Bitcoins have been a very hot topic recently. As in other blog posts, we aim here to understand fashionable financial/economic phenomena through data and analysis.

Bitcoins started rather as a geek hobby to become a real investment vehicle for many speculators/ investors. With this craze, the value of Bitcoins has increased more than 10 folds over the past 3 months. Wondering how to best enter the frenzy, either by buying Bitcoins or by mining Bitcoins, we did an economic analysis of the Bitcoins mining economics. We found that, based on the current situation, miners must invest roughly 40$ to mine a Bitcoin while Bitcoins can be sold in the market for close to 1000$; a 25 folds gain. In addition, projecting these results in the future, we found that it will take until 2015 for the cost of Bitcoins mining to reach the current 1000$ price level and finally close the arbitrage.

 

Buy or Mine

For people interested in getting some Bitcoins, there are two different avenues: (1) you can buy them on one of the exchange markets or (2) you can mine them. For many, the concept of mining is challenging to understand but Bitcoins are basically created every day, at a rate of about 25 per period of 10 minutes. People with the right equipment (i.e. hardware and software) and technical ability can join the other miners to “mine” those newly created Bitcoins.

 

Results and observations

Our quarterly financial model of Bitcoins mining is based on most recent inputs available, see below. It's divided into 3 sections: (1) the financial inputs/economics, (2) the technical parameters and (3) the mining cost calculation. The cost per Bitcoin line represents the total costs associated to mining Bitcoins for a well performing miner.

 

Check some of the detailed calculations by looking at my new post of the Revenues Generated by Bitcoins mining.

 

Key observations:

• Current mining costs: It costs a miner roughly 40$ today to mine a Bitcoin, this represents a 25x gain for miners.
• Exponential cost increase: The cost would be in excess of 10,000 by 2017. 
• Equilibrium reached in 2015: With the current price, the costs of mining Bitcoins will converge in year 2015 (around mid-year). Between now and then it seems to make a lot more sense to invest in mining rather than buying Bitcoins.
• Hardware is the big cost driver: The key driver of costs for miners is hardware; currently energy represents only a fraction of the total mining costs. This is due to change in the coming 5 years.
• Mining is the clear choice: All results are totally dependent on miners' view on price. For now anyone who has spare computing capacity should mine Bitcoins. Going forward the arbitrage is likely to close.
• Power consumption: Based on our calculations, by the end of 2016, the total processing power on the Bitcoins' network would consume a quantity of power equivalent to a small city. By 2018, equivalent to the consumption in Michigan.
• All results are based on inputs and sources below.

 

About us

OpenDataDepot wants to democratize access to data and facilitate data analysis and visualization for all. See examples of what we do by looking at our Example Gallery and our Blog.

 

Model inputs and hypotheses

Find the input value, we have used to create the model, below. Based on our research we strongly believe it's a very good representation of the current reality of Bitcoin mining.

 

Contact me at http://opendatadepot.org/contact-us/ to comment or get a copy of the model.