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If Bitcoin mining is becoming more and more impractical, where you'll need to buy like a ButterflyLabs unit, and where even eventually a room full of these units might not be enough some day, what then?

Or, am I failing to understand some controls on Bitcoin that make it where eventually the processing power requirements go down again by some market factor? Forgive me, I'm new at this.

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Bitcoin will change nature from inflationary to deflationary currency. This is as designed from the very beginning - there is an upper limit of how many bitcoins can there be. This is actually profitable for the stability of the currency - now it's prone to rapid exchange rate changes if someone starts a big mining farm and introduces a lot of it to the market. In the future this will not be the case - with fixed number of coins the value will only depend on supply and demand based on exchange of assets, not on "side stream" of "mining".

With coins falling out of circulation by being frozen as savings the number in circulation will be constantly falling.

Of course falling number will cause increased value of single coins and as result encourage people to spend their savings and reintroduce frozen assets into circulation, so the time before there's not enough bitcoin in circulation to support continued existence of the currency is very distant and we're likely to develop some alternatives before this happens.

Of course while at certain point continued purchases of mining hardware may cease to be profitable, running existing hardware is cheap, and so mining is unlikely to cease for quite a few years yet despite its dwindling profitability.

Edit:

When cost of electricity to mine one bitcoin will exceed the value of one bitcoin you may be sure production will stop (and it will be long before you need a whole warehouse of dedicated hardware to produce one.) Of course there will be people still producing them at a loss or using public/stolen/free electricity but they won't produce all that many of them.

Now let's assume the unlikely "too long chain" scenario eventually happens requiring a whole warehouse to process - which shouldn't happen considering the upper cap on the number of coins, unless someone miscalculated something - last bitcoin should be eventually generated on much less beefy hardware. Once you reach that limit, you will be unable to mine another coin, and so you won't obtain it, period.

If a bitcoin is already mined, it really doesn't put much stress on the infrastructure, it requires much, much less processing power to transfer as a payment or validate than to create. It's the mining process that would eventually grind to a halt first ages before the processing of mined bitcoins would become too hard on hardware.

If you had a warehouse of custom FPGA, you'll be left with a ton of useless mining hardware and only as many bitcoins as you obtained. The era of mining will come to an end as designed, and the bitcoins produced from even the longest chains will function just like any other ones in circulation.

  • No one is seeming to answer my question, but you spent the most time. The question is, if the block chain becomes too huge to process unless you had an entire warehouse of ButterflyLabs units, then what will do then? I'm not concerned with value. I'm concerned with it being impossible to process eventually. Does anything shrink that blockchain back down eventually by market forces? – Volomike Apr 9 '13 at 13:46
  • @Volomike: I added some more about what would happen (nothing really.) – SF. Apr 9 '13 at 14:11
  • Ah, so eventually mining stops. People can take advantage of mining now until the party is over. Meanwhile, those who choose not to mine can do stuff like buy/sell trade strategies just like currency market trading. – Volomike Apr 9 '13 at 14:18
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    No, mining doesn't stop. The amount of mining occurring will, over the long run, tend towards the level at which mining is break-even. – Stephen Gornick Apr 10 '13 at 10:09
  • @StephenGornick: Considering there is a limited total number of bitcoins to be mined, mining MUST stop eventually (or dwindle to insignificant trickle as that number is approached). And break-even is zero for these with access to free energy and hardware that already paid for itself. – SF. Apr 10 '13 at 12:11
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I think you misunderstand the problem. The reason mining is becoming impractical is because there's too much of it. It's like a restaurant that's too crowded. It means you can't get a table, but the restaurant is not going to go out of business.

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    It's like the Yogi Berra quote: no one is mining anymore: it's too crowded. – David Ogren Apr 19 '13 at 21:02
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Mining is not a long-term way to make money. Eventually, the best way to get BTC will be the old-fashioned way: Earn them.

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In the scenario Bitcoin is a success - my benchmark for which is it being used in a transactional capacity rather than just a store of value or speculation - the transaction fees will have grown to a size where they can continue to support mining indefinitely.

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As long as there is a ROI of a few months, people will buy equipment to mine. And equipment bought and running for a few months will keep running till the electricity cost is higher than the BTC earned. I expect mining will be profitable for a very long time to come, unless the BTC exchange rate crashes.

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