• Corpus ID: 16268063

Bitcoin & Gresham ' s Law-the economic inevitability of Collapse

@inproceedings{Gring2011BitcoinG,
  title={Bitcoin \& Gresham ' s Law-the economic inevitability of Collapse},
  author={Philipp G{\"u}ring and Ian Grigg},
  year={2011}
}

• Philipp Güring, I. Grigg
• Published 2011
• Economics

The Bitcoin economy exhibits remarkable and predictable stability on the supply side based on the power costs of mining. However, that stability is challenged if cost-curve assumption is not solely expressed by the fair cost of power. As there is at least one major player, the botnets, that can operate at a power-cost-curve of zero, the result is a breach of Gresham's Law: stolen electricity will drive out honest mining. This has unfortunate effects for the stability of the Bitcoin economy, and the result is inevitable collapse. We would like to share some thoughts about the economic models involved in the Bitcoin economy [SN], and the results that the model predicts. The Bitcoin Mine First, let us take a look at the process for manufacturing bitcoins, known as mining. To run a mining business, we need hardware (motherboard, graphics-card, ...) and power. Mining is a process of calculating/finding random inputs which, when hashed, fulfil certain requirements. When you have successfully mined a block, you earn 50 bitcoins as reward. The value of those 50 bitcoins depends on the market (e.g. https://www.mtgox.com/) of offers and requests, and therefore prices vary such as with national currencies or stocks on the stock market. Bitcoin has a difficulty parameter which is calculated approximately every 14 days from the global mining speed of the previous 14 days. This is to keep the overall mining rate of the whole network approximately constant to 1 block every 10 minutes. The difficulty tells us something about the current global mining capacity. If there are too many people mining at the same time, the difficulty factor goes up, and it is less likely/possible for a given miner to earn enough money in mined bitcoins to pay for the costs of production. At the margin, miners withdraw from mining, and the difficulty goes down. The miners do not have much direct influence on the market price of bitcoins, they can only sell the coins under-priced. After a longer period of time, the investment costs of the hardware marginalizes, and power-consumption in Watts of the hardware dominates the costs-side of the mining equation. For Bitcoin mining to be profitable, the following formula applies: Number of miners * average power costs per 10 minutes < 50 BTC * bitcoin price Where Costs cross with Price First Model Let us look at an example of costs and income distribution. For now, we shall assume a fixed power cost of 0.1203 USD per kWh = 0,02005 USD per 10 Minutes Reference: [EIA1], and a production unit of 200 Watt equipment [BMH] which we will call a miner. For a given average power price, and a given price of bitcoins, the maximum number of miners that are profitable can be calculated. If the price rises, more miners can be profitable, if it drops, profitability can be only achieved by less miners. Maximum number of miners for averages of 200 Watts and 0.20 USD/kWh BTC/USD 0,01 USD 1 USD 5 USD 10 USD 20 USD 32 USD Maximum number of profitable miners 125 miners 12469 miners 62344 miners 124688 miners 249377 miners 399002 miners Bitcoin trading started at a price of 0.01 USD, and therefore could potentially support up to 125 profitable miners at inception. The maximum trading price reached 32 USD, at which peak there was potential support for approximately 400,000 miners. Due to the shared nature of the difficulty parameter, it is transparent for all operators what their average costs curves are at any moment in time. As prices are reflected in the open market, every operator can regularly calculate estimated income against costs, and whether mining is profitable or not.