Thursday, December 5, 2013

Bitcoin fever

Believe whatever you want to believe but know this:  

The meek will NOT inherit the earth.  Some people will make money with Bitcoins, but most will become poorer.  This is the underlying reality of wealth. 

Until all Bitcoins are mined, the maximum value Bitcoins can reach is dampened by the computing cost needed to mine them.  Speculation drives prices upward, but the cost of electricity to run your computer stays (relatively) constant.   When your cost to generate a Bitcoin is less than its value, the price stops rising.   That should be obvious to anyone who stops to think about it at all.

Right now, even for an off the shelf, consumer level computer like the iMac I am sitting at right now, a $5,000 price is break even.   That is, it costs approximately $5,000 to mine a Bitcoin with my home computer.  

Obviously more powerful equipment (and not particularly expensive equipment) drives that price even lower.    I haven't researched the capabilities and power draws of dedicated Bitcoin mining hardware, but it is a slam dunk that they are far more efficient than my iMac, so stupid speculation may have already driven the price past its maximum reasonable point.  If that's true, the crash won't be long in coming.

But what about when all the Bitcoins are mined, the proponents shout?  Nothing to stop Bitcoins from climbing to any height then, right?  Sure -and nothing to stop diamonds, gold, Apple stock and Ngwee's or the Pound  from doing the same.  Bitcoin is just like gold, diamonds, Dutch tulip bulbs, the U.S. Dollar itself and Bernie Madoff's mutual fund.    It can have value and it can lose value.  It can be stolen, manipulated and perverted.  That's reality.

Bitcoin has advantages and disadvantages - like everything else.   Some people are going to get rich with Bitcoins - but that's only a small number and millions upon millions of others will become poorer for their efforts.  

If you were lucky or prescient enough to buy or mine Bitcoins before the hype, you've made some profit. If I were you (I'm not - I thought about buying Bitcoins years ago but never did), I'd take that profit and invest it in stocks. Unlike Bitcoins, gold, diamonds and Dutch Tulips, stocks have real intrinsic value - at least while the company is still in business!

See Let’s Cut Through the Bitcoin Hype: A Hacker-Entrepreneur’s Take also.

Update:  I found Bitcoin's Mining Hardware page and can now make some better estimates of Bitcoin's maximum price.  Based on the power consumption vs. Mhash/s figures given there, there is hardware that is 100 times faster than my iMac at a power cost of 4 times or so.    That means that the price of a Bitcoin should be around $200 at most  ($5,000 / 100 * 4).     Other hardware listed there has even more impressive factors.

You can take the figures there and plug them into a calculator.   I took the figures for the most powerful and expensive machine there : a $14,500 rig capable of 7,500,000 Mhash/s at a power cost of 2,250 Watts.   Even assuming 10 cents per KWH (which few of us can get),  that rig would pay for itself in 90 days AT A BITCOIN PRICE OF JUST $35.00!

If I let the calculator extend this for 8 years, scaling for expected difficulty over time, that falls to about $7.00.  

If you think that Bitcoin can trade at $1,000 when anyone with $15,000 to spare can generate them for $35.00 or less, you are an idiot.

I'm NOT against electronic currency.  Every form of money has its own advantages and disadvantages and perhaps we can eventually come up with something closer to ideal.  What I'm talking about here is ridiculous speculation.

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