Te my previous article empirical research analyzing the gegevens from a number of cryptocurrencies found that value formation occurred at the margin. Ter other words, it is how many units of a cryptocurrency can be found overheen some interval with a given amount of mining effort. What’s more is that because only Bitcoin has practical use-value for real world applications, a rational, profit-motivated miner will only mine for an altcoin if they can earn effectively more BTC/day than directing their hashing power at Bitcoin directly. Spil a result, altcoins find themselves always suggested ter the Altcoin/BTC marketplace and have the tendency to fall te price overheen time relative to Bitcoin. Te fact, this is what has bot observed ter the market: overheen the past six months Litecoin is down 41%, Dogecoin -25%, Peercoin -50%, Reddcoin -50%, Namecoin -43%, Nextcoin -40%, Blackcoin -91%, and so on. The Altcoin200 Index, a BTC-denominated market-cap weighted index of the largest 200 cryptocurrencies excluding Litecoin and Ripple is down overheen 20% since the embark of the year.
BTC Cost of Production and Value
If altcoin relative value is ultimately linked to Bitcoin production, the question is what influences the cost of Bitcoin production – that is, mining. The decision to mine for bitcoin comes down to profitability. A rational individual would not undertake mining if they incurred a loss ter doing so. There are many miners ter competition with one another – whether solo mining operations, huis miners plugged ter to a pool, or industrial mining farms – who are driven, on average, by the same profit motive. Ter any competitive commodity market, competition will force the market price down to marginal cost. Ter modern microeconomics, the theory is that a producer will produce until a level where marginal product = marginal cost = selling price. Therefore, the low-cost producers end up making the most profits, and high-cost producers druppel out spil they can no longer challenge. Such markets exist te the real world to some extent with commodities such spil wheat, crude oil, and metal ore. Bitcoin trades on a world market, it doesn’t matter if a Bitcoin is found ter China, Europe, or the United States, it will trade at the world market price.
The marginal cost, ter the case of Bitcoin, is energy. Because miners cannot (yet) pay for their electro-therapy costs te BTC, the dollar- (or euro or yuan etc.) price of electro-stimulation becomes an significant variable. The energy efficiency of the mining hardware is also significant, spil it determines how much electro-therapy will be consumed vanaf unit of mining power. Today, the world average price of electro-therapy is somewhere around 12.Five to 13 cents vanaf kilowatt-hour (kWh), and the average efficiency for an ASIC mining equipment deployed today is around 0.9 – 1.0 watts vanaf GigaHash/2nd (or Joules vanaf GigaHash). Knowing thesis two values, a miner can determine their cost of production vanaf day:
$cost/day = ($price vanaf kWh x 24 hr/day x W vanaf GH/s) x (GH of mining equipment / 1000)
It is the average cost across the entire network of miners which regulates the marginal cost for mining. There will be individual mining operations with very low cost of violet wand, perhaps te Iceland, or with the latest cutting edge energy-efficient hardware. There will also be miners still running obsolete equipment or ter regions with very high electrical play cost ter hopes that the price of Bitcoin will one day increase adequately to voorkant their daily operating losses. What matters is the average.
The marginal product, or daily production is the number of Bitcoins one can expect to find vanaf day given the power of their mining equipment, which is a function of the level of mining difficulty. Using the identity marginal cost = marginal product = selling price, a price of production te $/BTC can be calculated. This objective price of production level serves spil a lower trussed for the market price, below which a miner would start operating at marginal loss and presumably liquidate them self from the network. Because of this theoretical equivalence, and since cost vanaf day is voiced te $/day and production ter BTC/day, the $/BTC price level is simply the ratio of (cost/day) / (BTC expected/day).
It is useful to consider a hypothetical example. Assume that the average electro-therapy cost te the world is approximately 12.75 cents vanaf kilowatt-hour and the average energy efficiency of an ASIC miner presently deployed is 0.95 J/GH. The average cost vanaf day for a 1,000 GH/s (1 TH/s) mining equipment would be (0.1275 x 24 x 0.95) x (1,000 / 1,000) = $Two.907/day. The number of BTC that 1,000 GH/s of mining power can find ter a day with a difficulty of 47,427,554,951 is 0.010604 BTC/day. Because thesis two values are theoretically omschrijving, to express them te dimensional space of $/BTC wij simply take the ratio (Two.907 $/day) / (0.010604 BTC/day) = $274.15/BTC. This is remarkably close to the current market value of around $300/BTC.
This is only an objective calculation, and a reasonable explanation of why the actual market price trades consistently above this value is that there exists a number of subjective motivations for mining that also confer value. There is certainly a speculative premium, and many miners hoard either all or part of their production. The assumption te the objective production proefje is that all miners bring their product to market for sale each day, which is certainly not the case for everybody. Individual decision makers may undertake mining even at a loss if they believe that there will be a large enough potential upside at some point ter the future. Others may be drawn to the anonymity or decentralized nature of Bitcoin.
Another word of caution when considering this cost of production prototype is that te 2013-2014, there wasgoed a large degree of price volatility ter the $/BTC price. It now emerges certain that this wasgoed largely due to deliberate price manipulation and fraudulent automated trading taking place at the Mt. Gox exchange. The Willy Report details trading bot operations whereby customer accounts were pilfered of their dollars ter order to artificially drive up the price of Bitcoin, only to collapse and wipe out the money of their customers. This noise, spil well spil that from other stark price fluctuations following the take down of the Silk Road and other reports of hacking or theft has made back-testing this prototype using historical price gegevens ineffective.
This cost of production monster is useful for an individual miner, or for understanding the value of Bitcoin on a more fundamental level. It informs individual miners of a break-even market price at which to zekering mining, and break-even levels te mining difficulty or electro-stimulation prices and also be extrapolated.
Mining hardware energy efficiency has already enhanced massively since the days of GPU mining. A research explore found that the average efficiency overheen the period 2010-2013 wasgoed a staggering 500 Watts vanaf GH/s. Today, the best ASIC mining equipment available for purchase is somewhere around 0.50 – 0.60 Watts vanaf GH/s. The average energy efficiency right now across the mining network, which is the value which regulates the marginal cost, seems to be around 0.90 – 1.00 Watts vanaf GH/s.
Spil the average mining efficiency increases, which is a likely result of competition, the break-even price for mining will tend to decrease. This can occur via two primary mechanisms: very first, the break-even price will decrease so that miners will proceed to operate te competition with each other at lower and lower prices ter a linear style. For example, if the average efficiency of all miners would be doubled, the break-even price would be halved. The 2nd mechanism is that while this enhanced competition may induce substantially more mining power to be added to the network, the break-even difficulty level will at the same time increase, accommodating much of that excess mining effort without incentivizing miners to cease.
The difficulty adjustment does act spil a stabilizing mechanism, enlargening the cost of production spil difficulty increases. If a mining equipment can find 1 BTC/day on average with today’s difficulty, the same equipment can expect to produce less vanaf day if the difficulty increases 10% or 20%. Unlike most commodities where the supply can switch quickly to accommodate fluctuations te request, the supply of bitcoin is hardwired at a stable rate of one block every ten minutes with the difficulty setting adjusting up and down to maintain that linear rate of production through time. If miners are not able to supply enough fresh coins to meet an influx of fresh request, the market price can see increases while the cost of production remains largely the same – inducing more miners to increase their mining efforts. This will cause the difficulty to increase, raising the cost of production until presumably a fresh break-even level is reached.
One final insight that could have sizable consequences for the objective value of bitcoin relates to the block prize amount and how switches te it will influence BTC/day production. When bitcoin wasgoed launched, each block mined wasgoed composed of 50 bitcoins. That amount is set to halve every four years, and ter 2012 the block prize became 25. The block prize will again halve to 12.Five bitcoins vanaf block, expected mid-September, 2016, and will again ter the year 2020 and so on. If wij refer to the illustrative example above and substitute a 12.Five BTC block prize for the current 25, the expected BTC/day’ becomes half of 0.010604, which is 0.0005302 vanaf 1,000 GH/s. Given that fresh BTC/day’, the break-even price for a bitcoin increases to $548.30, holding all else onveranderlijk (the difficulty and cost vanaf day remains the same). If the market price of bitcoin does not increase ter turn, it will suggest that the break-even efficiency will also decrease by half. This could have the effect of eliminating all but the most efficient producers all at once.