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Why does mining profitability tend towards zero?

Is it different for short term miners than it is for long term miners?

Example: if I mine now and sell them next year, they may be worth more as next year they'll be harder to mine

Thanks

  • Do you mean "the mining reward"? The current reward is 50 BTC per block, and will be halved in 2013. Profitability has to include other things like difficulty = cost of mining, price of electricity, etc... – ripper234 Dec 6 '11 at 13:28
  • Can you try elaborating on your question, Sean? – ThePiachu Dec 6 '11 at 13:33
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    Sorry for the confusion, I meant profits in terms of how much a bitcoin is worth if exchanged for goods/services, as opposed to the "mining reward" of bitcoins per block. Hope this helps clear things up! – Sean Chapman Dec 6 '11 at 14:10
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As with all things related to supply and demand, the market will eventually find its equilibrium, where the cost of generating the Bitoins will be close to their sale price. If the costs were bigger, less cost efficient miners would not mine. If the price was higher, there would be more room for investment that would increase the difficulty, thus increasing the cost to mine every Bitcoin.

If you want to calculate how profitable mining is, just put the data into any Profitability Calculator.

4

This is a bit of a generalization, since mining profitability is different for different people depending on their comparative advantages.

But the profitability of mining is affected by the difficulty, which in turn is determined by the total hashrate of all miners. If at any time the profitability is too high, this will attract more miners causing the profitability to decrease. If it is negative, it will cause miners to quit, increasing the profitability. The result is that there will be very few untapped opportunities to profit from mining.

Note that the profitability is only close to 0 if all costs are considered - hardware, electricity, space, maintenance, risk and so on. Every potential miner will have his own costs/benefits analysis.

The causality in your quote is reversed - if bitcoins are worth more, they will be harder to mine. (At least, if we ignore the effect of generation reward halving.)

3

This is a loaded question, as it assumes that profitability will tend towards 0.

However, for any given piece of mining hardware it's almost certainly a fair assumption for the foreseeable future that it's profitability will tend towards zero. This is because, from an overall perspective, as new processing hardware is developed (improving both efficiency and processing power), the cost per hash of mining decreases.

While this holds true, there will always be a point in time when the cost of operating a given graphics card (or other processor), with all ownership costs included, exceeds the cost of purchasing new hardware.

The most important issue for miners purchasing new hardware is whether the break even point can be reached before the hardware becomes essentially obsolete (because the costs exceed the revenue). Predicting this currently involves taking a gamble on what the future price of bitcoins will be.

All this means that the profitability of mining doesn't necessarily approach zero, as long as you continue to optimise your mining equipment to maximise efficiency.

  • You're right about the question. It was only worded this way as I've heard time and time again how profitability tends towards zero, even though you're right, as it is just an assumption. Interesting take on mining hardware becoming obsolete! Gave me some good insight that I hadn't thought about previously – Sean Chapman Dec 7 '11 at 13:53
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The answer to your question can be found in the interplay between two independently varying factors: price and difficulty.

There are a number of factors which play into the variance of price, and it's too complex an issue to discuss here. Perhaps you could find your answers at the new Economics StackExchange (in public beta).

Difficulty is much simpler to track - the more people mine (more accurately, the higher the combined hashrate of the network) the higher the difficulty climbs. When price climbs, it tends to lead difficulty, making mining profitable so long as the price continues to increase. The increased potential for profit draws more miners until eventually the difficulty rises to meet or exceed the profit point. At this point, less efficient miners begin to switch off their operations and difficulty slows or reduces once again.

The equilibrium of such commodities is a well-understood economic principle based in supply and demand. Another way to think of it is that there's only so much "demand" for Bitcoin miners and so the "supply" of miners rises to meet that demand, typically overshoots a bit, then adjusts back to equilibrium like any market.

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