Zero, of course. Zero is the lower bound on lots of things: stock prices, minimum wages, retirement portfolios, etc.
Yeah, it's easy to imagine extinction events--an asteroid hitting the earth and eliminating humankind, for example. Or the commercialization of quantum computing--which at this point seems a very long way off (a few qubits at near absolute zero temperatures notwithstanding). Etc.
The higher the mining cost, the greater the security of the bitcoin blockchain. On the other hand, cheaper mining means saving money, but the miner can more easily cheat and steal your bitcoins. The cheapest possible mine is a database, where one person simply looks up how much bitcoin you have and keeps accounts. As long as that one person is honest everything will be fine. It's a trade-off: money for security. Bitcoin has opted for security--its blockchain has never been hacked.
For the moment, miners do their work for "free"--that is they are paid by creating new bitcoins rather than by charging users. But that will gradually change as fewer and fewer bitcoins remain to be mined. The last bitcoin will be mined in 2144. That's beyond my investment horizon, but in the meantime the rewards of mining gradually shrink. Beginning in 2020 each miner will only receive 6.75 bitcoins per block. Eventually transaction costs will be passed on to users as fees.
Yet I don't believe bitcoin will go to zero. The world is just not going to forget about cryptocurrencies--the technology will always be there. They may be more or less important in the future, but zero is not a likely outcome.
While many (most) of the so-called alt-coins will in fact go to zero, a few of them will undoubtedly survive and thrive. Bitcoin, if only because it has first-mover advantage, is the oldest and biggest of the bunch. Something substantial will have to happen before it gets displaced--and maybe not even then.
So let's eliminate zero as an option and ask: What is the lowest price bitcoin could fetch and still remain a viable cryptocurrency?
The cost of bitcoin depends on the expense of mining. Mining is the mechanism that cryptocurrencies use to verify each transaction. Transactions are signed cryptographically and put together in a block. Proving that the pass keys are all correct involves finding the solution to a cryptographic puzzle, which can only be done by trial and error--going through the billions and billions of possible solutions one at a time until the correct answer is found.
The miner who finds the correct solution today is rewarded by receiving 12.5 bitcoins, now worth around $85,000. The cost to the miner is the electricity used--on average in the US it costs an average of $4,758 per each bitcoin (in Louisiana the price averages $3,224). In South Korea, on the other hand, the bill runs $26,100--obviously there's no point in mining bitcoins there. The cheapest country for mining is Venezuela ($531), where electricity is highly subsidized.
That means each transaction cost about $16.30 to process. Note that this is per transaction and is not proportional to the amount transacted. Thus paying $2.50 at Starbucks is going to cost just as much as paying $5,000,000 to buy a NYC condo.
So let's take Louisiana as representing the cheapest, readily available rate--and round up to $3,500. That cost corresponds to about $44,000 per block (leaving a bit over $20,000 as profit to the miner). So how many transactions are in a block? That depends on the demand for transactions, but if we go back to the "bubble" period last year transactions were at a max. On December 18th, 2017 over 2700 transactions were processed in one block.
It's obvious that bitcoin makes no sense for small transactions--it adds multiples to the cost of your morning coffee. On the other hand, the overhead cost for the condo is trivial. So bitcoin makes sense for moving large amounts of money around, especially across international borders. No wonder institutions like banks and hedge funds have become really interested in bitcoin, while retail stores are generally not signing up. (Some apps are being developed to dramatically lower transactions costs for small purchases, albeit by sacrificing security.)
The higher the mining cost, the greater the security of the bitcoin blockchain. On the other hand, cheaper mining means saving money, but the miner can more easily cheat and steal your bitcoins. The cheapest possible mine is a database, where one person simply looks up how much bitcoin you have and keeps accounts. As long as that one person is honest everything will be fine. It's a trade-off: money for security. Bitcoin has opted for security--its blockchain has never been hacked.
For the moment, miners do their work for "free"--that is they are paid by creating new bitcoins rather than by charging users. But that will gradually change as fewer and fewer bitcoins remain to be mined. The last bitcoin will be mined in 2144. That's beyond my investment horizon, but in the meantime the rewards of mining gradually shrink. Beginning in 2020 each miner will only receive 6.75 bitcoins per block. Eventually transaction costs will be passed on to users as fees.
So it's easy to conclude that it costs about $16.30 per transaction--and absent cheaper electricity and/or advances in computer technology that will remain true into the future. But it's not quite so simple. Note that mining is successful when, by trial and error, miners find the true solution from among billions and billions of possible answers. If there are more miners they find the answer quicker, but bitcoin has a mechanism so that a block is solved every 10 minutes. That is, if there are more miners, the difficulty of the puzzle is increased so that solutions are found about 10 minutes apart.
The bottom line is the fewer the number of miners, the cheaper the transaction costs because the mining gets easier. The larger the number of miners, the more expensive the transaction costs. That makes sense--all those miners require more electricity. And it repeats what we said above.
Since miners go into business to earn money, and since more money will be earned when bitcoin is at a high price, a higher cost of bitcoin will effectively raise the transaction cost. Conversely, cheap bitcoins will dissuade miners, lowering transaction costs.
There needs to be a minimum number of miners to guarantee the security of the system. Let's guesstimate that is half of today's number. That implies that bitcoin can sink to approximately $1250 (half of $3500) before it becomes totally uneconomic.
So I suggest the lowest low that bitcoin can go is about $1250. It can't even get that low because all that does is cover the transaction cost--why bother? Still, if it falls below that the next stop is definitely zero.
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