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"Bitcoin prices are so low, you see, that miners are spending more money running their supercomputers than they're making from new coins. So why are they still

"Bitcoin prices are so low, you see, that miners are spending more money running their supercomputers than they're making from new coins. So why are they still going? Well, they have dollar debts that they need to pay back, and where else are they going to get the money? They're stuck, in other words, in a catch-22: they can't afford to keep mining, but they can't afford to stop mining, either." Huh? If miners are spending more on electricity than the Bitcoins they mine are worth then they should immediately stop mining (unless they are engaging in speculation)

Dylan16807 12y ago
If they weren't engaging in speculation they wouldn't have bought mining equipment in the first place.
- emmett 12y ago
  You don't need to spend a bunch of capital on mining equipment to speculate. You can just buy Bitcoin. Usually you buy mining equipment because you think you can make BC cheaper than everyone else with operational efficiency.
  - Dylan16807 12y ago
    In practice I think mining equipment has rarely been able to pay for itself without speculation because of so much demand to be a miner.
savanaly 12y ago
He's probably referring to the fact that marginal cost is still below marginal revenue, but long-run average cost is above marginal revenue. This situation is often covered in introductory microeconomics and the conclusion is that they will continue to operate in the short run but shut down in the long run.
eof 12y ago
Even if they are engaging in speculation, it would be more rational for them to quit mining and spend the money they would spend on electricity to buy bitcoin on the open market.
harryh 12y ago
The reporter clearly doesn't understand the difference between fixed and marginal costs. It's possible for Bitcoin mining to be profitable on a marginal basis while at the same time not profitable once you take into account capital costs. So you keep mining because you make money on a day by day basis but not enough to pay back the costs of acquiring your original hardware.
IgorPartola 12y ago
What others said. There's another possibility here too: mine at a loss now, then hold onto the BTC, in hope that BTC goes up in value. If you mine $10 worth of BTC a day, but it costs you $20 to do so, that's not a loss if a week from now the value goes up 4x. Not saying that's what they are doing, but it is not unlikely that huge mining operations know more than the public about what might happing going forward.
- tlrobinson 12y ago
  Yeah that's what I meant by "engaging in speculation", but as someone else pointed out, it would be far more rational to stop mining and buy $20 worth of Bitcoin rather than spend $20 mining $10 worth of Bitcoin...
  - x3sphere 12y ago
    For small-time miners, yes. But wouldn't any large scale operation run the risk of moving the market? By mining, they continue to amass coins without having to worry about this, so maybe that is a factor.
- gizmo686 12y ago
  Wouldn't you be better off using your money to buy $20 of BTC today?
  - moe 12y ago
    The idea is that with mining you can generate BTC for less than it would cost to buy them.
- cmsmith 12y ago
  Except that in your scenario why would anyone mine at $20 and hold when they could just buy at $10 and hold, doubling their return? With super-low transaction and storage costs, there's nothing special about the BTC I mined relative to the BTC I bought.
robert_tweed 12y ago
I believe this refers to the TCO which includes the up-front purchase cost as well as the operating costs, over the lifetime of the equipment. The up-front costs are already sunk and need to be repaid, hence they have to keep paying the ongoing costs in order to recoup as much as possible of their up-front debt. Of course sooner or later, due to Moore's law and the way bitcoin works, the operating costs themselves will exceed the value of bitcoins mined. But that is years into the future.
- wmf 12y ago
  sooner or later the operating costs themselves will exceed the value of bitcoins mined. For many people that is already happening, which is what the article is trying to say. cex.io and Cointerra already shut down.
- tlrobinson 12y ago
  That's one interpretation, but he did say "running their supercomputers", which implies they're running machines they already own at a loss. It's obvious that you'd run a machine you already own as long as it's profitable to do so. "Of course sooner or later, due to Moore's law and the way bitcoin works, the operating costs themselves will exceed the value of bitcoins mined. But that is years into the future." I'm not sure what you're referring to. The block reward schedule (halving every 4 years)? How does Moore's law come into play?
- nostromo 12y ago
  I suspect this is happening to some oil producers as well. Ex: if a large portion of an operation is a sunk cost, a producer may respond to lower prices by producing even more oil, in an attempt to maintain revenue (particularly if the producer is leveraged and has debt to maintain). Edit: oops, busted for not RTFA
  - cwyers 12y ago
    From the article: "(This, coincidentally, is the same dilemma that oil drillers who borrowed a lot during the boom face now during the bust)."
px1999 12y ago
It sounds a bit like a dollar auction http://en.wikipedia.org/wiki/Dollar_auction http://en.wikipedia.org/wiki/Dollar_auction to me (ish). What he's probably trying to say though is that miners are likely operating at near break-even, so they continue to mine in the hopes of their luck improving and being able to pay their debts (ie Gambler's fallacy). There are a bunch of reasons someone would do something illogical. Mining bitcoin is essentially gambling, and problem gamblers will continue to sit and gamble even if they're losing money. (Doubly so if they owe money to someone else).

Dylan16807 12y ago

If they weren't engaging in speculation they wouldn't have bought mining equipment in the first place.

emmett 12y ago
You don't need to spend a bunch of capital on mining equipment to speculate. You can just buy Bitcoin. Usually you buy mining equipment because you think you can make BC cheaper than everyone else with operational efficiency.
- Dylan16807 12y ago
  In practice I think mining equipment has rarely been able to pay for itself without speculation because of so much demand to be a miner.

savanaly 12y ago

He's probably referring to the fact that marginal cost is still below marginal revenue, but long-run average cost is above marginal revenue. This situation is often covered in introductory microeconomics and the conclusion is that they will continue to operate in the short run but shut down in the long run.

eof 12y ago

Even if they are engaging in speculation, it would be more rational for them to quit mining and spend the money they would spend on electricity to buy bitcoin on the open market.

harryh 12y ago

The reporter clearly doesn't understand the difference between fixed and marginal costs. It's possible for Bitcoin mining to be profitable on a marginal basis while at the same time not profitable once you take into account capital costs. So you keep mining because you make money on a day by day basis but not enough to pay back the costs of acquiring your original hardware.

IgorPartola 12y ago

What others said. There's another possibility here too: mine at a loss now, then hold onto the BTC, in hope that BTC goes up in value. If you mine $10 worth of BTC a day, but it costs you $20 to do so, that's not a loss if a week from now the value goes up 4x. Not saying that's what they are doing, but it is not unlikely that huge mining operations know more than the public about what might happing going forward.

tlrobinson 12y ago
Yeah that's what I meant by "engaging in speculation", but as someone else pointed out, it would be far more rational to stop mining and buy $20 worth of Bitcoin rather than spend $20 mining $10 worth of Bitcoin...
- x3sphere 12y ago
  For small-time miners, yes. But wouldn't any large scale operation run the risk of moving the market? By mining, they continue to amass coins without having to worry about this, so maybe that is a factor.
gizmo686 12y ago
Wouldn't you be better off using your money to buy $20 of BTC today?
- moe 12y ago
  The idea is that with mining you can generate BTC for less than it would cost to buy them.
cmsmith 12y ago
Except that in your scenario why would anyone mine at $20 and hold when they could just buy at $10 and hold, doubling their return? With super-low transaction and storage costs, there's nothing special about the BTC I mined relative to the BTC I bought.

robert_tweed 12y ago

I believe this refers to the TCO which includes the up-front purchase cost as well as the operating costs, over the lifetime of the equipment. The up-front costs are already sunk and need to be repaid, hence they have to keep paying the ongoing costs in order to recoup as much as possible of their up-front debt. Of course sooner or later, due to Moore's law and the way bitcoin works, the operating costs themselves will exceed the value of bitcoins mined. But that is years into the future.

wmf 12y ago
sooner or later the operating costs themselves will exceed the value of bitcoins mined. For many people that is already happening, which is what the article is trying to say. cex.io and Cointerra already shut down.
tlrobinson 12y ago
That's one interpretation, but he did say "running their supercomputers", which implies they're running machines they already own at a loss. It's obvious that you'd run a machine you already own as long as it's profitable to do so. "Of course sooner or later, due to Moore's law and the way bitcoin works, the operating costs themselves will exceed the value of bitcoins mined. But that is years into the future." I'm not sure what you're referring to. The block reward schedule (halving every 4 years)? How does Moore's law come into play?
nostromo 12y ago
I suspect this is happening to some oil producers as well. Ex: if a large portion of an operation is a sunk cost, a producer may respond to lower prices by producing even more oil, in an attempt to maintain revenue (particularly if the producer is leveraged and has debt to maintain). Edit: oops, busted for not RTFA
- cwyers 12y ago
  From the article: "(This, coincidentally, is the same dilemma that oil drillers who borrowed a lot during the boom face now during the bust)."

px1999 12y ago

It sounds a bit like a dollar auction http://en.wikipedia.org/wiki/Dollar_auction http://en.wikipedia.org/wiki/Dollar_auction to me (ish). What he's probably trying to say though is that miners are likely operating at near break-even, so they continue to mine in the hopes of their luck improving and being able to pay their debts (ie Gambler's fallacy). There are a bunch of reasons someone would do something illogical. Mining bitcoin is essentially gambling, and problem gamblers will continue to sit and gamble even if they're losing money. (Doubly so if they owe money to someone else).