Is there a logical reason to buy bitcoin for more than it costs to mine it?

For the sake of this question let's assume bitcoin was useful and had value beyond speculation.

Why would you ever buy bitcoin above mining price?

I have heard various estimates of what it costs to mine a bitcoin.

One answer on the topic on quoara suggests the electricity costs around 400$ (this is from late August 2017).

Source: https://www.quora.com/How-much-does-it-cost-to-mine-1-Bitcoin-in-the-US

Let's say with equipment investment and increased difficulty it now costs 1000$ or even 2000$ to mine a bitcoin.

Given that it is relatively cheap to mine bitcoin and there are even managed server solutions you can rent, is there any logical reason to buy bitcoins at a higher price, than they cost in production? Why are people mortgaging their houses in order to buy bitcoin at 17.000$ per coin when they could simply buy computers and electricity and pay only a fraction per coin?

Shouldn't the price of bitcoin be very closely tied to the price of producing bitcoin?

mining-profitability

user1721135

Posted 2017-12-22T15:18:46.343

Reputation: 171

Because people are irrational? – None – 2017-12-22T15:21:32.003

Sure, but that much? Its not like there is a shortage in computers. – None – 2017-12-22T15:24:49.213

3Bitcoin is not mined by normal "computers". It requires specialized ASIC rigs that are extremely power-hungry and generate a lot of heat and noise. You probably do not want one in your bedroom, and the electricity bill would eliminate most profits. Cloud-mining is a possibility, but individual mining makes very little sense. – abelenky – 2017-12-22T15:28:57.623

1Its still called a computer, and since there are so many cloud solutions the technical barrier and the "bedroom" problem aren't really stopping anybody from mining or investing in mining rather than botcoin directly. – None – 2017-12-22T15:36:10.933

1This might be on topic somewhere else, like at the bitcoin SE, but it's not particularly personal finance related and is largely opinion here. – None – 2017-12-22T15:48:26.537

1@Joe There is some economic/financial element to OP's question that should be on topic here. And OP asked for "logical reason", which is something that can be reasoned objectively. – None – 2017-12-22T16:23:24.980

Answers

Mining: It's a lot of trouble and expensive to set up a proper rig and the return on investment can take a long time when mining. It's not as cheap or profitable to mine the coins as you make it seem.

This online calculator:

https://www.cryptocompare.com/mining/calculator/btc?HashingPower=12&HashingUnit=TH%2Fs&PowerConsumption=1300&CostPerkWh=0.15

allows you to enter electricity cost, energy consumption and hashing power of specific rigs to figure out how much you'd make. It takes into account total network hashing power, average block time etc.

For example:

An antminer S9 (currently viewed as being the best pro-sumer miner on the market) has a hashing power between 12 and 14 TH/s and consumes between 1200 and 1400 Watts of power. at an average electricity price in the US of $0.12 per kW/h (and Europe's avg price is between 12 and 18 cents) you can expect to profit just a little under $500 per month on the machine.

Those machines are sold out direct from the manufacturer but you can find them from resellers on amazon or eBay for between $5000 and $7000 depending which batch they were from. It would take you a year to make your money back on your investment, and since the nature of that playing field is that a piece of equipment's yields reduce over time it will most likely take a lot more than one year to break even from the purchase of that miner.

Most miners are pretty much the same or take even longer to pay back; feel free to play around with that calculator and input different mining rigs you find on the internet.

Renting Servers: this site, the top result in a google search, https://www.nicehash.com/buy will rent you 50TH/s of hashing power, for 24 hours, for ~$94USD (they charge in Bitcoin). Using the calculator I linked above 50TH/s and an electricity cost of $0 would yield $2447/month worth of bitcoin or just over $81/day. So you'd be giving them $94 for $81 worth of Bitcoin.

Bottom Line: the reason people don't easily mine it for a tenth of the cost is because it's neither easy nor much cheaper to mine it.

Alexandre Aubrey

Posted 2017-12-22T15:18:46.343

Reputation: 276

So basically cloud mining only works if the price is increasing like crazy? – None – 2017-12-22T18:39:40.653

2@user1721135: When the price is measured in BTC, that doesn't help either. – Ben Voigt – 2017-12-22T19:43:31.237

Also overlooked in this answer is that time and effort spent setting up a mining operation are not infinite or costless. In the most trivial case, if you need bitcoin urgently, there is an implied cost to the time between when you decide to make a miner, and when it first yields anything. And there are opportunity costs (and possibly more obvious and immediate actual costs, depending on your situation) to spending time learning about the problem space enough to actually make a miner - I might be able to earn more in that time than the price difference to just purchase the bitcoin. – None – 2017-12-22T19:57:27.757

Is this answer assuming you join a mining pool? Otherwise there is going to be a lot of randomness about whether you end up mining any coins at all. – None – 2017-12-22T20:13:37.677

3@BenVoigt Why would anyone invest in cloud mining in this case? I have heard of people making money with it. – None – 2017-12-22T20:24:21.573

6@user1721135 if you pay the cloud provider at the beginning of the month, then sell your gained coins at the end of the month, but during that month the price of a coin doubled in price - voila, profit! (Note: do not try this at home, kids.) – None – 2017-12-22T20:40:04.977

3You have to ask yourself, why is the cloud provider renting the server to you instead of just using it on their own behalf? Not that that means it's a bad deal for you, but, think about what each of you is gaining from the transaction. Maybe you just like gambling, not join any pool, and roll the dice on a six figure but highly unlikely payout. Whereas the cloud provider wants a steadier income. – None – 2017-12-22T20:43:06.460

1Am I the only one who sees a certain humour in a cloud service provider renting their equipment to mine bitcoin and charging in those very same bitcoins? – None – 2017-12-22T22:19:04.717

@stannius It can be much more profitable to be renting your miner than to actually mine, because first when you rent you get more available money (If you buy a piece of hardware, you can immediately sell a 2 year contract at the price you paid it and than buy another one). This allows you to expand much faster. Mining is not always profitable and if you rent contracts you'll make sure that you are profiting from your investments. – Cedric Martens – 2017-12-23T01:11:24.377

You are talking about two very different investment options. One is investing cash into a type of commodity that has shown extremely high volatility; the other one is investing low amount of cash, but significant amount of time to create ("mine") additional units of the same commodity.

Sure the outcome of both are tied to the price of BTC. But ask yourself this: if you have a crystal ball that tells you, tomorrow BTC will double in price, will you borrow as much as you can to buy spot BTC, or buy a bunch of rigs to mine?

For how long it takes to mine 1 bitcoin, see this https://bitcoin.stackexchange.com/questions/13161/how-long-does-it-usually-take-to-mine-a-bitcoin-block

You also implied that the intrinsic cost of a bitcoin is the same as the marginal cost of mining an additional unit. That is probably the theoretical equilibrium point where mining bitcoin is fruitless, but the value itself isn't defined this way but rather, like @abelenky said, by what you can do with it (and what people think that they can do with it). In other words, the marginal cost should continue to rise up to the point where it converges to the value of a bitcoin, as approximated by its market price (not a good proxy tho IMHO).

EDIT: This bitcoin mania looks a lot like the gold mania back in the 70s. And interestingly, OP's question and my answers also apply there. (Why isn't the gold price the same as the cost to mine an ounce of gold?)

Here is some food for thought - Gold price adjusted for inflation

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

xiaomy

Posted 2017-12-22T15:18:46.343

Reputation: 181

Most people have no interest in buying, setting up, and operating a mining rig. It may be beyond the technical ability of many people, and simply isn't how they would choose to spend their time.

If someone wants to use Bitcoin, perhaps for an illicit purpose (see: Silk Road) or to move funds across international borders without detection, then they don't really care what the price of bitcoin is: If they buy BTC for $15,000 in Hong Kong, and can re-sell it at a similar price for USD in San Francisco, then the Bitcoin served their purpose, and the mining costs are not relevant to that transaction!

If someone is truly focused only on owning as much Bitcoin as possible, then it is true that mining is a cheaper route than buying. But the end result would be that they own a pile of ones-and-zeros, which Bitcoin critics are always quick to point out have no intrinsic value.

The value of BTC is not owning it, it is what you can do with it.

abelenky

Posted 2017-12-22T15:18:46.343

Reputation: 1 252

I kind of get that, for fast transactions, sure. But the people who invest could just throw their money at cloud mining, where they don't need to know or do anything and get a lot better price per coin than 10.000$ or whatever it costs atm. – None – 2017-12-22T15:26:20.543

Shouldn't the price of bitcoin be very closely tied to the price of producing bitcoin?

You have it backwards: the price of producing bitcoin is actually tied to the price of bitcoin.

https://bitcoin.stackexchange.com/questions/2154/why-does-mining-profitability-tend-towards-zero

As bitcoins become more valuable, more people use more miners, invent more efficient ASICs, etc. As more hashing power comes online, the new coins being mined at a constant rate get spread out thinner. Eventually the cost of mining approaches the value of the coins mined. When that happens, people collectively stop adding more hashing power.

If and when bitcoins become less valuable, it will stop being worth paying for the electricity to run existing miners. Hashing power goes offline. Those that stay in get rewarded with larger shares of the new coins.

It's possible for there to be temporary situations where the cost of mining a coin would be nontrivially less than its value; however, by the time you go buy an ASIC off ebay and get it running, that inefficiency will have already evaporated.

Your second misunderstanding is a corollary to the first: Your estimate of the cost of mining one bitcoin is off by an order of magnitude. It's astonishing how the cost of mining a coin has kept up with the value of coins, which have been doubling every month or so, but that just shows you how efficient this market is.

stannius

Posted 2017-12-22T15:18:46.343

Reputation: 111

But the price has increased faster than mining difficutly in the last months wouldnt you agree? – None – 2017-12-22T23:13:42.307

1Maybe, but so has the street price of an ASIC, plus the difficulty of finding one actually for sale. Then by the time you get your hands on one, so will a bunch of other people. And like someone said above - if you knew bitcoin was going to double in price in a month, would you buy an ASIC and wait weeks for it to arrive, or would you buy a coin? – None – 2017-12-22T23:16:40.073

Assuming that there's an infinite number of bitcoins and assuming that you can "mine a bitcoin" quickly, yes, you would be right.
There's one block mined every 10 minutes (on average) with a set payout per block. If you decided you want to invest in bitcoin and go ahead and mine a few bitcoins you would have your bitcoin in a year, depending on how much you want to invest.
You also have to take into account that none of the bitcoin miners want to break even. They don't spend thousands of dollars on mining rigs so that they can sell the bitcoins near the price it would take to mine them. The up-front cost is extremely high at this point. (You could just spend a hundred bucks on a USB miner and have your bitcoin in a few decades....)

Similarly you could be asking why the price for electricity is so high when you could just build a nuclear power plant that generates a kWh of electricity for fractions of a penny....

xyious

Posted 2017-12-22T15:18:46.343

Reputation: 101

A "few decades" with a USB miner is optimistic. At current rates, even the best USB Miners would take roughly 12,000 years to earn a single BTC. – abelenky – 2017-12-22T20:52:17.960

That is far longer than I thought, but I was just making a point of "it's too long to be worthwhile" – xyious – 2017-12-23T00:17:59.427