever mined.
    - mirceal 4y ago
      In the future, we will all drink Gatorade and have a president wrestler. You see, I can also make stuff up. It may also happen! Saw a documentary about this already.
    - ntoskrnl 4y ago
      Sure, if they also convince every miner, user, and exchange on earth to download the fork and agree to the protocol change. That's like saying "in the future the linux kernel could be insecure, because the devs could add a keylogger"
      - smnplk 4y ago
        There is a BIP process in place and there were many upgrades already done to the software that runs BTC nodes. But I don't really care for Bitcoin either way. It can never be a currency. >> That's like saying "in the future the linux kernel could be insecure, because the devs could add a keylogger" This is just informal fallacy. Is increasing hard cap immediate threat to btc ? I don't think it is. Bitcoin has so many other unsurmountable obstacles, that it's "monetary policy" is irrelevant.
intabli 4y ago
What renders this whole calculation wrong is that it doesn’t account for transaction fees AND transaction fees growth which was also supposed to be growing exponentially, had Bitcoin not been artificially limited to ~ 2 MB blocks every ten minutes. On an actually uncapped Bitcoin instance, Blocks (Block size) and transaction fees will grow exponentially, rendering all such “Bitcoin is environmentally terrible” and “Miners aren’t profitable” calculations absurdly wrong. Other instances exist that are chugging along flawlessly and are set to help miners grow their revenue with on-chain transaction fees growth: DYOR. Of course, BTC Maxis lead by companies set to profit from such an artificial limit on Bitcoin (hint: they often peddle L2 solutions) would hate for you or anyone to understand and study those facts.
- mdoms 4y ago
  So in a fantasy universe that doesn't exist this analysis doesn't make sense. Ok?
  - intabli 4y ago
    These uncapped forks do exist, they’re the reason the whole community split in 2017; so when those “analysis” articles ignore them and ignore the fact that the white paper and Bitcoin’s creator explicitly called for on-chain growth and scaling, they’re being either dishonest or ignorant. It’s like someone saying “Look at how wasteful this car limited to 20MPH is! All cars are wasteful!”. No, not all cars, especially that the original design explicitly said to scale the engine as more speed is needed.
    - paulgb 4y ago
      I don't see how any of this undermines the post. What “uncapped fork” could these big miners switch to that would give them anywhere near the revenue they have today?
      - intabli 4y ago
        I won’t point you to any, but you should dig deeper into the 2017 block size wars and understand why the community forked then and how, avoid the commercially appealing answers and the laser eyes.
bseidensticker 4y ago
I managed a Bitcoin mining operation a long time ago. We made machines that made 50% of their BTC in the first month of their operation, and the remaining 50% over the next 5 months. After that they cost more to run than they produced. The accountants wouldn't believe us when we told them that the machines were worthless after only 6 months.
- chucknthem 4y ago
  How long ago was this? The rate of improvement on ASICS as well as new entrants to mining hasn't been this intense in a long time.
  - bseidensticker 4y ago
    2013
    - chucknthem 4y ago
      That makes sense, 2013 was when ASICs were getting popular and started dominating mining. The industry has slowed down significantly since. Presumably they've implemented most of the low hanging fruit optimizations. Antminers from 3+ years ago are still profitable in a lot of areas with <=$0.1/kWh electricity.
    - Dmitriysz 4y ago
      This makes sense. In the earlier days of bitcoin we’ve seen substantial improvements in mining every 3-6 months. We’re talking about significant 100x-1,000x improvements in efficiency and profitability. To stay competitive, these improvements in efficiency made it necessary for miners to upgrade mining equipment every 3-6 months. Because of its closeness to silicon fabrication and cheap energy, China emerged as the de facto place to set up these mining farms. Those previous 100x-1,000x improvements are no longer possible. The development of mining hardware caught up with Moore’s law. This is the observation that transistors in a dense integrated circuit doubles about every two years. It would be fair to assume ~2x improvements in mining every ~2 years. This would mean that mining equipment would now have a longer shelf life, and no longer be obsolete in a few months.
vmception 4y ago
Yeah publicly traded bitcoin mining companies are a very new phenomenom, and investors are undiscerning and being taken advantage of. Its fine though, as long as those investors find new investors who only care about revenues. The actual company is a conduit, the revenues still occur but nobody had been asking what happens to the actual money. Lucrative game. Good article, calls for nothing except FYI to investors.
- dbv1 4y ago
  How are the investors being taken advantage of exactly? Investors normally primarily care about profits, that’s not abnormal.
  - vmception 4y ago
    Investors care about corporate governance and management of the finances as well, corporate profits for share buybacks can accelerate investor profits The article details this basically pointing out that c-suite payouts are high and this is currently being tolerated but maybe by ignorance
  - me_again 4y ago
    I think it's abnormal for executives to get compensation > entire company revenue. I'm sure it happens in other industries from time to time but it seems like a sign of misinvestment to me.
  - josu 4y ago
    As explained in the article profits are frontloaded, so the company currently looks better than it should.
  - FabHK 4y ago
    Yes, and MARA has only been profitable in one quarter so far, if I read things correctly, and the author argues quite convincingly that even those profits are overstated insofar as the depreciations are understated, and things will quite likely turn worse. At the same time, extravagant salaries are being paid. That is how investors are being taken advantage of.
zionic 4y ago
While I have heard a myriad of arguments against PoS, my opinion is that the ecological benefits alone are worth switching as soon as possible. We can continue to iterate on it to improve the negative sides, but we can’t afford to wait for a “perfect” replacement forever while PoW does such extreme harm.
- tylersmith 4y ago
  The main feature of PoW over PoS is being completely objective and uncensorable. There will always be networks using it because of this even when most are using and better off with PoS.
  - zionic 4y ago
    How is PoS easier to censor than PoW, specificity ETH 2.0’s implementation.
    - eldenwrong 4y ago
      Vitalik Buterin : stop all trading!! Reverse the chain! Its okay if we control all the supply because we have it in the premine to our friends and they have the best interest in keeping Ethereum safe.
    - yokem55 4y ago
      Yeah, the most obvious externality of an ethereum validator is a few megabits of sustained internet traffic that makes it difficult to run on capped internet services. Otherwise it is just a matter of being able to buy the eth, setting up the node (cheap commodity pc hardware) and putting it in a corner in your home. In contrast for POW you have to be able to source specialized hardware and an electricity supply cheap enough to make the hardware profitable, both of which are much more noticable to the outside world.
      - tylersmith 4y ago
        The censorship doesn't happen at the network level but at the protocol level, by removing a validators stake.
Heston 4y ago
I propose we move to a new system. Proof of Wasted Electricity
- jagger27 4y ago
  That's the current system.
  - toss1 4y ago
    Yeah, but maybe we could do something more spectacular with the electricity - maybe run giant Tesla coils and reward who can create the longest / most durable / most spectacular / etc. sparking events . . .
  - hypertele-Xii 4y ago
    That's the joke.
  - thfuran 4y ago
    Then how about proof of steak, based on holding beef call options?
- hammock 4y ago
  Goes to show you that energy is the real base metal of the world. Whether you are mining bitcoin or gold, or drilling oil - the power rests in the hands whoever controls the energy to pull it out of the ground/air.
  - RedBeetDeadpool 4y ago
    Exactly. You could use anything as currency. Prisoners use cigarettes or ramen. Its not about the product being mined so much as work being done, and therefore work being stored. Replace any currency with any power generation you want. In prison, its the work of smuggling that stores economic value in cigarettes. In a gold based system, its the work of mining elements out of the earth that stores economic value in base metals. In a peer to peer network, its the work of electricity(of any kind whatsoever, clean or polluting) that stores economic value on a fair distributed ledger. Money is about storage of work, and quite frankly the weaker the money used to store energy, the more lethargic and rusted the whole economic system gets. Fiat, i.e. "proof of wasted energy" just does a lot of work and lets it evaporate in economic terms leaving the entire society that uses it in constant need of more and more fiat because that energy, that work done, keeps dissipating. It doesn't matter what money is: seashells, carved rai stones, arrowheads, cigarettes, ramen, non-livable apartment homes sold solely for wealth storage, luxury cars, art, gold, printed paper with your uncle sam's face and "guarantee" stamped on it, centralized entry in a private database, decentralized entry on a public blockchain. Society needs money in order to achieve higher levels of cooperation. Might as well use the strongest form of money that exists. And as far as I know, it aint proof of wasted electricity, i.e. fiat.
fredgrott 4y ago
I once explained the same points to someone who use to pop in here when his name was mentioned Calacanis when he bought some mining rigs several years ago. You see there are some valid economic reasons why CBOT and several other exchanges allow the shorting of bitcoin without making those contracts tied to bitcoin. If any of you want to bet anyway on bitcoin do not buy mining rigs, think of it this way it represents a business we all are familiar with... Buy domains to speculate and base the business model paying for it on ad revenue off of the websites with each domain name buy. Its the same dam economic trends and same long term bad result
hn_throwaway_99 4y ago
Proof-of-work is so obviously, undeniably, mathematically guaranteed to be a crypto dead-end, that I'm gobsmacked we're still having discussions like this. Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin. It's really just simple arbitrage: if the value of Bitcoin goes up, but the electricity cost doesn't, then you have essentially 2 different prices for 1 good, which should attract more miners to spend more money on electricity. And, indeed, this is exactly what has happened. The problem, of course, is that if it takes an Argentina's worth of electricity to run Bitcoin now, how does the world manage if Bitcoin has a 10 or 100 times greater market cap? Obviously it can't, and world governments would rightly shut it all down before the majority of our electric output went to mining BTC. There is simply no way around this issue if you're on a proof-of-work system, and given that, it's so easy to see that BTC is guaranteed to fail at some point. It's like we're on a train rushing towards a bridge that's out, and everyone can see the bridge is out, but somehow we've convinced a large number of people that we'll "jump the gap" when we get there.
- kobieyc 4y ago
- madacol 4y ago
  > the electricity value expended on mining is proportional to the total market cap of Bitcoin That's not true, it's at most, equal to the printing rate of bitcoins (coinbase transactions)
- junofan 4y ago
  You’re saying that as the price of Bitcoin has risen, the price of electricity has risen? I think something’s missing from your argument.
  - tiagobraw 4y ago
    I think he meant that if the price of 1 bitcoin rise, the energy cost of mining 1 bitcoin should also rise in proportion
jmyeet 4y ago
It blows my mind how well-known all the problems there are with crypto and yet it's become so huge while solving virtually no problem other than avoiding laws about the movement of money and capital. The Bitcoin network in particular uses more electricty than Argentina. Defenders will point out that it's majority renewable. That's intellectually dishonest because Bitcoin is simply chasing cheap power and hydro power is among the cheapest. Bitcoin miners will happily use coal if it's sufficiently cheap. Also, use of certain renewables comes at the expense of other people. In the Hudson Valley, miners have raised the electricty prices for other residents in those towns. Bitcoins transactions consume an enormous amount of electricity. Defenders will also claim we'll move to Proof of Stake ("PoS") over Proof of Waste but this too is a myth. For one, Bitcoin's massive computational and electricity waste is key to defending the network. I don't know what happens when we run out of coins to mine. Also, if it's as simple as that, why haven't we simply moved to PoS for everything? PoS ultimately is a rich-gets-richer scenario is why. It's really no different to the Luna anchor stakers getting 20% returns at the expense of everyone else who comes along later. And for all of this waste we get what? Transactions that can only be guaranteed if they're entirely contained within the network because as soon as you want to include something outside of that (eg converting crypto to or from cash) you've just added the same trust issue that is intrinsic to every traditional financial transaction. And what fuels this continued mass delusion is the fabric of American beliefs that every American is just a temporarily embarassed millionaire [1]. [1]; https://www.goodreads.com/quotes/328134-john-steinbeck-once-said-that-socialism-never-took-root-in https://www.goodreads.com/quotes/328134-john-steinbeck-once-...
- ollieglass 4y ago
  > solving virtually no problem other than avoiding laws about the movement of money and capital This is a tremendously valuable problem to solve for some.
  - jmyeet 4y ago
    But at what cost? This [1] estimates the annual Bitcoin energy consumption at 145TWh. If the Bitcoin network were a country it would rank 25 in the world by energy consumption [2]. The cost of that electricity is hard to estimate but if you use a ballpark of $0.10/kWh that puts the cost of the Bitcoin network at almost $15 billion annually just for the electricity. [1]: https://ccaf.io/cbeci/index https://ccaf.io/cbeci/index [2]: https://en.wikipedia.org/wiki/List_of_countries_by_electricity_consumption https://en.wikipedia.org/wiki/List_of_countries_by_electrici...
SergeAx 4y ago
This is a great moment to remind myself that "markets can stay irrational for much longer than I can remain solvent".
t_mann 4y ago
Some of the top-rated comments make me wonder whether the authors have even read the article. This isn't about whether PoW or cryptocurrencies as a whole make sense, but strictly about the economics of mining, and how standard accounting practices might obfuscate miners' true profitability. The author sounds like an investor who would be equally happy to hold long instead of short positions in those stocks if their prices were different.
- wmf 4y ago
  Of course they haven't read the article and even if they did, most people won't discuss the details of something if they object to the fundamentals.
  - pennaMan 4y ago
    So, wilful ignorance via political stance? Nice.
- SilasX 4y ago
  On that note, I don't get why it doesn't mention if there are any other (standard) methods of depreciation accounting that are more realistic for this kind of asset. The author mentions that oil well already have this issue and so you could just see if their method works. Wikipedia gives a list of the other ways: https://en.wikipedia.org/wiki/Depreciation#Methods_for_depreciation https://en.wikipedia.org/wiki/Depreciation#Methods_for_depre... (I also vaguely remember a lot of people screaming bloody murder about how it's unfair to oil wells to get accelerated depreciation.)
  - josu 4y ago
    > I don't get why it doesn't mention if there are any other (standard) methods of depreciation accounting that are more realistic for this kind of asset Of course there are, and they should actually be using them. But then fundraising would be harder. They are cheating on accounting, in order to raise equity capital, and hoping that the price of bitcoin will go up in the future and cover the losses.
  - 4y ago
davidgerard 4y ago
nice to see an article about bitcoin mining's shonky accounting, and not about PoW itself. the other weird accounting thing: in 2021, bitcoin miners started stockpiling unsold bitcoin. This was new behaviour. Miners didn't hold onto cryptos for ages in the ten years previously - maybe for a short time, but then they sold it. I can find no sensible reason for this, except that there aren't enough actual dollars in the crypto market to sell the bitcoins without crashing the market. (I ask coiners about this from time to time. Most answers are some more complicated version of "there aren't enough actual dollars not to crash the market." Some of them confidently state that miners have magically transmuted some time in June 2021 from uncompromising economic agents into bitcoin moon boys, who are sure it'll go to a million. I don't believe them.) The miners have tended to borrow against the bitcoins - from other companies in the crypto industry. Because they all know they're all in this together.
- paulgb 4y ago
  Thanks David, means a lot because I’m a fan of your work :) One thing that will be interesting is what happens when they do start selling hoarded bitcoin (and unless a new source of capital appears, they will need to). RIOT already quietly sold $9M of cryptocurrencies in Q1 of this year. Given the mining hardware they have already ordered, I suspect they’ll be doing more of that into an already distressed market.
rufusroflpunch 4y ago
The comments are yet another endless proof-of-work debate. Here’s the truth: none of this debate matters. Bitcoin isn’t going away, and it’s not changing consensus algorithm. Money is a network good, and Bitcoin has the best network. It will continue to grow whether you like it or not. Bitcoin isn’t like some other cryptocurrency that formed around a founder or company. There is nothing and one no one to attack. It just… exists and will continue to exist until something comes along that is 10x or 100x better. The problem for those that oppose Bitcoin is that none of them are capable of building something better at the problems that Bitcoin addresses.
- bb88 4y ago
  > Bitcoin isn’t going away, and it’s not changing consensus algorithm. Well... until someone forks it to change the consensus algorithm, right? Or the programmers decide to make the change globally? Or the miners want a different consensus algorithm to make their mining more profitable? Or... Or... Or...
  - rufusroflpunch 4y ago
    No offense, but this demonstrates a lack of knowledge about Bitcoin’s history and nature. All of these things have been tried and failed. The core devs and the miners don’t control Bitcoin. The full nodes control Bitcoin. The only way to successfully fork Bitcoin is to convince all of the nodes to run the code. Other cryptocurrencies get around this by being more centralized. This includes Ethereum. These other blockchains make it significantly more difficult and costly to run nodes, which means fewer nodes run, mostly by large corporations so that they can exert control and fork the chains all the time. Bitcoin is different. Anyone can run a node on an old laptop. There are tens of thousand of public nodes worldwide, who knows how many private ones. If miners ran a fork to change consensus rules, the nodes would just reject the blocks and the miners just waste electricity.
    - bb88 4y ago
      I don't speak for HN, but why do bitcoin proponents always assume people to be ignorant on a website with some of the smartest people on the planet? I've never got this, and never will. No offense, but it's the most incurious form of argument on a website dedicated to curiosity.
mdavis6890 4y ago
It now dawns on me that we can stimulate massive investment and efficiency gains in any domain we want, if only we create a crypto on that domain. E.g. Food. Create a new proof-of-food based crypto. Poof! Literally solved world hunger right there.
- TheDong 4y ago
  I think this might be the survivorship bias talking. The vast majority, like 99%+, of all crypto projects fail. Anyway, so far there's: Foodcoin (https://coinmarketcap.com/currencies/food/ https://coinmarketcap.com/currencies/food/), TE-Food (https://coinmarketcap.com/currencies/te-food/ https://coinmarketcap.com/currencies/te-food/), and probably a dozen other scams. Let me give you an analogy to what you said "After seeing that Google and Apple have market caps of a trillion dollars, it dawns on me that we can stimulate massive investment and efficiency just by making a publicly traded company focused on that thing. If we make a food-based public company, poof, world hunger solved". Just because bitcoin has a huge amount of money in it does not mean all cryptos will succeed. Just because google has a trillion dollar market cap does not mean every publicly listed company will.
  - mdavis6890 4y ago
    I don't think your examples are quite what I was talking about. I was talking about where the coins are mined based on how much food you are growing or have harvested. A bit like Chia Coin, but instead of rewards based on disk space, it would be harvested food or something like that. Like with each bushel of corn you harvest there's a random chance you get a FoodCoin. And secondly I was joking, but clearly my attempt at humor failed as I also got at least one downvote.
    - TheDong 4y ago
      I was pretty sure it was a joke, but the manic enthusiasm for the impractical that I've seen the crypto ecosystem makes it hard to be certain sometimes. I look forward to the government-issued "Agriculture-coin" issued to farmers that show they grow a certain amount and follow certain standards: https://en.wikipedia.org/wiki/Agricultural_subsidy#United_States https://en.wikipedia.org/wiki/Agricultural_subsidy#United_St...
Jasonrams 4y ago
Gatsky 4y ago
> Disclosure: I hold short positions in companies mentioned in this article. This is not financial advice. Hmm. Well, on the one hand, he is putting his money where his mouth is. On the other hand, this could be prime evidence of motivated reasoning. The author has also submitted his own article to HN it seems. Reading the analysis, it makes sense, but I'm not experienced in analysing company financials. Other people I respect/trust who have a good track record don't feel this way about the companies in question. I think, in general, shorting volatile assets is a pretty fraught undertaking. There could be a Gamestop style short squeeze fueled by Crypto bros for example. There could be a purchase announcement that could spike the price. ARK could decide to buy a large stake. All these things could lose you a lot of money for 'no good reason'.
- xmodem 4y ago
  > On the other hand, this could be prime evidence of motivated reasoning. I find in cases like this it can be useful to go and check the primary sources. Of course, it's impossible to re-blind yourself having already read the analysis. > Last year, one MARA executive earned over $220 million in cash and stock-based compensation, in a year when the company’s total revenue was $150 million. The author helpfully links the SEC filing they've taken this number from, and it would appear to be accurate, though one detail the author glosses over is that this is 99% stock. I'm not sure how that affects your analysis. (I hold no position in this company)
- Thorrez 4y ago
  >I think, in general, shorting volatile assets is a pretty fraught undertaking. There could be a Gamestop style short squeeze fueled by Crypto bros for example. I think most of the risk could be mitigated by holding bitcoin while shorting the miners.
  - polygamous_bat 4y ago
    I am curious, how would holding Bitcoin hedge the meme stock frenzy risk?
    - 4y ago
mattwilsonn888 4y ago
The obvious retort is that mining is competitive. If you are not taking advantage of cheap energy you are not a competitive miner. If you source your energy from high demand locations like cities you will fail. The miners who profit will be the ones extracting energy from places where it is otherwise useless, or less in demand. Also, if miners started selling equipment to buy Bitcoin it would simply make mining more profitable to the point where the average miner would profit again. It's a basic equilibrium and the ominous "I don't think this ends well," has less direct connections the arguments in the piece than it does the author's disclosed financial interest in seeing mining companies fail. To be fair, it may be the case that mining is currently over allocated, but implying that the practice is going to totally collapse is about as hyperbolic as any NFT shilling crypto bro telling you his decentralized Pokemon card knock off is the epitome of finance type get-up this site is so apt to complain about.
shudza 4y ago
>Based on the reported hash rate and operational costs in Q1, at a current global hash rate of 225 EH/s, I estimate that MARA has a cost per coin mined of $21,000 and RIOT has a cost per coin mined of $31,000. I'm sorry but this is almost certainly wrong. I mine at home and my cost is 22k per btc mined. I have a 1 generarion older equipment than they do, and my electricity is probably 3-4 times the price they are having. You should redo your math and look for errors.
- paulgb 4y ago
  It seemed wild to me too, but I double checked and I don't see any errors. Here's the data and calculations, annotated with sources. https://docs.google.com/spreadsheets/d/11hd-Q6KdkNETiRBs_JYwxOEAEfiEM4YoYad__grb5lE/edit?usp=sharing https://docs.google.com/spreadsheets/d/11hd-Q6KdkNETiRBs_JYw... Keep in mind that these are companies that made a big bet when Bitcoin was in the 50-65k range that it would keep going up. They planned their expansion based on that scenario, so it's not that crazy that they allowed their margins to get so slim.
cs702 4y ago
This analysis is incomplete, for four reasons: 1. The author fails to explain clearly that what we call mining "mining" is a distributed form of transaction processing, in which transaction fees are earned via proof-of-work. Currently most of the transaction fees come from block rewards, but transaction fees are in fact set by competition based on the marginal cost of computation. 2. By design, Bitcoin's block rewards have always been meant to be temporary, as explained by Satoshi Nakamoto in his/her/their paper. I mean, the rewards are halving on a fixed schedule, and everyone knows that eventually there will be no more rewards. The only purpose of the block rewards was -- and is -- to provide a temporary incentive for jump-starting Bitcoin's transaction processing network. 3. As the rewards go to zero, Bitcoin transaction fees will fluctuate. They will be determined by competition based on the marginal cost of computation. My expectation is that Bitcoin transaction fees will go up over time. 4. Many transaction processors, i.e., "miners," are convinced that Bitcoin eventually will have a market capitalization similar to that of gold (~$12T, give or take), so they are hoarding their share of block rewards. Many investors in these operations are convinced too. Some in fact are willing to lose money processing transactions to get the block rewards.
- gregable 4y ago
  1. The author points out that txn fees are tiny, 1% of the revenue. And they are unlikely to be significant during the depreciation period of the machines. 2/3. Sure, but see #1. 4. Sure, but the author is pointing out that the cost of buying BTC exposure via these companies is higher than just buying BTC by a lot. It almost seems like a short position of these companies combined with a long position on BTC is a solid bet over a long term horizon.
  - cs702 4y ago
    > Sure, but the author is pointing out that the cost of buying BTC exposure via these companies is higher than just buying BTC by a lot. The investors also get transaction processing infrastructure, including software and facilities, and a team, not just exposure to BTC. Perhaps they see future value in building that infrastructure now. > It almost seems like a short position of these companies combined with a long position on BTC is a solid bet over a long term horizon. If you think that's a solid bet, you're of course welcome to go ahead and make it!

436 points by paulgb 4y ago

ttul 4y ago

Many of the same people who made millions swindling investors in copper mines and such have pulled the same truck in the crypto world. It seems there is plenty of dumb money around willing to play the same game over and over again. And yes, it never ends well.

DerekBickerton 4y ago

Excuse me, I'm a crypto noob, but how much BTC could I make if I bought a dedicated mining rig for, say $2000 and let it run nonstop for two years? Would my investment be worth it? Could I cash out my earnings to fiat and have more money than my initial investment or otherwise generate a profit?

deleted 4y ago
[deleted]
Marazan 4y ago
No.
speedgoose 4y ago
Do you produce your electricity? (solar panels, windmills, coal factory…) If not you have to guess the energy price in your area over the next two years. You also need to estimate the Bitcoin price over the next two years. And you probably need to estimate the bitcoin hash rate over the next two years. Good luck.
WJW 4y ago
It is entirely impossible to say. First off, your electricity price will determine how much (if any) profit you'd make. Most bitcoins mines are in areas with very low electricity prices for this very reasons and if you are not, it might be outright impossible to profitably run a mining rig. Obviously, the price of bitcoin over those two years would be very important to your income and assuming a price of 60k (where it was a few months ago) would result in a very different outcome than the same calculation with the current price of 30k. Bitcoin has been very volatile since basically forever, so it is very difficult to predict of your scheme would be profitable.
- nradov 4y ago
  This is why Bitcoin miners located in Kosovo where electricity is "free". They're supposed to pay, but due to the political situation the power company can't disconnect deadbeat customers. https://balkaninsight.com/2021/05/12/in-north-kosovo-mining-for-bitcoin-on-free-electricity/ https://balkaninsight.com/2021/05/12/in-north-kosovo-mining-...
  - danans 4y ago
    Even "better", the electricity in Kosovo is almost 100% lignite coal-based: https://bankwatch.org/beyond-fossil-fuels/the-energy-sector-in-kosovo https://bankwatch.org/beyond-fossil-fuels/the-energy-sector-...
- Canada 4y ago
  > First off, your electricity price will determine how much (if any) profit you'd make. No it wouldn't. The electricity cost is a factor, but it's not that significant compared to the capital cost of the equipment, the price of which fluctuates depending on the expected profit. You can also see this with GPUs, but it's far more pronounced with Bitcoin mining hardware which has no other use.
  - FabHK 4y ago
    Source? In fact, any breakdown of mining costs would be quite informative.
    - Canada 4y ago
      Source is doing it before, and being friends with people who have done it at scale. Just go ahead and try to do it. You will find that it's not possible to actually order stuff from bitmain when mining is profitable at their list prices. It's almost as if they just run the machines themselves when it's profitable, and deliver orders when that is more profitable than using them. So there is effectively a "spot" price for the machines where sellers who have inventory try to extract as much value as they can. Thus, the capital cost is more significant than electrical. (Obviously within reason, but paying 5 cents or 10 cents per kw/h is less relevant than capital cost) I should say though, after the 2018 crash S9s could be had in bulk for $100 each, where they were selling for over $3000 only months earlier. So maybe the flood of these out there makes my experience outdated.
_fat_santa 4y ago
This wholly depends on where you are getting energy and for how much. The "idea" around mining BTC is it's not free, you are exchanging Energy for BTC. If you live in Iceland where renewables are plentiful and cheap then you will likely make money, just about anywhere else though it's a gamble. TL;DR: Just dont.
agoose77 4y ago
Ultimately you can do what you want ^^, but it's worth considering the environmental impact of what you're proposing. Say a mining rig uses 1kW - for 2 years non-stop that's 1kW for 17520 hours. If CO2/kWh is 0.85lbs, then that's 14892 lbs, or 6.75 tonnes! The average passenger vehicle emits 4.6 tonnes of CO2 per year - that's less than our hypothetical rig! https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-typical-passenger-vehicle https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-t...
- ipaddr 4y ago
  This says nothing because electricity depending on the source can have none or more than your number.
  - Snowworm 4y ago
    Yup. Just build a nuclear reactor in your back garden and it's easy passive income!
    - louloulou 4y ago
      Or solar panels on the roof
- wyager 4y ago
  That's a lot of carbon you're helping remove from the ground and turn into plants!
- seaman1921 4y ago
  so as long as we are under average passenger vehicle its ok to do anything - great argument dude - justify an evil with a bigger evil
- UncleEntity 4y ago
  Other than those yahoos who recommissioned some coal-fired power plants not too long ago most mining operations are located in areas with surplus renewable energy methinks.
humanistbot 4y ago
Add your hardware and electric costs and calculate daily/weekly/monthly profit at: https://minerstat.com/mining-calculator https://minerstat.com/mining-calculator But unless you can find free electricity (like at work or school), it usually isn't worth it. You also have to factor in the failure rates at keeping a computer running 24/7 at max cycles.
- thombat 4y ago
  Stating the obvious, but if making money depends upon "free electricity" then it's an elaborate way to take money from whoever is paying that power bill.
  - matheusmoreira 4y ago
    Not always. In my country, they incentivize solar energy generation but don't actually pay us any money for it. They give us "kWH credits" that expire within one year if not consumed. So it's much better to dump all that surplus energy into a miner so it can be converted into actual money. If the power company doesn't like it, they can pay me real cash instead of bullshit credits.
    - thombat 4y ago
      I guess if the network/power company can't/won't accept surplus power then it hugely devalues the financial case for domestic solar, since if your summertime production doesn't much exceed consumption then you have a big shortfall in the rest of the year. Here (Germany) there are limits on what the network will accept so people play elaborate games of trading off battery charging vs selling across the day, with one eye on the weather forecast. But in your case you're probably not so much making money from the "free electricity" as reducing the potential loss on the cost of installing and maintaining the system?
      - matheusmoreira 4y ago
        > network/power company can't/won't accept surplus power Oh, they'll happily accept the power I'm generating... They just won't pay me for it. > your summertime production doesn't much exceed consumption then you have a big shortfall in the rest of the year Indeed, that's the case with most homes who invested into solar power. Most of them are planned precisely so they'll generate just enough energy to cover their yearly comsumption. Mine is set up to generate as much energy as possible. I just installed as many panels as possible. > Here (Germany) there are limits on what the network will accept so people play elaborate games of trading off battery charging vs selling across the day, with one eye on the weather forecast. That's interesting, I didn't know that. Everything I've read about the german solar power system made me think it was perfect: you could just generate as much power as you wanted and get paid for it. I had no idea people had to play those games. Why can't the network accept the power? > But in your case you're probably not so much making money from the "free electricity" as reducing the potential loss on the cost of installing and maintaining the system? In my case the equipment has already more than paid for itself. I generate more power than I consume almost all year long and my energy bill is almost zero. Maintenance costs have been minimal so far. When I generate more power than I consume, they give me expiring kWh credits. I don't want these credits to accumulate under any circumstances since I'm already generating surplus at almost all times. So it's in my interest to increase my energy consumption: anything else means giving them energy for free. So I set up a miner.
mistrial9 4y ago
uhh - this is exactly "not systems thinking" .. it is an individual opportunistic thinking. Responses below link to broad societal effects, various environmental claims, appeals to morality and reason.. all of which intersect very little with the "I see food" diet implied by this question. As an analogy, the sticky part of lottery tickets is, people will reliably participate with their own money; others complain; nothing changes as people do it again anyway. Opportunistic planners take advantage of the "I see food" people, make glossy lottery tickets and pay a premium to food store managers to sell those lottery tickets; more people complain. Can we identify the systems parts in play here, to create enough context to actually decide what is important, what is unstoppable, and what might be a rational, thinking response to all of this going on ?
- cowtools 4y ago
  Good points, but I think that if you want to consider the "ethics" of cryptocurrency mining, you have to acknowledge that currently there is a lot of hype around crypto that will eventually go away. There are a lot of irrational actors. If you want to make a statement about the nature of bitcoin, I would consider an "equilibrium" situation where: * The cost of specialized hardware is stable (e.g. what are the economies of scale as t->infinity ?) * The price of bitcoin in terms of energy (BTC/watt hr) is stable * Miners are rational actors It seems to me like the most concerning aspect of cryptocurrency mining is that the hashrate is dependent on externalities like the price of bitcoin, rather than the necessary hashrate to defeat a 51% attack.
  - catlifeonmars 4y ago
    > currently there is a lot of hype around crypto that will eventually go away. What is the mechanism that will make this happen?
wussboy 4y ago
Based on the replies you got, it seems pretty clear that the answer to all three of your questions is “no”.
ntoskrnl 4y ago
Any company that could build hardware capable of turning a profit would use it themselves, instead of selling it to the public. Don't try to buy a money printer. Life isn't that easy.
- redox99 4y ago
  People have been saying this literally since the first ASIC came out. And guess what. People have made a lot of money buying these money printers.
- jabits 4y ago
  Not so sure, what about a machine like a slot machine? I think you make money making something you know how to make
- vikingerik 4y ago
  There is arbitrage. It's possible that a hardware company might be located where electricity is expensive, or in an unfavorable regulatory or tax jurisdiction, such that they wouldn't directly profit from running the mining equipment, but someone in a better environment could. But yeah, this would be a small minority of situations.
- amelius 4y ago
  Solar panels are money printers. Yet no company is offering to put them on my roof at their cost.
  - catlifeonmars 4y ago
    Why not?
  - betamaxthetape 4y ago
    This used to be the case in the UK. There were a few companies that would install solar panels on your roof, at no cost to you. You could use the electricity generated by the panels at no cost. The catch was that the companies took the feed-in tariff (the government subsidy for generating renewable electricity), and that you needed to commit to having the panels on your house for a minimum number of years (making it unviable if you rented, or planned to move in a few years). In the mid-2010s the UK changed how the subsidies worked, changing from the feed-in scheme where you were paid per unit of electricity generated (regardless of if you consumed that energy or sent it back to the electricity grid) to the Smart Export Guarantee, where you are only paid for the electricity that you sent back to the grid. According to Wikipedia [0] this caused many of the companies operating the "free solar panels" schemes to go out of business. [0] https://en.wikipedia.org/wiki/Feed-in_tariffs_in_the_United_Kingdom#Free_electricity_schemes https://en.wikipedia.org/wiki/Feed-in_tariffs_in_the_United_...
andy81 4y ago
You'd be competing against others who steal their electricity or have it subsidised (including pollution, resource depletion, regulatory arbitrage, financial crime and other externalities). If you can take advantage of some of those and don't mind that the money isn't being generated so much as taken from other people then it's a great idea.
mirceal 4y ago
there are multiple variables here. one is the cost of the hardware. 2000$ is not enough for latest generation ASIC miners. It just isn't. You want the latest generation ones. We are probably talking 10k+ for something decent. The second one is the cost of power. People like to talk shit about the environmental impact of bitcoin and stuff, but the reality is that the bitcoin you mine is worth less than the power you are using in most places around the world. Bitcoin mining is profitable in areas where the cost of power is heavily subsidized (it's free real estate meme) or you can easily generate power yourself (solar, wind, thermal, etc). So, if the cost of power is > value of mined bitcoin, it does not make sense to mine it The third part is mining pools. You can build all the rigs you want, but the reality is that most bitcoin is mined by mining pools. So you will have to join one of those pools if you want to have a steady guaranteed small income. So to answer your question: depending where you are for an investment of X this could be profitable (medium/long term) but you need to understand more about the cost of the hardware, cost of power and dynamic of mining pools to actually pull this off (so for a noob, you're better off just buying 2000$ of BTC, holding for 2 years and selling. sorry noob. The wild west era of bitcoin mining is long behind us)
scotty79 4y ago
If you don't have a super cheap source of electricity then most likely you wouldn't break even.

cowtools 4y ago

Mining is always a rat race against the rest of the network. Although this article makes me hopeful for alternative PoW solutions like RandomX[1] that seek to combat the advantages specialized mining hardware altogether. [1] https://github.com/tevador/RandomX https://github.com/tevador/RandomX

andy81 4y ago
Specialized mining hardware is an environmental disaster but it does make 51% attacks more difficult. With POW on general purpose CPUs, anyone can rent cloud processing to mine for short bursts in a way that's just not possible for attacks on bitcoin.
- cowtools 4y ago
  That is a good point, but consider the following: 1. If a cryptocurrency is dominated by specialized miners, then you have a centralization effect as the majority hash-rate can be more controlled by monopolies that can take advantage of their economies of scale. Because mining is mostly done by companies at scale, it is easier for governments to impose regulations on miners and control the type of transactions that are allowed to be verified. 2. Vendors accepting cryptocurrency can always choose their own level of risk by deciding how many blocks to wait before accepting a transaction. This allows them to "wait out" temporary attacks. I would say that the permanent miner takeover as described #1 is an order of magnitude more threatening than the temporary attacks as you've described. But it is still quite an issue. Specialized hardware will depreciate if it is tied to a cryptocurrency that has been attacked. So miners are incentivized not to attack, lest they devalue the resell value of their hardware. Note that this advantage doesn't really apply to GPU-mined cryptocurrencies.
  - javert 4y ago
    There is no such thing as a "miner takeover" because miners don't vote. Unlike with proof of stake. The only powers they have are to censor transactions, conduct denial of service and (if they have over 50%) conduct a double spend attack. What you are describing in #1 is a government takeover of miners. Definitely a nit pick, but what are we here for if not for that?

RichardHeart 4y ago

solveit 4y ago
How does proof of wait deal with sybil attacks?
- CipherThrowaway 4y ago
  GP is probably referring to HEX which is one of the more shameless Ponzi coins. HEX is an Ethereum token so its "proof of wait" mechanism is not actually a consensus protocol. The name is a marketing gimmick that merely apes (pun intended) the PoX terminology.
cowtools 4y ago
>proof of wait Care to enlighten us with a link?
humanistbot 4y ago
Link or GTFO

woodruffw 4y ago

This is a really excellent summary of just one among many sufficient reasons why bitcoin’s economics are fundamentally untethered from reality. Just the last points alone are condemning: no legitimate scheme in history has seen its executives cash out real money against such a small proportion of expected future earnings (in scrip).

paulgb 4y ago
Thanks! FWIW, this is a follow up to an older article that covered a number of other issues with bitcoin's economics: https://paulbutler.org/2021/betting-against-bitcoin/ https://paulbutler.org/2021/betting-against-bitcoin/
repomies69 4y ago
This article has really nothing to do with Bitcoin itself. It is just a story how stupid investors are pouring money to companies that have the Bitcoin in its name, without really going through the business at all. These companies have been ridiculously lousy investments. Borderline scams, when you look at executive compensation.
- catlifeonmars 4y ago
  > This article has really nothing to do with Bitcoin itself. It is just a story how stupid investors are pouring money to companies that have the Bitcoin in its name, without really going through the business at all. How do you figure? Much of the (featured) article is centered around hashrate to bitcoin production ratios over time. Literally one the central features of bitcoin.
- woodruffw 4y ago
  It has "nothing to do with Bitcoin itself" in the sense that it's about the economics of mining, which has everything to do with bitcoin and its valuation.
  - wallacoloo 4y ago
    it's about the economics of mining _using an external source of capital_. the more significant interaction is not between the ASICs and the bitcoin rewards, but the companies and their investors. in that sense, it's more accurate to say it has "everything to do with public stock markets". the author gives the oil analogy. the oil wells themselves have very similar economics to mining. it's the relationship between these similar operations and the investors which sets them apart more than the activity they're involved in.

wyager 4y ago

This should probably be titled something like "the problem with an accounting strategy that I made up, which some people might be using, I'm not sure".

gitfan86 4y ago
Sure, maybe the books of these companies are not as cooked as implied in the article, but the question remains: How does a company who spends 31k mining BTC that is currently worth 30k and pays their executives tens of millions in compensation work out in the long run?
- mirceal 4y ago
  here is the thing. there are good investments and bad investments. good execution strategies and bad execution strategies. i have no doubt that a lot of these companies will go belly up. happens in every new domain where there is a lot of uncertainty and FUD. So the question is not: how does a company ... work out in the long run? the question is: which company actually does things in a sane manner and will survive to be a dominant player in the space once the dust settles?
- wyager 4y ago
  If you're confident in your analysis you should take a short position.
  - gitfan86 4y ago
    LOL, Financial derivatives are the exactly problem with the markets today that I'm calling out. Everyone is trying to figure out how to make a "trade" that will make money. The last thing I'm going to do is enter into a financial contract that can be short squeezed and margin called.
salmonlogs 4y ago
Operating cashflow and depreciation curves are the most basic accounting principles out there, the author did not make anything up - he is applying a logical analysis to publicly available data.

benreesman 4y ago

I think this is what we call “self-limiting”. Maybe miners are subsidizing their mining by BTC appreciation (though, it seems it’d be easier to just buy BTC), and if they are then some people are going to find new jobs when the price changes slope. Problem solved.

woodruffw 4y ago
“Self-limiting” is a game-theoretic property, not an economic property. The point of the post is that there’s a fundamental economic unreality in how these mining companies are valued, and all signs (such as hearty executive bonuses) point to the fact that their leadership is aware and is emptying the bag before leaving others holding it.
mdoms 4y ago
This is covered in the article.
andreyk 4y ago
The post makes this exact point actually, so seems the author agrees.
- benreesman 4y ago
  I mostly agree, my little TLDR is a matter of emphasis. This article should be like a tweet: “Watch out for MinerCo, their depreciation schedule looks wonky, I’m short!” And then maybe footnote if it’s not obvious. But it’s Movie Trailer Voice: “The Problem with BitCoin Miners”. Wait there is one problem that so exceeds in importance all the other pros and cons that it’s The Problem? Oh no you’re short some companies and want people to sell them. Jim Cramer’s got to retire someday.

doomroot 4y ago

TLDR people are throwing capital at mining companies because they want traditional financial access to bitcoin gains. Mining companies will reach their proper evaluation when a bitcoin spot ETF is available to investors.

deleted 4y ago

[deleted]

henvic 4y ago

> As of writing, there are 1,960,775 bitcoin remaining to be mined. There will be more: https://henvic.dev/posts/bitcoin/#scarcity https://henvic.dev/posts/bitcoin/#scarcity They'll find a way to convince more suckers to adopt the shitcoin.

ntoskrnl 4y ago
Sorry, is that link arguing that bitcoin is not scarce because each bitcoin can be divided into smaller units?
- everfree 4y ago
  Looks like it is. If you subdivide something, that doesn't make more of it.
- smnplk 4y ago
  In the future, BTC could be more abundant, because devs in bitcoin core can increase the upper limit of max bitcoins ever mined.
  - mirceal 4y ago
    In the future, we will all drink Gatorade and have a president wrestler. You see, I can also make stuff up. It may also happen! Saw a documentary about this already.
  - ntoskrnl 4y ago
    Sure, if they also convince every miner, user, and exchange on earth to download the fork and agree to the protocol change. That's like saying "in the future the linux kernel could be insecure, because the devs could add a keylogger"
    - smnplk 4y ago
      There is a BIP process in place and there were many upgrades already done to the software that runs BTC nodes. But I don't really care for Bitcoin either way. It can never be a currency. >> That's like saying "in the future the linux kernel could be insecure, because the devs could add a keylogger" This is just informal fallacy. Is increasing hard cap immediate threat to btc ? I don't think it is. Bitcoin has so many other unsurmountable obstacles, that it's "monetary policy" is irrelevant.

intabli 4y ago

What renders this whole calculation wrong is that it doesn’t account for transaction fees AND transaction fees growth which was also supposed to be growing exponentially, had Bitcoin not been artificially limited to ~ 2 MB blocks every ten minutes. On an actually uncapped Bitcoin instance, Blocks (Block size) and transaction fees will grow exponentially, rendering all such “Bitcoin is environmentally terrible” and “Miners aren’t profitable” calculations absurdly wrong. Other instances exist that are chugging along flawlessly and are set to help miners grow their revenue with on-chain transaction fees growth: DYOR. Of course, BTC Maxis lead by companies set to profit from such an artificial limit on Bitcoin (hint: they often peddle L2 solutions) would hate for you or anyone to understand and study those facts.

mdoms 4y ago
So in a fantasy universe that doesn't exist this analysis doesn't make sense. Ok?
- intabli 4y ago
  These uncapped forks do exist, they’re the reason the whole community split in 2017; so when those “analysis” articles ignore them and ignore the fact that the white paper and Bitcoin’s creator explicitly called for on-chain growth and scaling, they’re being either dishonest or ignorant. It’s like someone saying “Look at how wasteful this car limited to 20MPH is! All cars are wasteful!”. No, not all cars, especially that the original design explicitly said to scale the engine as more speed is needed.
  - paulgb 4y ago
    I don't see how any of this undermines the post. What “uncapped fork” could these big miners switch to that would give them anywhere near the revenue they have today?
    - intabli 4y ago
      I won’t point you to any, but you should dig deeper into the 2017 block size wars and understand why the community forked then and how, avoid the commercially appealing answers and the laser eyes.

bseidensticker 4y ago

I managed a Bitcoin mining operation a long time ago. We made machines that made 50% of their BTC in the first month of their operation, and the remaining 50% over the next 5 months. After that they cost more to run than they produced. The accountants wouldn't believe us when we told them that the machines were worthless after only 6 months.

chucknthem 4y ago
How long ago was this? The rate of improvement on ASICS as well as new entrants to mining hasn't been this intense in a long time.
- bseidensticker 4y ago
  2013
  - chucknthem 4y ago
    That makes sense, 2013 was when ASICs were getting popular and started dominating mining. The industry has slowed down significantly since. Presumably they've implemented most of the low hanging fruit optimizations. Antminers from 3+ years ago are still profitable in a lot of areas with <=$0.1/kWh electricity.
  - Dmitriysz 4y ago
    This makes sense. In the earlier days of bitcoin we’ve seen substantial improvements in mining every 3-6 months. We’re talking about significant 100x-1,000x improvements in efficiency and profitability. To stay competitive, these improvements in efficiency made it necessary for miners to upgrade mining equipment every 3-6 months. Because of its closeness to silicon fabrication and cheap energy, China emerged as the de facto place to set up these mining farms. Those previous 100x-1,000x improvements are no longer possible. The development of mining hardware caught up with Moore’s law. This is the observation that transistors in a dense integrated circuit doubles about every two years. It would be fair to assume ~2x improvements in mining every ~2 years. This would mean that mining equipment would now have a longer shelf life, and no longer be obsolete in a few months.

vmception 4y ago

Yeah publicly traded bitcoin mining companies are a very new phenomenom, and investors are undiscerning and being taken advantage of. Its fine though, as long as those investors find new investors who only care about revenues. The actual company is a conduit, the revenues still occur but nobody had been asking what happens to the actual money. Lucrative game. Good article, calls for nothing except FYI to investors.

dbv1 4y ago
How are the investors being taken advantage of exactly? Investors normally primarily care about profits, that’s not abnormal.
- vmception 4y ago
  Investors care about corporate governance and management of the finances as well, corporate profits for share buybacks can accelerate investor profits The article details this basically pointing out that c-suite payouts are high and this is currently being tolerated but maybe by ignorance
- me_again 4y ago
  I think it's abnormal for executives to get compensation > entire company revenue. I'm sure it happens in other industries from time to time but it seems like a sign of misinvestment to me.
- josu 4y ago
  As explained in the article profits are frontloaded, so the company currently looks better than it should.
- FabHK 4y ago
  Yes, and MARA has only been profitable in one quarter so far, if I read things correctly, and the author argues quite convincingly that even those profits are overstated insofar as the depreciations are understated, and things will quite likely turn worse. At the same time, extravagant salaries are being paid. That is how investors are being taken advantage of.

zionic 4y ago

While I have heard a myriad of arguments against PoS, my opinion is that the ecological benefits alone are worth switching as soon as possible. We can continue to iterate on it to improve the negative sides, but we can’t afford to wait for a “perfect” replacement forever while PoW does such extreme harm.

tylersmith 4y ago
The main feature of PoW over PoS is being completely objective and uncensorable. There will always be networks using it because of this even when most are using and better off with PoS.
- zionic 4y ago
  How is PoS easier to censor than PoW, specificity ETH 2.0’s implementation.
  - eldenwrong 4y ago
    Vitalik Buterin : stop all trading!! Reverse the chain! Its okay if we control all the supply because we have it in the premine to our friends and they have the best interest in keeping Ethereum safe.
  - yokem55 4y ago
    Yeah, the most obvious externality of an ethereum validator is a few megabits of sustained internet traffic that makes it difficult to run on capped internet services. Otherwise it is just a matter of being able to buy the eth, setting up the node (cheap commodity pc hardware) and putting it in a corner in your home. In contrast for POW you have to be able to source specialized hardware and an electricity supply cheap enough to make the hardware profitable, both of which are much more noticable to the outside world.
    - tylersmith 4y ago
      The censorship doesn't happen at the network level but at the protocol level, by removing a validators stake.

Heston 4y ago

I propose we move to a new system. Proof of Wasted Electricity

jagger27 4y ago
That's the current system.
- toss1 4y ago
  Yeah, but maybe we could do something more spectacular with the electricity - maybe run giant Tesla coils and reward who can create the longest / most durable / most spectacular / etc. sparking events . . .
- hypertele-Xii 4y ago
  That's the joke.
- thfuran 4y ago
  Then how about proof of steak, based on holding beef call options?
hammock 4y ago
Goes to show you that energy is the real base metal of the world. Whether you are mining bitcoin or gold, or drilling oil - the power rests in the hands whoever controls the energy to pull it out of the ground/air.
- RedBeetDeadpool 4y ago
  Exactly. You could use anything as currency. Prisoners use cigarettes or ramen. Its not about the product being mined so much as work being done, and therefore work being stored. Replace any currency with any power generation you want. In prison, its the work of smuggling that stores economic value in cigarettes. In a gold based system, its the work of mining elements out of the earth that stores economic value in base metals. In a peer to peer network, its the work of electricity(of any kind whatsoever, clean or polluting) that stores economic value on a fair distributed ledger. Money is about storage of work, and quite frankly the weaker the money used to store energy, the more lethargic and rusted the whole economic system gets. Fiat, i.e. "proof of wasted energy" just does a lot of work and lets it evaporate in economic terms leaving the entire society that uses it in constant need of more and more fiat because that energy, that work done, keeps dissipating. It doesn't matter what money is: seashells, carved rai stones, arrowheads, cigarettes, ramen, non-livable apartment homes sold solely for wealth storage, luxury cars, art, gold, printed paper with your uncle sam's face and "guarantee" stamped on it, centralized entry in a private database, decentralized entry on a public blockchain. Society needs money in order to achieve higher levels of cooperation. Might as well use the strongest form of money that exists. And as far as I know, it aint proof of wasted electricity, i.e. fiat.

fredgrott 4y ago

I once explained the same points to someone who use to pop in here when his name was mentioned Calacanis when he bought some mining rigs several years ago. You see there are some valid economic reasons why CBOT and several other exchanges allow the shorting of bitcoin without making those contracts tied to bitcoin. If any of you want to bet anyway on bitcoin do not buy mining rigs, think of it this way it represents a business we all are familiar with... Buy domains to speculate and base the business model paying for it on ad revenue off of the websites with each domain name buy. Its the same dam economic trends and same long term bad result

hn_throwaway_99 4y ago

Proof-of-work is so obviously, undeniably, mathematically guaranteed to be a crypto dead-end, that I'm gobsmacked we're still having discussions like this. Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin. It's really just simple arbitrage: if the value of Bitcoin goes up, but the electricity cost doesn't, then you have essentially 2 different prices for 1 good, which should attract more miners to spend more money on electricity. And, indeed, this is exactly what has happened. The problem, of course, is that if it takes an Argentina's worth of electricity to run Bitcoin now, how does the world manage if Bitcoin has a 10 or 100 times greater market cap? Obviously it can't, and world governments would rightly shut it all down before the majority of our electric output went to mining BTC. There is simply no way around this issue if you're on a proof-of-work system, and given that, it's so easy to see that BTC is guaranteed to fail at some point. It's like we're on a train rushing towards a bridge that's out, and everyone can see the bridge is out, but somehow we've convinced a large number of people that we'll "jump the gap" when we get there.

kobieyc 4y ago
madacol 4y ago
> the electricity value expended on mining is proportional to the total market cap of Bitcoin That's not true, it's at most, equal to the printing rate of bitcoins (coinbase transactions)
junofan 4y ago
You’re saying that as the price of Bitcoin has risen, the price of electricity has risen? I think something’s missing from your argument.
- tiagobraw 4y ago
  I think he meant that if the price of 1 bitcoin rise, the energy cost of mining 1 bitcoin should also rise in proportion

jmyeet 4y ago

It blows my mind how well-known all the problems there are with crypto and yet it's become so huge while solving virtually no problem other than avoiding laws about the movement of money and capital. The Bitcoin network in particular uses more electricty than Argentina. Defenders will point out that it's majority renewable. That's intellectually dishonest because Bitcoin is simply chasing cheap power and hydro power is among the cheapest. Bitcoin miners will happily use coal if it's sufficiently cheap. Also, use of certain renewables comes at the expense of other people. In the Hudson Valley, miners have raised the electricty prices for other residents in those towns. Bitcoins transactions consume an enormous amount of electricity. Defenders will also claim we'll move to Proof of Stake ("PoS") over Proof of Waste but this too is a myth. For one, Bitcoin's massive computational and electricity waste is key to defending the network. I don't know what happens when we run out of coins to mine. Also, if it's as simple as that, why haven't we simply moved to PoS for everything? PoS ultimately is a rich-gets-richer scenario is why. It's really no different to the Luna anchor stakers getting 20% returns at the expense of everyone else who comes along later. And for all of this waste we get what? Transactions that can only be guaranteed if they're entirely contained within the network because as soon as you want to include something outside of that (eg converting crypto to or from cash) you've just added the same trust issue that is intrinsic to every traditional financial transaction. And what fuels this continued mass delusion is the fabric of American beliefs that every American is just a temporarily embarassed millionaire [1]. [1]; https://www.goodreads.com/quotes/328134-john-steinbeck-once-said-that-socialism-never-took-root-in https://www.goodreads.com/quotes/328134-john-steinbeck-once-...

ollieglass 4y ago
> solving virtually no problem other than avoiding laws about the movement of money and capital This is a tremendously valuable problem to solve for some.
- jmyeet 4y ago
  But at what cost? This [1] estimates the annual Bitcoin energy consumption at 145TWh. If the Bitcoin network were a country it would rank 25 in the world by energy consumption [2]. The cost of that electricity is hard to estimate but if you use a ballpark of $0.10/kWh that puts the cost of the Bitcoin network at almost $15 billion annually just for the electricity. [1]: https://ccaf.io/cbeci/index https://ccaf.io/cbeci/index [2]: https://en.wikipedia.org/wiki/List_of_countries_by_electricity_consumption https://en.wikipedia.org/wiki/List_of_countries_by_electrici...

SergeAx 4y ago

This is a great moment to remind myself that "markets can stay irrational for much longer than I can remain solvent".

t_mann 4y ago

Some of the top-rated comments make me wonder whether the authors have even read the article. This isn't about whether PoW or cryptocurrencies as a whole make sense, but strictly about the economics of mining, and how standard accounting practices might obfuscate miners' true profitability. The author sounds like an investor who would be equally happy to hold long instead of short positions in those stocks if their prices were different.

wmf 4y ago
Of course they haven't read the article and even if they did, most people won't discuss the details of something if they object to the fundamentals.
- pennaMan 4y ago
  So, wilful ignorance via political stance? Nice.
SilasX 4y ago
On that note, I don't get why it doesn't mention if there are any other (standard) methods of depreciation accounting that are more realistic for this kind of asset. The author mentions that oil well already have this issue and so you could just see if their method works. Wikipedia gives a list of the other ways: https://en.wikipedia.org/wiki/Depreciation#Methods_for_depreciation https://en.wikipedia.org/wiki/Depreciation#Methods_for_depre... (I also vaguely remember a lot of people screaming bloody murder about how it's unfair to oil wells to get accelerated depreciation.)
- josu 4y ago
  > I don't get why it doesn't mention if there are any other (standard) methods of depreciation accounting that are more realistic for this kind of asset Of course there are, and they should actually be using them. But then fundraising would be harder. They are cheating on accounting, in order to raise equity capital, and hoping that the price of bitcoin will go up in the future and cover the losses.
- 4y ago

davidgerard 4y ago

nice to see an article about bitcoin mining's shonky accounting, and not about PoW itself. the other weird accounting thing: in 2021, bitcoin miners started stockpiling unsold bitcoin. This was new behaviour. Miners didn't hold onto cryptos for ages in the ten years previously - maybe for a short time, but then they sold it. I can find no sensible reason for this, except that there aren't enough actual dollars in the crypto market to sell the bitcoins without crashing the market. (I ask coiners about this from time to time. Most answers are some more complicated version of "there aren't enough actual dollars not to crash the market." Some of them confidently state that miners have magically transmuted some time in June 2021 from uncompromising economic agents into bitcoin moon boys, who are sure it'll go to a million. I don't believe them.) The miners have tended to borrow against the bitcoins - from other companies in the crypto industry. Because they all know they're all in this together.

paulgb 4y ago
Thanks David, means a lot because I’m a fan of your work :) One thing that will be interesting is what happens when they do start selling hoarded bitcoin (and unless a new source of capital appears, they will need to). RIOT already quietly sold $9M of cryptocurrencies in Q1 of this year. Given the mining hardware they have already ordered, I suspect they’ll be doing more of that into an already distressed market.

rufusroflpunch 4y ago

The comments are yet another endless proof-of-work debate. Here’s the truth: none of this debate matters. Bitcoin isn’t going away, and it’s not changing consensus algorithm. Money is a network good, and Bitcoin has the best network. It will continue to grow whether you like it or not. Bitcoin isn’t like some other cryptocurrency that formed around a founder or company. There is nothing and one no one to attack. It just… exists and will continue to exist until something comes along that is 10x or 100x better. The problem for those that oppose Bitcoin is that none of them are capable of building something better at the problems that Bitcoin addresses.

bb88 4y ago
> Bitcoin isn’t going away, and it’s not changing consensus algorithm. Well... until someone forks it to change the consensus algorithm, right? Or the programmers decide to make the change globally? Or the miners want a different consensus algorithm to make their mining more profitable? Or... Or... Or...
- rufusroflpunch 4y ago
  No offense, but this demonstrates a lack of knowledge about Bitcoin’s history and nature. All of these things have been tried and failed. The core devs and the miners don’t control Bitcoin. The full nodes control Bitcoin. The only way to successfully fork Bitcoin is to convince all of the nodes to run the code. Other cryptocurrencies get around this by being more centralized. This includes Ethereum. These other blockchains make it significantly more difficult and costly to run nodes, which means fewer nodes run, mostly by large corporations so that they can exert control and fork the chains all the time. Bitcoin is different. Anyone can run a node on an old laptop. There are tens of thousand of public nodes worldwide, who knows how many private ones. If miners ran a fork to change consensus rules, the nodes would just reject the blocks and the miners just waste electricity.
  - bb88 4y ago
    I don't speak for HN, but why do bitcoin proponents always assume people to be ignorant on a website with some of the smartest people on the planet? I've never got this, and never will. No offense, but it's the most incurious form of argument on a website dedicated to curiosity.

mdavis6890 4y ago

It now dawns on me that we can stimulate massive investment and efficiency gains in any domain we want, if only we create a crypto on that domain. E.g. Food. Create a new proof-of-food based crypto. Poof! Literally solved world hunger right there.

TheDong 4y ago
I think this might be the survivorship bias talking. The vast majority, like 99%+, of all crypto projects fail. Anyway, so far there's: Foodcoin (https://coinmarketcap.com/currencies/food/ https://coinmarketcap.com/currencies/food/), TE-Food (https://coinmarketcap.com/currencies/te-food/ https://coinmarketcap.com/currencies/te-food/), and probably a dozen other scams. Let me give you an analogy to what you said "After seeing that Google and Apple have market caps of a trillion dollars, it dawns on me that we can stimulate massive investment and efficiency just by making a publicly traded company focused on that thing. If we make a food-based public company, poof, world hunger solved". Just because bitcoin has a huge amount of money in it does not mean all cryptos will succeed. Just because google has a trillion dollar market cap does not mean every publicly listed company will.
- mdavis6890 4y ago
  I don't think your examples are quite what I was talking about. I was talking about where the coins are mined based on how much food you are growing or have harvested. A bit like Chia Coin, but instead of rewards based on disk space, it would be harvested food or something like that. Like with each bushel of corn you harvest there's a random chance you get a FoodCoin. And secondly I was joking, but clearly my attempt at humor failed as I also got at least one downvote.
  - TheDong 4y ago
    I was pretty sure it was a joke, but the manic enthusiasm for the impractical that I've seen the crypto ecosystem makes it hard to be certain sometimes. I look forward to the government-issued "Agriculture-coin" issued to farmers that show they grow a certain amount and follow certain standards: https://en.wikipedia.org/wiki/Agricultural_subsidy#United_States https://en.wikipedia.org/wiki/Agricultural_subsidy#United_St...

Jasonrams 4y ago

Gatsky 4y ago

> Disclosure: I hold short positions in companies mentioned in this article. This is not financial advice. Hmm. Well, on the one hand, he is putting his money where his mouth is. On the other hand, this could be prime evidence of motivated reasoning. The author has also submitted his own article to HN it seems. Reading the analysis, it makes sense, but I'm not experienced in analysing company financials. Other people I respect/trust who have a good track record don't feel this way about the companies in question. I think, in general, shorting volatile assets is a pretty fraught undertaking. There could be a Gamestop style short squeeze fueled by Crypto bros for example. There could be a purchase announcement that could spike the price. ARK could decide to buy a large stake. All these things could lose you a lot of money for 'no good reason'.

xmodem 4y ago
> On the other hand, this could be prime evidence of motivated reasoning. I find in cases like this it can be useful to go and check the primary sources. Of course, it's impossible to re-blind yourself having already read the analysis. > Last year, one MARA executive earned over $220 million in cash and stock-based compensation, in a year when the company’s total revenue was $150 million. The author helpfully links the SEC filing they've taken this number from, and it would appear to be accurate, though one detail the author glosses over is that this is 99% stock. I'm not sure how that affects your analysis. (I hold no position in this company)
Thorrez 4y ago
>I think, in general, shorting volatile assets is a pretty fraught undertaking. There could be a Gamestop style short squeeze fueled by Crypto bros for example. I think most of the risk could be mitigated by holding bitcoin while shorting the miners.
- polygamous_bat 4y ago
  I am curious, how would holding Bitcoin hedge the meme stock frenzy risk?
  - 4y ago

mattwilsonn888 4y ago

The obvious retort is that mining is competitive. If you are not taking advantage of cheap energy you are not a competitive miner. If you source your energy from high demand locations like cities you will fail. The miners who profit will be the ones extracting energy from places where it is otherwise useless, or less in demand. Also, if miners started selling equipment to buy Bitcoin it would simply make mining more profitable to the point where the average miner would profit again. It's a basic equilibrium and the ominous "I don't think this ends well," has less direct connections the arguments in the piece than it does the author's disclosed financial interest in seeing mining companies fail. To be fair, it may be the case that mining is currently over allocated, but implying that the practice is going to totally collapse is about as hyperbolic as any NFT shilling crypto bro telling you his decentralized Pokemon card knock off is the epitome of finance type get-up this site is so apt to complain about.

shudza 4y ago

>Based on the reported hash rate and operational costs in Q1, at a current global hash rate of 225 EH/s, I estimate that MARA has a cost per coin mined of $21,000 and RIOT has a cost per coin mined of $31,000. I'm sorry but this is almost certainly wrong. I mine at home and my cost is 22k per btc mined. I have a 1 generarion older equipment than they do, and my electricity is probably 3-4 times the price they are having. You should redo your math and look for errors.

paulgb 4y ago
It seemed wild to me too, but I double checked and I don't see any errors. Here's the data and calculations, annotated with sources. https://docs.google.com/spreadsheets/d/11hd-Q6KdkNETiRBs_JYwxOEAEfiEM4YoYad__grb5lE/edit?usp=sharing https://docs.google.com/spreadsheets/d/11hd-Q6KdkNETiRBs_JYw... Keep in mind that these are companies that made a big bet when Bitcoin was in the 50-65k range that it would keep going up. They planned their expansion based on that scenario, so it's not that crazy that they allowed their margins to get so slim.

cs702 4y ago

This analysis is incomplete, for four reasons: 1. The author fails to explain clearly that what we call mining "mining" is a distributed form of transaction processing, in which transaction fees are earned via proof-of-work. Currently most of the transaction fees come from block rewards, but transaction fees are in fact set by competition based on the marginal cost of computation. 2. By design, Bitcoin's block rewards have always been meant to be temporary, as explained by Satoshi Nakamoto in his/her/their paper. I mean, the rewards are halving on a fixed schedule, and everyone knows that eventually there will be no more rewards. The only purpose of the block rewards was -- and is -- to provide a temporary incentive for jump-starting Bitcoin's transaction processing network. 3. As the rewards go to zero, Bitcoin transaction fees will fluctuate. They will be determined by competition based on the marginal cost of computation. My expectation is that Bitcoin transaction fees will go up over time. 4. Many transaction processors, i.e., "miners," are convinced that Bitcoin eventually will have a market capitalization similar to that of gold (~$12T, give or take), so they are hoarding their share of block rewards. Many investors in these operations are convinced too. Some in fact are willing to lose money processing transactions to get the block rewards.

gregable 4y ago
1. The author points out that txn fees are tiny, 1% of the revenue. And they are unlikely to be significant during the depreciation period of the machines. 2/3. Sure, but see #1. 4. Sure, but the author is pointing out that the cost of buying BTC exposure via these companies is higher than just buying BTC by a lot. It almost seems like a short position of these companies combined with a long position on BTC is a solid bet over a long term horizon.
- cs702 4y ago
  > Sure, but the author is pointing out that the cost of buying BTC exposure via these companies is higher than just buying BTC by a lot. The investors also get transaction processing infrastructure, including software and facilities, and a team, not just exposure to BTC. Perhaps they see future value in building that infrastructure now. > It almost seems like a short position of these companies combined with a long position on BTC is a solid bet over a long term horizon. If you think that's a solid bet, you're of course welcome to go ahead and make it!