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How to Mine Bitcoin Profitably
Minting Money With Megawatts
Sveinn Valfells, PhD1
& J´on Helgi Egilsson2
1
linkd.in/wtaHi5
2
Faculty of Economics
University of Iceland
Presented at Scaling Bitcoin, Montreal
September 13, 2015
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
Outline
1 How to Mine Bitcoin Profitably
2 About the Authors
3 Appendix
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Outline
1 How to Mine Bitcoin Profitably
2 About the Authors
3 Appendix
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Mining Defines The Character of Bitcoin
Computational proof secures the Bitcoin blockchain [1]
“The solution we propose begins with a timestamp server.”
— Satoshi Nakamoto [1]
Low-trust solution to double
spending problem.
Miners’ “proof of work” clears and
secures transactions.
New services may expand market.
Financial and technological barriers
to entry.
Consolidation may erode “trustless,
decentralized” character of Bitcoin.
Trailing 365 day mining revenues: $384M.
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Miners Compete For Network Share
Costs determined by system specifications and deployment environment
π(X) =
X
h0 + X
× B × (S + F) − X × C −
1
T
×
X
z
+ NRE (1)
X Incremental hashing capacity.
B Bitcoin price.
S New supply.
F Transaction fees.
h0 Initial hashing capacity.
C Operational costs.
z Technological factor of
production.
NRE Non-Recurring Engineering
costs.
T Amortisation period.
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Profit Function Determines Network Size
Key points depend on technology and investment time horizon
Maximum hashrate
hCAP =
B(S + F)
C
(2)
Hashrate of maximum profitability
h∗
=
h0B(S + F)
C + 1
zT
(3)
Breakeven hashrate
h
Upper/Lower
BE = h0 +
(B(S + F) − h0(C + 1
zT
) − NRE
T
)
2(C + 1
zT
)
±
(B(S + F) − h0(C + 1
zT
) − NRE
T
)2 − 4(C + 1
zT
)h0
NRE
T
2(C + 1
zT
)
(4)
Implied amortisation TImplied
Calculate shortest profitable payback period or implied amortisation, TImplied
(using Equation 4).
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Moore’s Law Is Key Efficiency Driver
Semiconductor technology will improve efficiency in near and medium term
C Operational cost ($).
CLC Co-location and power cost ($).
POW ASIC energy efficiency (W/PHa/s).
PUE Datacentre energy efficiency (> 1).
UTZ Equipment utilisation (< 1).
C =
CLC × POW × PUE
UTZ
(5)
CLC NRE INV POW PUE UTZ
$/kW/month $ $/PHa/s W/GHa/s None None
Generation One 150 2M 10M 0.8 1.2 0.8
Generation Two 100 4M 1M 0.4 1.1 0.9
Generation Three 50 8M 0.5M 0.1 1.03 0.99999
Table : Characteristic price and performance numbers for three generations of Bitcoin
mining ASICs and their deployment environments [2, 3].
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Network Approaching State Of Current Art
First and second generations outdated at $232 and 368 PHa/s [4]
Gen One no longer profitable.
Gen Two close to economic limit.
Gen Three has short payback TImplied .
Price volatility influences TMarket .
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Network Has Room For Growth
Generation Three can double network size at current price
hLower
BE hUpper
BE h∗
hCAP Margin
T = 0.5 PHa/s PHa/s PHa/s PHa/s %
Generation One nan nan nan 142 -160
Generation Two nan nan nan 522 29
Generation Three nan nan nan 4955 93
T = 1
Generation One nan nan nan 142 -160
Generation Two nan nan nan 522 29
Generation Three 412 487 448 4955 93
T = 3
Generation One nan nan nan 142 -160
Generation Two nan nan nan 522 29
Generation Three 373 1324 702 4955 93
T = 5
Generation One nan nan nan 142 -160
Generation Two nan nan nan 522 29
Generation Three 370 1880 835 4955 93
https://github.com/sweyn/
bitcoin-mining-profitability
Generation Three is “State of the Art”,
entry price $10M.
Maximum processor power efficiency
doubles every three years [5].
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
New Strategies Could Change The Game
New technologies or new deployment strategies could disrupt mining
“[W]here no player has an incentive to deviate from his or her chosen
strategy after considering an opponent’s choice.”
— Nash Equilibrium [6]
Amortize NRE over large batch.
Push down variable investment cost with large
volumes.
Minimize system energy dissipation.
Allow discovery of low electricity prices.
Up to ≈10 GHa/s feasible on smartphones
(105
phones for 1 PHa/s )
π(X) =
X
h0 + X
× B × (S + F) − X ×
CLC × POW × PUE
UTZ
−
1
T
×
X
z
+ NRE
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
How to Mine Bitcoin Profitably
Mining Has Room For Profitable Growth
Mining will scale with Bitcoin, network will grow and become more efficient
Network size Mining network supports growth up to ≈ 1300 PHa/s.
Efficiency Efficiency can improve substantially while Moore’s Law is valid.
Dynamics Miners will compete on technology, operational efficiency,
deployment strategy, and cost of capital.
Endstate Window to entry has narrowed, market will consolidate.
Revenues Revenues will shift from new issue to transfer fees.
Key factors Expectations of Bitcoin price and volatility will determine level of
investment (TMarket versus TImplied ).
Surprises New applications (merged mining); new processor platforms
(graphene); new deployment strategies (embedded mining).
Conclusion Bitcoin is a compelling innovation which is likely to scale.
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
About the Authors
Outline
1 How to Mine Bitcoin Profitably
2 About the Authors
3 Appendix
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
About the Authors
Some Relevant Previous Remarks
Bitcoin is potential dynamite waiting to be ignited.
— Communication with Teddy Shalon, August, 2011
Bitcoin can easily be projected to rise to $20 – $120 within three years.
— Communication with Pamir Gelenbe, January, 2013
We expect Bitcoin mining revenues to grow to $600M within three years . . . network
capacity will rise 50–300×. The total energy requirement will be at least 12 MW and
possibly as much as 70 MW.
— Memorandum to Landsvirkjun, August, 2013 [7]
I encourage people to do their own research and only risk as much as they are willing
to lose in Bitcoin or any other virtual currency.
— BBC Newsnight, November, 2013
MtGox failure is not systemic . . . trend of Bitcoin will continue upwards but will be
interspersed with price spikes and corrections.
— BBC World News & BBC World Business Edition, February, 2014
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
About the Authors
References
[1] Satoshi Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. http://bitcoin.org. May 24, 2009.
[2] The Bitcoin Wiki. Mining hardware comparision. https://en.bitcoin.it. Retrieved, August, 2013.
[3] Nermin Hajdarbegovic. Kncminer plans 16nm bitcoin mining asic launch in 2015. CoinDesk. November 18, 2014.
[4] Blockchain.info. Bitcoin Block Explorer. https://blockchain.info. Retrieved, April 17, 2015.
[5] Jonathan Koomey & Samuel Naffziger. Moore’s Law Might Be Slowing Down, But Not Energ Efficiency. IEEE Spectrum. March 31, 2015.
[6] Investopedia. Nash equilibrium. http://www.investopedia.com. Retrieved, September 2015.
[7] J´on H Egilsson & Sveinn Valfells. Global Payment Processing Using Icelandic Energy Resources. Memorandum for Landsvirkjun. August, 2013.
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
Appendix
Outline
1 How to Mine Bitcoin Profitably
2 About the Authors
3 Appendix
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16
Appendix
Bigger Blocks Are Better For Bitcoin
1Mb limit is artificial constraint which must be expanded, question is when and how
Block size Max yearly data Max growth rate
Mb Gb Mbps
1Mb 53 0.013
8Mb 420 0.110
Table : Change in blockchain data requirements with increase in blocksize from
1Mb to 8Mb.
Compare with retail smartphone:
iPhone6+ storage up to 128Gb.
iPhone6+ bandwidth up to 168/22Mbps.
Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably
Presented at Scaling Bitcoin, Montreal September 13,
/ 16

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How To Mine Bitcoin Profitably (Scaling Bitcoin - Montreal)

  • 1. c Copyright Sveinn Valfells & J´on Helgi Egilsson 2013-15. Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) How to Mine Bitcoin Profitably Minting Money With Megawatts Sveinn Valfells, PhD1 & J´on Helgi Egilsson2 1 linkd.in/wtaHi5 2 Faculty of Economics University of Iceland Presented at Scaling Bitcoin, Montreal September 13, 2015 Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 2. Outline 1 How to Mine Bitcoin Profitably 2 About the Authors 3 Appendix Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 3. How to Mine Bitcoin Profitably Outline 1 How to Mine Bitcoin Profitably 2 About the Authors 3 Appendix Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 4. How to Mine Bitcoin Profitably Mining Defines The Character of Bitcoin Computational proof secures the Bitcoin blockchain [1] “The solution we propose begins with a timestamp server.” — Satoshi Nakamoto [1] Low-trust solution to double spending problem. Miners’ “proof of work” clears and secures transactions. New services may expand market. Financial and technological barriers to entry. Consolidation may erode “trustless, decentralized” character of Bitcoin. Trailing 365 day mining revenues: $384M. Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 5. How to Mine Bitcoin Profitably Miners Compete For Network Share Costs determined by system specifications and deployment environment π(X) = X h0 + X × B × (S + F) − X × C − 1 T × X z + NRE (1) X Incremental hashing capacity. B Bitcoin price. S New supply. F Transaction fees. h0 Initial hashing capacity. C Operational costs. z Technological factor of production. NRE Non-Recurring Engineering costs. T Amortisation period. Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 6. How to Mine Bitcoin Profitably Profit Function Determines Network Size Key points depend on technology and investment time horizon Maximum hashrate hCAP = B(S + F) C (2) Hashrate of maximum profitability h∗ = h0B(S + F) C + 1 zT (3) Breakeven hashrate h Upper/Lower BE = h0 + (B(S + F) − h0(C + 1 zT ) − NRE T ) 2(C + 1 zT ) ± (B(S + F) − h0(C + 1 zT ) − NRE T )2 − 4(C + 1 zT )h0 NRE T 2(C + 1 zT ) (4) Implied amortisation TImplied Calculate shortest profitable payback period or implied amortisation, TImplied (using Equation 4). Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 7. How to Mine Bitcoin Profitably Moore’s Law Is Key Efficiency Driver Semiconductor technology will improve efficiency in near and medium term C Operational cost ($). CLC Co-location and power cost ($). POW ASIC energy efficiency (W/PHa/s). PUE Datacentre energy efficiency (> 1). UTZ Equipment utilisation (< 1). C = CLC × POW × PUE UTZ (5) CLC NRE INV POW PUE UTZ $/kW/month $ $/PHa/s W/GHa/s None None Generation One 150 2M 10M 0.8 1.2 0.8 Generation Two 100 4M 1M 0.4 1.1 0.9 Generation Three 50 8M 0.5M 0.1 1.03 0.99999 Table : Characteristic price and performance numbers for three generations of Bitcoin mining ASICs and their deployment environments [2, 3]. Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 8. How to Mine Bitcoin Profitably Network Approaching State Of Current Art First and second generations outdated at $232 and 368 PHa/s [4] Gen One no longer profitable. Gen Two close to economic limit. Gen Three has short payback TImplied . Price volatility influences TMarket . Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 9. How to Mine Bitcoin Profitably Network Has Room For Growth Generation Three can double network size at current price hLower BE hUpper BE h∗ hCAP Margin T = 0.5 PHa/s PHa/s PHa/s PHa/s % Generation One nan nan nan 142 -160 Generation Two nan nan nan 522 29 Generation Three nan nan nan 4955 93 T = 1 Generation One nan nan nan 142 -160 Generation Two nan nan nan 522 29 Generation Three 412 487 448 4955 93 T = 3 Generation One nan nan nan 142 -160 Generation Two nan nan nan 522 29 Generation Three 373 1324 702 4955 93 T = 5 Generation One nan nan nan 142 -160 Generation Two nan nan nan 522 29 Generation Three 370 1880 835 4955 93 https://github.com/sweyn/ bitcoin-mining-profitability Generation Three is “State of the Art”, entry price $10M. Maximum processor power efficiency doubles every three years [5]. Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 10. How to Mine Bitcoin Profitably New Strategies Could Change The Game New technologies or new deployment strategies could disrupt mining “[W]here no player has an incentive to deviate from his or her chosen strategy after considering an opponent’s choice.” — Nash Equilibrium [6] Amortize NRE over large batch. Push down variable investment cost with large volumes. Minimize system energy dissipation. Allow discovery of low electricity prices. Up to ≈10 GHa/s feasible on smartphones (105 phones for 1 PHa/s ) π(X) = X h0 + X × B × (S + F) − X × CLC × POW × PUE UTZ − 1 T × X z + NRE Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 11. How to Mine Bitcoin Profitably Mining Has Room For Profitable Growth Mining will scale with Bitcoin, network will grow and become more efficient Network size Mining network supports growth up to ≈ 1300 PHa/s. Efficiency Efficiency can improve substantially while Moore’s Law is valid. Dynamics Miners will compete on technology, operational efficiency, deployment strategy, and cost of capital. Endstate Window to entry has narrowed, market will consolidate. Revenues Revenues will shift from new issue to transfer fees. Key factors Expectations of Bitcoin price and volatility will determine level of investment (TMarket versus TImplied ). Surprises New applications (merged mining); new processor platforms (graphene); new deployment strategies (embedded mining). Conclusion Bitcoin is a compelling innovation which is likely to scale. Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 12. About the Authors Outline 1 How to Mine Bitcoin Profitably 2 About the Authors 3 Appendix Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 13. About the Authors Some Relevant Previous Remarks Bitcoin is potential dynamite waiting to be ignited. — Communication with Teddy Shalon, August, 2011 Bitcoin can easily be projected to rise to $20 – $120 within three years. — Communication with Pamir Gelenbe, January, 2013 We expect Bitcoin mining revenues to grow to $600M within three years . . . network capacity will rise 50–300×. The total energy requirement will be at least 12 MW and possibly as much as 70 MW. — Memorandum to Landsvirkjun, August, 2013 [7] I encourage people to do their own research and only risk as much as they are willing to lose in Bitcoin or any other virtual currency. — BBC Newsnight, November, 2013 MtGox failure is not systemic . . . trend of Bitcoin will continue upwards but will be interspersed with price spikes and corrections. — BBC World News & BBC World Business Edition, February, 2014 Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 14. About the Authors References [1] Satoshi Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. http://bitcoin.org. May 24, 2009. [2] The Bitcoin Wiki. Mining hardware comparision. https://en.bitcoin.it. Retrieved, August, 2013. [3] Nermin Hajdarbegovic. Kncminer plans 16nm bitcoin mining asic launch in 2015. CoinDesk. November 18, 2014. [4] Blockchain.info. Bitcoin Block Explorer. https://blockchain.info. Retrieved, April 17, 2015. [5] Jonathan Koomey & Samuel Naffziger. Moore’s Law Might Be Slowing Down, But Not Energ Efficiency. IEEE Spectrum. March 31, 2015. [6] Investopedia. Nash equilibrium. http://www.investopedia.com. Retrieved, September 2015. [7] J´on H Egilsson & Sveinn Valfells. Global Payment Processing Using Icelandic Energy Resources. Memorandum for Landsvirkjun. August, 2013. Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 15. Appendix Outline 1 How to Mine Bitcoin Profitably 2 About the Authors 3 Appendix Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16
  • 16. Appendix Bigger Blocks Are Better For Bitcoin 1Mb limit is artificial constraint which must be expanded, question is when and how Block size Max yearly data Max growth rate Mb Gb Mbps 1Mb 53 0.013 8Mb 420 0.110 Table : Change in blockchain data requirements with increase in blocksize from 1Mb to 8Mb. Compare with retail smartphone: iPhone6+ storage up to 128Gb. iPhone6+ bandwidth up to 168/22Mbps. Sveinn Valfells, PhD & J´on Helgi Egilsson How to Mine Bitcoin Profitably Presented at Scaling Bitcoin, Montreal September 13, / 16