Why do you assume that the price of Bitcoin, and its uptake are tightly connected? Why couldn’t it be possible for the price to stay around $200 from now on, even while Bitcoin becomes massively used all over the world? The price of the dollar is not continuously rising (indeed it falls over time) but it is nevertheless widely used.
There is an asymmetry regarding Bitcoin price. If the price of Bitcoins is higher than the cost of mining them, that will cause more investment in Bitcoin miners, leading to more Bitcoins created and hence a lower price. But if the price of Bitcoins is lower than the cost of mining them, this does not cause Bitcoins to be destroyed. Indeed the “sunk cost” hardware keeps running, so the supply keeps going up. Yes, the supply goes up by less than it otherwise would, but it still goes up. Surely we should say that the price of Bitcoins should be capped by the cost of mining them, not set by it?
Your item 2 is wrong. More investment in bitcoin mining does NOT increase the rate of bitcoin creation. The “difficulty” level of mining is automatically increased to keep the creation rate of bitcoin at a predetermined constant. More investment in mining simply lowers the return (counted in bitcoin) on all previous investments in mining.
Bitcoin mining is not like gold mining. If you buy a mine with 100 ounces of gold in it, you will extract 100 ounces of gold before the mine is dead. But the amount of “bitcoin” in a bitcoin mine depends on how many other mines there are. If the investment in mining doubles, the mine you have already invested in will produce only half as many bitcoins, because the “difficulty threshold” of successful mining is constantly and automatically adjusted to keep the rate of new bitcoin creation constant.
But “demand” for bitcoin is not the same as bitcoin adoption. Bitcoins are neither created nor destroyed when (for example) a merchant accepts bitcoins in a transaction. Similarly, demand for dollars is not a function of how many people are willing to use dollars in their transactions, but rather how many people want to hold dollars (and at what liquidity price). I agree that increased demand for bitcoin (relative to supply) will increase the price, I just don’t see why that relative demand has to increase if bitcoin catches on as a medium of exchange. For example, suppose bitcoin neither ‘dies’ nor expands, but stays at its current level. In that case, we’d expect the price of bitcoins to fall over time, as more bitcoins are created but demand does not increase.
Good catch. But doesn’t this re-inforce my point that the cost of mining bitcoins will cap, rather than set, the price?
You are correct. There can be an increasing number of transactions per unit time, but whether those transactions are in microbitcoins or megabitcoins is orthogonal.
I thought Bitcoins were a proof of work thing, with a limited total number, so the rate of mining changes over time and in response to the price, or has that changed?
When I lasted looked mining on your own electricity bill was madness, but botnets were being used to mine, and had sufficient benefits in being easy to convert that the botnet operators were preferring bitcoin mining over riskier endeavours.
A little ambiguous. The total return to all miners halves every 4 years or so. If the total investment in mining equipment is doubling every 4 years, then the return to unit investment in mining will decrease by 75% every 4 years. Both the total rate of BTC creation and the increasing investment chasing that creation are decreasing the return to the mining investment.
Mining doesn’t impose any sort of cap on prices in the traditional sense. High prices lead to more mining activity, but more mining activity doesn’t change the creation rate, it just spreads the proceeds of creation out over more miners. If BTC doubles in price, but the miners double in quantity, then mining is exactly as profitable as it was before. If BTC halves in price, and half the miners shut off their rigs, ditto.
The proceeds overwhelmingly don’t go to miners. They go to electricity utilities and the upstream value chain of those businesses. Because the cost of electricity is always nearly identical to the proceeds. Basically, bitcoin is a way to turn perfectly good dollars into an extra load on the grid for no good reason.
Possibly stupid questions:
Why do you assume that the price of Bitcoin, and its uptake are tightly connected? Why couldn’t it be possible for the price to stay around $200 from now on, even while Bitcoin becomes massively used all over the world? The price of the dollar is not continuously rising (indeed it falls over time) but it is nevertheless widely used.
There is an asymmetry regarding Bitcoin price. If the price of Bitcoins is higher than the cost of mining them, that will cause more investment in Bitcoin miners, leading to more Bitcoins created and hence a lower price. But if the price of Bitcoins is lower than the cost of mining them, this does not cause Bitcoins to be destroyed. Indeed the “sunk cost” hardware keeps running, so the supply keeps going up. Yes, the supply goes up by less than it otherwise would, but it still goes up. Surely we should say that the price of Bitcoins should be capped by the cost of mining them, not set by it?
Your item 2 is wrong. More investment in bitcoin mining does NOT increase the rate of bitcoin creation. The “difficulty” level of mining is automatically increased to keep the creation rate of bitcoin at a predetermined constant. More investment in mining simply lowers the return (counted in bitcoin) on all previous investments in mining.
Bitcoin mining is not like gold mining. If you buy a mine with 100 ounces of gold in it, you will extract 100 ounces of gold before the mine is dead. But the amount of “bitcoin” in a bitcoin mine depends on how many other mines there are. If the investment in mining doubles, the mine you have already invested in will produce only half as many bitcoins, because the “difficulty threshold” of successful mining is constantly and automatically adjusted to keep the rate of new bitcoin creation constant.
Bitcoins are created at the same pace no matter what, so
If there is a lot of demand for bitcoin, the price will necessarily increase since we can’t mine at a faster rate.
Miners don’t affect the rate of bitcoin creation,
But “demand” for bitcoin is not the same as bitcoin adoption. Bitcoins are neither created nor destroyed when (for example) a merchant accepts bitcoins in a transaction. Similarly, demand for dollars is not a function of how many people are willing to use dollars in their transactions, but rather how many people want to hold dollars (and at what liquidity price). I agree that increased demand for bitcoin (relative to supply) will increase the price, I just don’t see why that relative demand has to increase if bitcoin catches on as a medium of exchange. For example, suppose bitcoin neither ‘dies’ nor expands, but stays at its current level. In that case, we’d expect the price of bitcoins to fall over time, as more bitcoins are created but demand does not increase.
Good catch. But doesn’t this re-inforce my point that the cost of mining bitcoins will cap, rather than set, the price?
You are correct. There can be an increasing number of transactions per unit time, but whether those transactions are in microbitcoins or megabitcoins is orthogonal.
I thought Bitcoins were a proof of work thing, with a limited total number, so the rate of mining changes over time and in response to the price, or has that changed?
When I lasted looked mining on your own electricity bill was madness, but botnets were being used to mine, and had sufficient benefits in being easy to convert that the botnet operators were preferring bitcoin mining over riskier endeavours.
The rewards of mining half every 4 years or so, and this can be sped up some if the total network hashrate doubles up a lot, but that’s about it.
A little ambiguous. The total return to all miners halves every 4 years or so. If the total investment in mining equipment is doubling every 4 years, then the return to unit investment in mining will decrease by 75% every 4 years. Both the total rate of BTC creation and the increasing investment chasing that creation are decreasing the return to the mining investment.
Mining doesn’t impose any sort of cap on prices in the traditional sense. High prices lead to more mining activity, but more mining activity doesn’t change the creation rate, it just spreads the proceeds of creation out over more miners. If BTC doubles in price, but the miners double in quantity, then mining is exactly as profitable as it was before. If BTC halves in price, and half the miners shut off their rigs, ditto.
The proceeds overwhelmingly don’t go to miners. They go to electricity utilities and the upstream value chain of those businesses. Because the cost of electricity is always nearly identical to the proceeds. Basically, bitcoin is a way to turn perfectly good dollars into an extra load on the grid for no good reason.
I have a friend who mines bitcoin...but only in the winter, because he has electrical heating anyways, so there’s no net new electrical load.
It doesn’t necessarily do that either. The more mining gets specialized, the more centralization we see.
Fair. For added precision, “spreads the process of creation out over more dollars worth of mining equipment”.