Inside a Chinese Bitcoin Mine That's Grossing $1.5M a Month
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I believe China used to have some pretty significant restrictions to prevent capital flight - I wonder if that has something to do with this mining operation.
As an example: suppose you are a resident of country X, and you have 1000 XUnits that are valued at 1000 USD, but there are capital flight restrictions such that you can exchange your 1000 XUnits for only 300 USD. And suppose that you need to exchange your XUnits to USD, for whatever reason. You then use your XUnits to buy electricity and mining hardware, and generate Bitcoins, and sell them for 750 USD.
Note that you could try to do the same with e.g. steel, barrels of oil, or widgets, but with hardware you'd be subject to import/export taxes, and the entire operation would have much higher overhead costs (comparatively, setting up a mining farm is pretty cheap).
Electricity is very reasonably priced (especially in rather rural areas where the factory is based) and there are tons of people with money in China that are always looking for potential high yield investments - sometimes with cash that cannot be invested in ventures that can be traced back to them due to it's dubious origins.
Here's one from Kathmandu, http://www.canstockphoto.com/tangled-electric-cables-5050998....
>not a messy place where people steal electricity //
FWIW I wasn't suggesting that such a place be messy, the cause of this sort of cabling [dis]arrangement isn't related to hygiene; nor that Chinese are more prone to steal electricity just that complicated webs of cabling (as in that Kathmandu photo) could make it difficult to tell easily that someone had put in an extra line.
Someone could fly in via Hong Kong with a piece of paper that could unlock $100MM of BTC and nobody would know.
Meanwhile building a gigantic BTC mining facility will not go unnoticed.
Not an impossible scenario, but it might not be the most reliable.
Buying bitcoin might have made sense for a regular chinese lee, but it cannot actually handle any real transaction demands.
Besides, Singapore implemented this functionality long ago. Sell Chinese goods at breakeven (or even a loss) to a corporation in Singapore, which realizes the profits. Singapore is the busiest trans-shipment port in the world [1].
Ultimately (and not long from now if these rates of adjustment continue), mining will be a commodity business with a very small profit margin. When you consider that there are uses for low grade heat (like home and office heating), once the ASICs catch up with Moore's law, it seems likely that the profitability will be slightly negative for someone trying to run this kind of business. (As another reason, there will probably be people who have access to basically free electricity that would have been wasted, and just need to amortize the cost of the ASICS).
However, because mining is a zero sum game, we can conclude that the profitability of mining was very high at the time of the making of this video, or else the margins wouldn't have been able to drop as much as they did. This says that a rational large investor would choose to put their money into mining rather than directly buying bitcoins, if they were interested in getting into this space. That's probably why the price has been falling since the peak early last year.
That's a really interesting point. I wonder if we'll see utility companies get into bitcoin mining as a way of profiting from their excess capacity during non-peak times.
http://www.nytimes.com/2012/09/24/technology/data-centers-in...
Then came a showdown late last year between the utility and Microsoft, whose hardball tactics shocked some local officials.
In an attempt to erase a $210,000 penalty the utility said the company owed for overestimating its power use, Microsoft proceeded to simply waste millions of watts of electricity, records show.
And, the utility put Microsoft in the position of wasting $70,000 of power or paying a $210,000 fine.
Exactly what did they EXPECT was going to happen?
As much as I like to slag Microsoft, any rational human being is going to react that way when presented with those incentives.
If a customer moves in and says "oh yeah, I'm gonna need an average of 100 MW 24/7 for the next 20 years" and then turns out to only use half that, the utility is now short a bunch of a money that it spent upgrading its distribution infrastructure for that customer's supposed needs.
There is a reason cex.io / ghash.io (the biggest mining pool) contracted out their hash power to other suckers (err I mean buyers) instead of mining themselves.
It might still make sense for some people even when the margins are small
This is the main reason I'm highly skeptical of bitcoin, not to mention wildly fluctuating value, little if any privacy gains (http://www.forbes.com/sites/timothylee/2011/07/14/how-privat...), and a host of other problems.
http://www.reddit.com/r/Bitcoin/comments/2v02n9/life_inside_...
You can deduce from the video that their utility rate is ~$0.09/kWh.
That's substantially higher than other major bitcoin miners are paying.
Maybe a similar one for complaints about the other comments, too, although that's harder. Need snapshots, really.
0 - http://www.reddit.com/r/Bitcoin/comments/2v02n9/life_inside_...
If I were making such an investment, I'd think carefully about the rate of computational depreciation (which is predictable) and probably hedge on the price of power. The only unpredictable thing in this setup is the price of bitcoin, which I believe they're extremely bullish on long term. You could probably figure out a way to hedge that, too, if you could find someone to take the action.
It seems a pointless waste of electricity and human effort, but justifiable with the current bitcoin prices.
More information better written at [0] and [1], but they'd be able to reverse their own transactions (and double spend), and also stop any other transactions being confirmed.
So essentially these miners are making it more difficult for anybody to attack the blockchain, thus they're providing security.
[0] http://bitcoin.stackexchange.com/questions/658/what-can-an-a... [1] https://en.bitcoin.it/wiki/Weaknesses#Attacker_has_a_lot_of_...
Of course, this only works if they're (or someone else is) not big enough to control more than 50% of the hash rate (not sure how much they would have to grow to do that)
Only for the Bitcoin network, which is like saying that putting a fence and armed guards around a plot of industrial wasteland is inherently good because it increases security.
The fear at the time was that the Germans could do a stealth smash-and-grab on New York and steal all of our gold. So they moved it all across a mountain range to the middle of an Army base (in fact, they used to train tank crews there). Even in peace-time, the prospect of being chased by the entire US military across a thousand miles of US territory is sufficiently daunting that the depository itself doesn't need to be that impressive.
• All the employees, regulators and effort put into the auditing and compliance needed to make fractional reserve lending slightly less risky
• The leakage and losses due to carding fraud which goes unfixed because banks have little incentive to fix it
• The mind-blowing resource misallocations that result from misguided but well intentioned economic interventions, like the Spanish housing estates that were built then knocked down without ever being occupied ...
and so on.
Yes, Bitcoin mining is pretty wasteful today. It's a misallocation of resources caused by monetary inflation - the fact that you get to print money by solving SHA256 preimage puzzles diverts lots of energy and effort into doing so even though it makes no real sense. But Satoshi knew inflation caused harmful resource misallocation which is why he scheduled it to halve every four years (some inflation at the start is needed to actually issue the currency into existence, of course).
Now think about the wastefulness of mining, but on a massively larger scale, and without any end in sight. That's other currencies.
Inflation on the other hand, in the long term, guarantees bifurcation of rich and poor (wealth disparity). The reason for this is fairly simple. The poor spend between 100 and 110 percent of their disposable income, and they spend it on consumption. The rich, on the other hand, invest at least 10 percent of their disposable income in some kind of asset, either fixed assets or financial assets. Assets can then be used as collateral against loans which are used to purchase more assets. Inflation erodes the real value of the loan i.e. the nominal principal of the loan does not inflate, but it's real value deflates with inflation. Thus, inflation is a virtuous circle of asset ownership, which gives access to credit, which both increases assets owned, and whose liability decreases with inflation.
To put it another way, never ending inflation is a transfer mechanism of wealth from the poor to the rich. Once the poor realise this, they demand a political solution. The political solution inevitably involves increasing taxes on the middle class (the rich don't pay taxes), to pay for social welfare programs (i.e. free money). In this way, inflation not only transfers wealth from the poor to the rich, it also indirectly destroys the middle class by crushing them with a punitive tax burden to placate the poor.
If you have savings and investments, inflation puts pressure on you to make them perform, otherwise you are losing money; it works like a capital tax in that regard. You just can't sit on it since money can't really be saved without someone else borrowing it (production and consumption have to even out at the end of the day!). So no, the rich don't really get richer off inflation. They aren't brorowing money from the poor at any rate.
If you think of a person as having a balance sheet, with assets (property, shares, bonds, cash) and liabilities (loans), and a profit and loss of revenues (salary, dividends, coupons, rents, i.e cashflows) and expenses (food, shelter, clothing, transport, interest etc), then inflation:
* increases the value of your assets => asset prices rise with inflation
* decreases your liabilities => loan balances stay constant in nominal terms, but in real terms the liability is decreasing.
* increases your income => wages and salaries rise with inflation
* increases your expenses => the price of consumables increases with inflation.
So, ideally, in a high inflation environment, you want to hold as many assets as you can afford, levered as much as possible, with a high income, and low expenses.
So the rich purchase assets with debt. Inflation pushes the price of assets up, and the real value of the debt down. I agree that the assets you purchase should generate a cashflow to cover the financing drag. Inflation also increases dividends, rents and coupons.
Because the poor have expenses (outgoings) equal to or greater than income (wages, salary), price inflation erodes their disposable income, and price inflation is elastic, but wages are sticky, so the poor are always playing catchup, and in the interim, the rich are buying up their assets with cheap debt.
The rich are both lending and borrowing money; again, who do you think they are borrowing money from? Who are they buying the assets from? Again, it is not the poor, unless you are suggesting they are accumulating previously non-existing or non-utilized assets?
The rich are not borrowing from each other. Banks create money endogenously. They are buying existing assets from each other, and they are also buying new assets as they are created. Without inflation, asset purchases would look less attractive on a cash return basis, so inflation does serve that purpose. However, persistent inflation is forcing the market to be investors when they may want to save or spend.
So if we're measuring ecological efficiency of Bitcoin, it'd be something like cents or watt-hours or grams CO2 per financial transaction. I've never seen a rigorous comparison, but I wouldn't be at all surprised if Visa and Paypal are more ecologically efficient than Bitcoin.
We store it in vaults...
http://geology.com/minerals/gold/uses-of-gold.shtml
I suspect that even a lot of the "investment" uses of gold are much more about human emotional needs. I helped someone sort out the house of a deceased elderly relative. There was quite a bit of stuff purchased and stored away: coins, silver, gold. A number were of the Franklin Mint variety, where they wildly overprice the metal:
http://coins.thefuntimesguide.com/2008/11/franklin_mint_coin...
I'm sure the guy was happy with his purchase, but as investments go it was a terrible idea. He would have been much better off putting his money in index funds.
In contrast when gold mining gets more efficient, either we expend less energy, or we produce more industrially-useful gold. Admittedly in the limit where people are just buying gold and putting it on the shelf I guess the same considerations as bitcoin apply? Hmm.
Gold mining and refining can be nasty stuff.
Suppose somebody spends a lot of money hiding easter eggs, and then I spend a lot of money finding and getting the eggs. We can both save a lot of money by them just giving me the eggs.
If the ASICs already bought and shipped to consumers later, they would be effectively free!
Alternatively they might be using the low chips that failed QC and never shipped - they might burn out eventually but if you are running them yourself you can be prepared for that.
He didn't seem all that enthusiastic about bitcoin's prospects.