34. On the Bitcoin Limit and Profitability of Nodes

34

On the Bitcoin Limit and Profitability of Nodes

THE ORIGINAL POSTS in this thread questioned the profitability of miners to mine when the difficulty level becomes high and the amount of bitcoin rewards decreases (it was 50 BTC at the time of these posts, but was reduced to 25 BTC later on in early 2013).

Re: Current Bitcoin economic model is unsustainable

Satoshi Nakamoto February 21, 2010 05:44:24 PM

xc wrote:

Nothing to sweat people. Nobody ever died of a‘deflationary spiral.’ : ) I agree with “I-am-notanonymous.” The market will choose the best bitcoin-like currency. I happen to believe, however, that the rules that Satoshi has founded bitcoin on will be more than adequate for the future of a thriving bitcoin economy.

Everybody knows exactly how fast the supply of bitcoins will grow: it’s set in stone in the rules of the programming and the bitcoin network. While it’s true that there is not acurrently existing fully-fleshed out market to truly price bitcoins, such markets and exchanges are being developed. As faras future would-be bitcoin generators are concerned, the question is not how much will he “demand....to compensate for his costs.” The question he’ll be asking himself is “given current market values and my ability to utilize electricity and CPU resources, is it worth it for me to generate bitcoins?” If the answer is yes, he participates. If it’s no, he stops trying to mine for bitcoins and focuses on trading tangible assets with bitcoins serving as an appropriate intermediary. If he’s not sure, he tries his hand at it for a while and then makes a final decision.

The number of nodes and associated computational cpu power will be in flux, and that competitive flux will allow for costs to approximate value (not the other way around.) Value being set by the markets and the demand for use of bitcoinas a trade intermediary (a money). In the far future, the competition of transaction costs will play a more important role for the would-be node operator.

Contrary to the paradox of thrift argument you present, collecting bitcoins and saving them with hopes of earning purchasing power through deflation is not a bad thing. It will allow for the pooling of bitcoin capital and make purchasesof larger capital investments possible. In the future, there might even be bitcoin banks that lend out saved bitcoins with market-set interest rates, thereby diminishing the effects of hoarding. All this wonderful saving, however, comes ata price: delayed gratification of present desires. From the perspective of the would-be saver, the question will always be denying present desires to purchase real tangible assets now versus the future possibilities of purchasing more later. This time preference naturally varies with people and in different circumstances.

Given the fact that bitcoins are by their electronic nature easily divisible, prices will be able to easily adjust to deflationary pressures. If too many are saving, prices will fall and the rate of interest will go down. This encouragesdemand (lower prices) and decreases the desire to save (less interest).

XC

Excellent analysis, xc.

A rational market price for something that is expected to increasein value will already reflect the present value of the expected future increases. In your head, you do a probability estimate balancing the odds that it keeps increasing.

In the absence of a market to establish the price, NewLibertyStandard’s estimate based on production cost is a good guess and a helpful service (thanks). The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price.

In later years, when new coin generation is a small percentage of the existing supply, market price will dictate the cost of production more than the other way around.

At the moment, generation effort is rapidly increasing, suggesting people are estimating the present value to be higher than thecurrent cost of production.