Is mining equipment purchased and paid for in advance? If so, this sounds like a few years ago in oil and gas. Prices dropping but quantities supplied rising due to sunk costs in drilling contracts.
Generally yes. I would expect most bitcoin mining operations would continue for a while after they stopped making a return on investment, until they were no longer making a profit on the cost of electricity. However, electricity is a fairly large part of the cost of mining, and there is a treadmill on the hardware side as well as better ASICs are developed (the ASIC developers skim the cream of this as well, units sold to customers have likely already been used, sometimes heavily).
> mining operations would continue for a while after they stopped making a return on investment
Marginal return. The ASICs could have been bought for $10 with the expectation of making $1 a year and paying out 50¢ for electricity (a 5% yield). Now it’s making 51¢ a year (a 0.1% yield). Not enough to make economic sense, but enough to keep running the rig; 0.1% is more than zero.
Broadly, I was pushing back against the author’s inchoate claim that “the continued growth in hash power demonstrates a strong, continued belief in Bitcoin by miners worldwide.”
Profits aren't even required if you're laundering money. You might pay a 30-50% fee for any laundering scheme, so if you can only lose 15% of your money by running in the red rigs you're still accomplishing your goals
That advance investment in infrastructure must be a very important part of this effect. Those sunk costs probably are most important thing here. ASIC lead time is months and not the only advance investment.
But betting on future price, speculation, also is important.
Also there maybe could be influence from changes in energy pricing.
What I would love to see is a breakdown of locations of miners over time. I wonder if the increase is in places where electricity is cheaper and/or subsidized.
I do not believe the increase has anything to do with better mining hardware since the top mining hardware has not really changed much in over two years.
My guess is either:
1. Most people have already invested in the hardware and are therefore okay mining at a loss with the hope that the Bitcoin price will rise again in the future.
OR
2. A lot of miners are using renewable energy in which case it wouldn’t make sense to stop. For example, if you are using wind or solar or hydro energy, then the energy is still going to be available even if you turn off your mining hardware.
> For example, if you are using wind or solar or hydro energy, then the energy is still going to be available even if you turn off your mining hardware.
That's only true if you can't sell the energy for more than bitcoins mined for that energy.
I was interested to learn in the recent indictment that the Russians were using bitcoin as essentially a means of money laundering. The Russia government uses it's budget to mine some bitcoins and used those to buy the servers used to hack the DNC. I imagine criminals and people looking to evade currency controls have similar interests.
I would be very surprised if mining was the sole source of the funding simply because mining hardware is so expensive, and it would take a long time to mine $90,000.
The Bloomberg article says
> the defendants conspired to launder the equivalent of more than $95,000 through a web of transactions
So while they may have done some mining, I think the majority came via other sources.
That is certainly an interesting perspective though – that the increase in hash rate is due to people wanting to evade traditional currency systems to fund their illicit activities. It would not surprise me at all if some governments were involved in this too.
The Conspirators funded the purchase of computer infrastructure for their hacking activity in part by “mining” bitcoin. Individuals and entities can mine bitcoin by allowing their computing power to be used to verify and record payments on the bitcoin public ledger, a service for which they are rewarded with freshly-minted bitcoin. The pool of bitcoin generated from the GRU’s mining activity was used, for example, to pay a Romanian company to register the domain dcleaks.com through a payment processing company located in the United States.
63. In addition to mining bitcoin, the Conspirators acquired bitcoin through a variety of means designed to obscure the origin of the funds. This included purchasing bitcoin through peer-to-peer exchanges, moving funds through other digital currencies, and using pre-paid cards. They also enlisted the assistance of one or more third-party exchangers who facilitated layered transactions through digital currency exchange platforms providing heightened anonymity.
It's not such a clear cut decision. You can only buy once, while the miner can produce for many years, especially now when the ASIC tech reached the state-of-the-art so progress is slower.
No they really don’t. I have quite a bit of experience with modern mining hardware and they aren’t designed to last more than about 6 months or so. It’s about extracting the maximum hashes per watt for the early period of ownership when difficultly is low, damage to hardware be damned.
>> 1. Most people have already invested in the hardware and are therefore okay mining at a loss with the hope that the Bitcoin price will rise again in the future.
It doesn't make sense to mine at a loss, as in that case they can buy more bitcoins at market price, rather than mining them.
One of my theories to explain this phenomenon (actually discussed in a previous thread) is that bitcoin mining might very well be a roundabout way to launder money, or at the very least a mechanism by which you can circumvent capital movement control: use local money to buy mining h/w + power, get clean, freshly minted BTC from that.
If that is actually the case, then the "operating at a loss" part is not really an issue: I suspect all means of money laundering have a sizable built-in cost.
[edit]: both theories are discussed at length in other comments below.
Also this article seems to miss that you can take illegal money, buy hashing equipment and launder it via mining... I'm sure having crypto in the news has got more crime bosses' attention? Obviously I have no proof of this being the case.
I guess it depends on what you mean by "hashing equipment"
For example, if you go to Ritchie Street in Chennai, India there are plenty of stores that will sell you a top of the line GTX 1080 GPU for cash. No record of the transaction, and no taxes. A lot of stores will probably even accept USD.
You wouldn't be able to launder boatloads of cash this way, but with enough motivation you could do this on a regular basis and offset some cash.
Yes, it is unfortunately already the case in most EU countries. In France and Italy, for example, you can't buy a new car cash (cash transactions over 2.5K euros are basically illegal).
This is a very profound loss of individual freedom, almost as important as losing right to free speech would be, yet strictly no one on the political spectrum seems the least concerned about it.
Citizens United in the US has had equally-troublesome consequences, based on the premises that corporations are people and money is their speech.
Conflict of interest plays a role here, and that's unfortunately something that has been under constant 'redefinition', especially in the last 20-40 years.
"If not, what kind of business provides you with hashing equipment from dirty money?"
That part is easy. Other businesses don't know if your money is dirty, the issue is transactional, i.e. buying without a receipt in the tax domain you're in.
So, if you can somehow take 'dirty USD' and buy ASICs anywhere outside of America, it will probably work.
The purpose of Money Laundering is to get money into a bank account that the government will recognize as legit, but 'dirty money' can still be used for whatever reasons for nefarious purposes, a lot of it even from 'good businesses'.
Buying a few ASICS in cash from individual stores will not raise eyebrows like walking into a Ferrari dealership with cash might.
How do you account for the cost of the ASICs then if it was bought with dirty money? Or the method is to start a legit business and make it waaaaay more profitable on paper (with all the dirty money)? (Like it "used to" be with laundries and/or casinos?)
If the BTC business is supposed to be legit, you just wouldn't put the ASICS on the books as assets. But I don't think the BTC business would necessarily need to be legit in the first place.
It does seem like a powerful opportunity for nefarious activity, and this may be keeping the price propped up on some level.
Organized crime is big business and they aren't stupid.
I know they aren't stupid, but they need a non-transparent, hard-to-audit business. Like a restaurant. The IRS (or the relevant tax authority) won't count how many meals you have served, and you can price it as high as you like.
Or you can just do a festival and claim that you had a lot more visitors. It's hard to count people after all, and easy to print fake tickets.
So, I simply think that ASICs are not the things used for money laundering, because their output is very constant, and the hashrate is public knowledge, so easy to verify how much money you made.
I have no idea what I am talking about, but I imagine you can exaggerate the returns and downplay the costs on an operation like bitcoin mining to squeeze in your dirty money. Like they would with any cash heavy business where it is hard to determine the actual costs and revenue.
It’s the same process with buying a cash buisiness, you bootstrap it with debt or clean money. You are assuming that the criminal only has access to dirty money, but it’s not that hard to take out a credit card, a loan, and/or have some savings.
The miner is not a magical money machine, it doesn't make so much money. You'd need to keep buying new and new hardware and somebody will get suspicious soon.
hm, so first the new mining operations run the entire fabrication line, so they have factories in Shenzhen or Scandinavia and create the mining hardware and start mining. if you have the whole production line you can pay for costs in cash or straight from the illicit source to people without ever passing through a reportable system
secondly, when you do buy mining hardware or buy hashrate (cloud mining), most manufacturers and service providers ONLY take bitcoin, so if the money was dirty it still never passed through a reportable system. when you pay for invoices with cryptocurrency there is no billing address or any other information about the buyer. if you funds came from a botnet, a hack or even drugs but stayed in the system, there is no necessity to link your identity to anyone. you can ship your hardware to any address, or straight to a data center, and even if you think that will reveal your identity even the mining proceeds can go to any random address recipient and this is all new money.
instead of trying to reveal the flaws, try imagining it as if you had five million dollars in bitcoin to launder and i2p/TOR and see how you could remain anonymous without messing up your OPSEC on either the blockchain or from your other activities.
At Bitcoin’s peak, a single block was worth almost a
quarter million dollars and miners may view the current
market as a way to accumulate more Bitcoin at lower prices
Don't understand that last sentence. They create money via using electricity and amortizing ASICs, not the other way around
My take was that if they already bought the ASICs, mining may make sense at break even for electricity so they can continue to accumulate and hold bitcoin if they think it will pop to 20K+ or more in the future.
The miners are more than likely expecting that the future value is worth much more than the electricity today. Bitcoin went from 1k to 20 k inside of a year. If that happens again, or more, they would be able to sell at 10x the electricity cost.
It won’t. It’s a bubble. No real commodity or currency increases 20x in value in a year. It’s funny-money, Just like the dotcom Boom in the late 1990s.
Bitcoin is basically unused as a currency except by criminals, and has no functional advantages over other payment systems for honest people. Just like stock of pets.com in 1998.
Have you tried sending money internationally with any reliability? Randomly getting shut down by PayPal, waiting for insane amounts of time before normal bank transfers get through, etc. Even if you completely ignore any other aspect of it, this is a legitimate use case that works well.
Also, mining equipment is continually getting better. Large scale parallel ASICs like these are still a relatively recent field, with lots of remaining room for improvement. It's far less stagnant than current x86 processor speed. Mining is very much a red queen's race.
Supply has going up (many producers), and demand has fallen relative to that - as evidenced by the price falls and margin collapse for miners.
In the real mining industry we see the same effect, where there is a commodity price (for say Nickel or Iron), and the suppliers, faced with very high capital costs, will continue to produce until their marginal cost is underneath the marginal revenue. At this stage they slow or mothball mines, smelters and refineries. That comes at a huge cost.
The last mines left are the ones with the most efficient costs/tonne, which is combination of access to ore, the type of ore, the closeness and efficiency of smelters and refineries and so on. A big part of it is the scale of the operation, and how up to date the equipment is, but also how well it is all operated.
Aluminium refining is particularly relevant, as electricity is one of the main input costs. We have seen refineries close down and sell their power back during extended periods of high electricity prices and relatively low aluminium prices (e.g. when Enron dove up Ca. prices). Newer/larger aluminium plants are fr more efficient, but the price of electricity is everything.
(I've led turnarounds at very large nickel and alumninium smelters/refineries and helped others with their turnarounds on mines/operations)
In the case of bacon mining the main factors are, once the computing equipment is acquired, the price of electricity and the conversion efficiency per kWh.
Simplest explanation: Big players are willing to operate at a loss to gain marketshare. Then when bitcoin hits $100k you're dominating the market and bringing in the big bucks.
Freshly mined coins have a premium because they are clean (i.e. you are 100% sure they haven't been robbed before, which can create problems) and untraceable (i.e. there's no way to link them to the original assets used to purchase the miners).
Other than that, a person might not have access to the equivalent volume of BTC but have easy access to energy/miners. Additionally, depending on how you predict hash rate and BTC price to evolve, mining might have a better ROI.
I don’t think that explanation makes sense. It isn’t about regular computing power, it is about the hash rate of the mining hardware. They use specialized hardware (ASICs), and if you look on this page you can see a breakdown of the hashrates:
I've heard repeatedly that in some cases Bitcoin is mined at a loss. This can be done to get money out of countries with capital controls or to launder money. They don't mind taking a haircut... it's the cost of doing business.
Indeed I noticed too. Profitability halved compared to 4 weeks ago. There are various possible causes, such as miners having to use equipment they ordered before, but 6 months after the peak, and given the costs of power, it seems unlikely. Mining remains widly profitable. A side effects is that it increases the security of the network.
My best explanation is that we are noticing the runup to another peak.
Money can't buy enough coins through mining equipment anymore, and therefore will eventually buy existing coins directly, causing another peak.
1) The supply of the miners are usually delayed by a month or two in some cases. So people buying miners when bitcoin was 18,000 to 12,000 in Jan, would be receiving their miners in March or later.
2) Prices of miners have fallen because of the price of bitcoin. You can buy an s9 miner for just USD 600 right now (https://shop.bitmain.com/product/detail?pid=0002018062817430...) which might have resulted in people increasing their investment in miners, increasing the hashrate.
Halving is scheduled for 2020. Miners probably have lots of dormant equipment they already purchased and are gradually turning on. They must increase hashpower if they want to maintain the same return, but it's in their best interest not to do it all at once to keep difficulty low for as long as possible. Price is probably not a big factor in the short term.
I sort of doubt that, you would want to use the mining equipment as soon as you get it because more efficient equipment would/could come out between now and then making your profits a lot less or even your equipment obsolete
Not with bitcoin - ASICS are the only profitable way to mine. They only work on sha256 coins, and generally crypto currencies that use the same POW have similar difficulty/profitability.
Hash rate increases are great. I wish they'd do a massive jump that takes miner profitability out of reach even if it were 100k/coin.
The amount of power used on bitcoin miners isn't good for the world, unless it funds alternative energy infrastructure that eventually gets repurposed for other reasons, but I doubt that is the case.
There's that inflation is a tax meme again. Nobody forces you to hold any asset with inflation with the exception of a yearly conversion into local currency for tax payment. The fact that you need USD to pay for everything else too is purely due to free market economics.
I don't see why that's a meme. My economics professor described inflation as a tax on cash. Being a tax doesn't have anything to do with being forced to hold it.
> The fact that you need USD to pay for everything else too is purely due to free market economics.
It's due to economic forces, yes, but US monetary policy is hardly the picture of a "free market." Legal tender laws alone would end in the US Dollar driving everything else out of the domestic market, even without other factors.
Bitcoin is not monetarily inflationary. (and definitely not price inflationary, long term). Its limit is known well ahead of time. The distribution is spread over time, by design. But the number of bitcoins is mathematically capped.
> But the number of bitcoins is mathematically capped.
The number of bitcoins is capped at a distant future date; but in the present, it continually increases. This is similar to how a curved Earth can appear to be locally flat. For now and for many years to come, the supply of bitcoins does inflate constantly.
Please don’t conflate savings and investment - they are fundamentally different things with very different risk profiles. Both serve a purpose. Modern monetary policy has made saving impossible.
That's simply not true. There are plenty of cheap investments (via ETFs) for pretty much any risk profile. If you save money in the form of currency on a savings account then you misunderstand modern financial markets. That's not the idea behind a currency.
Please, enlighten me. Show me a risk free asset that pays above the rate of inflation (don't forget to consider any taxes you might owe on interest and dividends!).
An inflation adjusted government bond ETF might be what you seek. In any case, there's no such thing as free lunch: In other words "a risk free asset that pays above the rate of inflation" doesn't exist.
Oh really? Specifically, which one? Give me a link. Keep in mind the latest inflation reading today was 3.33%y/y. This is also an optimistic reading -- if you use the exact same calculation the fed used back in the 80s inflation would be at 10% (many government obligations such as TIPS are linked to CPI and, as such, they are motivated to make that number appear low).
Risk free savings used to be much easier when the dollar couldn't be freely printed. Sure, there were times of moderate deflation and moderate inflation, but overall the average was 0. Furthermore, labor was able to consistently achieve wage gains. Those days ended in the 70s (and is evidence by the famous wage-vs-productivity charts). Also, you're conveniently ignoring the fact that fiat currency has made it possible for governments to print money to pay for war instead of needing to levy a tax on its citizens (something which would frequently be met with protest).
I-Bonds and TIPs are two types of bonds that are adjusted based on the inflation rate by law and backed by the US government, and they both pay slightly more than the inflation rate because of their other various features.
Correct, TIPs will keep pace with inflation. Until you pay income taxes on the interest they earned. Then it's not even close. Also, you're putting a lot of trust in the governments calculation of CPI. What makes today's calculation better than the calculation used in the 80s?
My savings are in MMAs, CDs and Treasuries. These earn interest and, on average, track inflation. Savings and investments shouldn’t be conflated; neither should saving and hoarding cash.
why wouldn't a private cohort of unelected and in most cases anonymous individuals with significant and arbitrary leverage over the value of the Bitcoins in your possession be effectively the same (worse, because there is no accountability or out of band feedback control whatsoever to stabilize their behavior in the direction of good faith) trap as you fear with central banks who can arbitrarily control inflation?
I think it was Noded 0.18.0 [1] (maybe 17) which reminded me of the notion of distributed money as "ethical" money.
What's nice about BTC (it appears to me) is that it's the largest platform with the most buy-in & mindshare. If that changes we'll have a different set of options available to us. Until then, it's the best option that the planetary civilization has to constrain a set of powerful actors who appear to be above reproach by law for their morally deficit behavior (historically, and presently).
