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Well, theoretically the value of Bitcoin would be a function of energy costs and mining difficulty, but that hasn’t happened in practice, and would still be vol

Well, theoretically the value of Bitcoin would be a function of energy costs and mining difficulty, but that hasn’t happened in practice, and would still be volatile anyway.

DennisP 4y ago
The difficulty and energy cost is a function of price, not the other way around. If the price goes down, miners aren't profitable and some have to quit, which makes the difficulty adjust downwards.
wcoenen 4y ago
This is a common misconception. It's the other way around: mining follows the price. Miners can collectively earn a pre-determined flow of block rewards. If the price rices, then those block rewards become more valuable. So then miners can afford to spend more on hardware and electricity as they compete to get those block rewards. Now that the price has dropped, the opposite will happen. Miners can no longer spend the same amount on electricity, so many will be shutting down their mining rigs. Only the miners with the lowest electricity cost can keep operating. The difficulty will drop until it is once again in equilibrium with the price. For real world resource mining, it's different. E.g. if a metal used by industry can't be mined for less than 1 $/kg, then that must put a price floor on the price of that metal (in the long term, ignoring short term price volatility). This dynamic doesn't exist in Bitcoin, which confuses many people.
- bongoman37 4y ago
- srfilipek 4y ago
  Yes, in practice mining mostly follows price, but it's still not quite that cut and dry. Miners also need to sell bitcoin to recoup operational costs. They influence the value of bitcoin by being an active trader and setting limits to their sale price. Current price influences future mining. Past mining influences current price.
bandrami 4y ago
Umm... no. https://en.wikipedia.org/wiki/Second_law_of_thermodynamics https://en.wikipedia.org/wiki/Second_law_of_thermodynamics This says those energy costs are lost to the universe, forever https://en.wikipedia.org/wiki/Third_law_of_thermodynamics https://en.wikipedia.org/wiki/Third_law_of_thermodynamics And this says the underlying value is zero

Well, theoretically the value of Bitcoin would be a function of energy costs and mining difficulty, but that hasn’t happened in practice, and would still be volatile anyway.

DennisP 4y ago

The difficulty and energy cost is a function of price, not the other way around. If the price goes down, miners aren't profitable and some have to quit, which makes the difficulty adjust downwards.

wcoenen 4y ago

This is a common misconception. It's the other way around: mining follows the price. Miners can collectively earn a pre-determined flow of block rewards. If the price rices, then those block rewards become more valuable. So then miners can afford to spend more on hardware and electricity as they compete to get those block rewards. Now that the price has dropped, the opposite will happen. Miners can no longer spend the same amount on electricity, so many will be shutting down their mining rigs. Only the miners with the lowest electricity cost can keep operating. The difficulty will drop until it is once again in equilibrium with the price. For real world resource mining, it's different. E.g. if a metal used by industry can't be mined for less than 1 $/kg, then that must put a price floor on the price of that metal (in the long term, ignoring short term price volatility). This dynamic doesn't exist in Bitcoin, which confuses many people.

bongoman37 4y ago
srfilipek 4y ago
Yes, in practice mining mostly follows price, but it's still not quite that cut and dry. Miners also need to sell bitcoin to recoup operational costs. They influence the value of bitcoin by being an active trader and setting limits to their sale price. Current price influences future mining. Past mining influences current price.

bandrami 4y ago

Umm... no. https://en.wikipedia.org/wiki/Second_law_of_thermodynamics https://en.wikipedia.org/wiki/Second_law_of_thermodynamics This says those energy costs are lost to the universe, forever https://en.wikipedia.org/wiki/Third_law_of_thermodynamics https://en.wikipedia.org/wiki/Third_law_of_thermodynamics And this says the underlying value is zero