Phones Laptops Cameras Tablets Headphones Smartwatches VR Headsets This is my NextSubmitted by on Tue, 2015-02-03 21:29.Bitcoin’s been on a long decline over the past year, and today is around $220 per coin.The value has always been based on speculation about Bitcoin’s future value, not its present value, so it’s been very hard to predict and investment in the coins has been risky.Some thinking led me to a scary conclusion.Recent news has revealed that a number of “cloud mining” companies have shut down after the price drop.Let me explain why.Over time, all bitcoin mining has been done using specialized ASIC hardware.The hardware is priced so that you can make a decent but not ridiculous profit with it.All the bitcoins mined go mostly into paying for mining hardware and electricity — much less goes into profit for the miners.In the past, the electricity was the big cost, but mining hardware got fast enough and expensive enough that most of the cost of mining has been paying off your mining hardware, with electricity dropping to being 20% or less of the cost.

In other words, most of the 3600 btc/day mining revenues of the bitcoin system have been going into the people making mining chips and rigs, but that’s another story.With the drop in price, electricity is back up to being half your cost.lake bitcoin exchangeThat puts a squeeze on the cost of mining equipment.bitcoin enemiesWith cloud mining, as with Amazon Web Services, you rented mining equipment and power by the hour.mine-litecoinPeople who bought their mining equipment will still run it as long as the revenue is more than the operating cost.bitcoin risk factors for insuranceFor cloud mining, you need the revenue to exceed the operating and capital cost, because the capital costs are amortized into the operating cost.bitcoin physical coin wallet

While cloud mining companies could cut their fees to cut their losses, some have instead just left the business.As noted, those who bought mining equipment are running it now at less profit, but as long as the mining brings in more than the electricity cost, it’s still worth running — the mining gear is all paid for, and even though you will never make back your money, it’s worse if you shut it off.litecoin buy with credit cardYou can get a good analysis of the cost and profitability of mining rigs at this mining calculator.konto na bitcoinIt’s not out of the question that a sudden panic might drop Bitcoin quickly down to $100.ethereum rigIt probably won’t happen, but it certainly could.ethereum not a store of value

At this point, with current generation mining equipment, most miners then see their revenue drop below the cost of electricity.If they are rational and strictly profit-oriented, they cry into their beer and turn off the mining rig.And the cloud miners have already done that, and some other miners have done the same sooner than they expected, and the network hashrate (the measure of how much mining power there is) has had minor sustained drops for the first time in years.(It’s worst than this.Even at $150, all but the most recent mining rigs become unprofitable to keep turned on, and so a major drop would happen with much less of a drop needed.New mining equipment expected to ship in the next few months is profitable at even lower prices, though.)The way Bitcoin works, when they turn off the rig, it doesn’t mean more coins for the other miners.Bitcoin sets the reward rate with a “difficulty” number that makes the Bitcoin lottery problem harder the more mining capacity is out there.

Your reward rate is a strict function of the difficulty and the power of your miners.Every 2016 blocks, the difficulty adjusts based on how much capacity seems to be mining.Under normal operations, 2016 blocks is two weeks, as long as people are mining at the rate seen in the 2 weeks prior to setting the current difficulty.If large volumes of miners shut off their rigs as non-productive, the mining rate would crash.The wait for a new difficulty could be not just two weeks if this happened at the wrong time, but 4 weeks if half the miners shut down, or 8 weeks if 3/4 of them left.In terms of the Bitcoin world, it’s effectively forever, and long before that, confidence in the coin price would probably drop further, causing more miners to shut off their rigs.Only dedicated fans willing to lose money to preserve the system would keep mining.In such a panic, the Bitcoin Foundation and others might propose an emergency modification of the Bitcoin software base which is able to do an emergency reduction of the difficulty number.

Alternately they could propose bumping the mining reward back to 50 coins instead of 25.This would still take days, which I think is too long.But if they did, it’s a sticky issue.As soon as you drop the difficulty enough, all those miners come back online, and now the difficulty is too low.To do it right, an estimate would have to be made of how much mining capacity is cost effective and set the difficulty so that only some of the miners come back online, a number tied to that difficulty.For example, one might look at the various mining rigs out there, and set the difficulty such that they are (barely) profitable while others are not.Problem is, the profitability depends on the price of a bitcoin, which will be wildly fluctuating.It’s not clear how to solve this.If the electricity cost exceeds the reward, but you still want bitcoins for future investment, the rational thing is not to mine, but to just buy bitcoins on the exchanges and keep the price up.The collapse would probably spread to altcoins, but some might survive and become successors to Bitcoin.

In addition, there are many people devoted to Bitcoin who would continue to mine, even at a loss, to get it back on its feet.After all, the early years of Bitcoin, all mining was at a loss, though it turned into a huge bonanza later and was a wise idea in hindsight.With the large number of well funded companies in the space, we could see companies willing to maintain unprofitable mining for some time if the alternative is the destruction of the thing they’ve based their business on.They might even buy up the rigs of failed miners, or pay them to mine.Perhaps, if they are ready, they could heed the warning in this message and make contracts with enough miners to say, “we’ll pay you to keep mining if a collapse happens.” Alternately, Bitcoin users and boosters could just start deliberately leaving large transaction fees in their transactions to make the cost of mining worthwhile again.While hard to sustain long term, it is in their interest to spend their bitcoins to keep the mining system going, since those coins probably drop immensely if it falls down.

It also keeps faith in the mining system since if the coin owners ran the miners, they might corrupt the network with that much power.It should be noted that it’s always been part of the plan for Bitcoin that higher transaction fees would arise as the coinbase rewards dropped, but not this early, and because the reward dropped in btc, not dollars.The subsidy would have to be enough to overcome losses and provide a modest or even very small profit.The network cost pays 3600 bitcoins/day in mining fees (or $360K at $100/bitcoin.)The subsidy might be more in the range of $50K or $100K per day — affordable to keep the network alive for up to 14 days to survival.Another idea would be to develop a way to make the difficulty more dynamic, or provide some mechanism for an emergency reduction.(An emergency increase would mean something was really wrong and would probably also mean somebody had more than half the mining capacity, another must-not-happen.)What sort of events could cause such a huge drop, to 45% of the current value?

That’s not been seen in a short time, but a big political event, such as a suggestion the USA or EU might forbid or impede Bitcoin could do it.But there are many other things that can cause panic.A shutdown of exchanges (a common technique in stock market panics) would probably do little, as there are exchanges all over the world and all will not shut down.A call to miners to sacrifice might work, at least for a while, to allow time to fix the problem.Mining rigs are shut down all the time as non-profitable, but in the past that’s always been because newer, better rigs were out there dominating the mining space and pushing up the difficulty.It would be a new idea to have rigs shut down because the dollar price dropped.When such rigs shut down, they would not be permanently useless, and unless torn down, they would be able to restart at any time.For example, if the difficulty dropped (because they all shut down) they would all start running again, and blocks would come out faster than intended.