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Bitcoin Mining The Evolution of A Multibillion Dollar Industry Yassine Elmandjra, and Derek Hsue, V. Miner Influence The impact miners have on the Bitcoin network is a hotly debated topic. Does hashrate drive price? Can the value of a bitcoin be linked to the costs of producing it? Are miners whales? What are the threats to mining? We explore some of these questions below. Do Miners Set the Price Floor? Production costs have been hypothesized as a link to fundamental valuations. Termed the labor theory of value,46 the hypothesis is that “the value of a commodity can be objectively measured by the labor hours and energy required to produce that commodity.” Prevalent in the 18th and 19th centuries, its proponents argue that the labor theory can value all commodities, with prices in excess of that ‘fundamental valuation’ as the profits. Applying this theory, researchers can derive the average production price per bitcoin after accounting for capital spending (capex) and operating expenses (opex). With data from bitcoin miners, they can calculate the mean cost of production and a uniform production price. This commodity pricing framework, however, fails to incorporate bitcoin’s supply schedule. Typical exploration and development companies respond to price signals and vary production accordingly, while bitcoin’s issuance is mathematically metered and does not vary. If the price of a traditional commodity like gold increases, companies will increase production until the marginal cost equals the market price minus transport costs. If the price falls, production will drop until the marginal cost equals the market price. Relative to what otherwise would be the case, volatility drops as supply increases in rising price markets and supply decreases in falling price markets. In contrast, bitcoin’s issuance is predefined, its supply curve inelastic, suggesting that bitcoin miners cannot set a price floor. Regardless of the amount of mining resources, the difficulty adjustment forces the issuance of bitcoin to be consistent over time.47 If miners enter or exit the ecosystem, difficulty adjusts accordingly to stabilize the rate of issuance. If the cost of production rises, unprofitable miners may simply exit the system. This characteristic sets bitcoin apart from all other commodities and along with its fixed supply, determines its volatility. While they might serve as a gauge of miner profits and margins, we believe production costs are unlikely to be the primary determinant of bitcoin’s price. 46 “Labor Theory of Value.” Wikipedia, Wikimedia Foundation, 21 Feb. 2020, en.wikipedia.org/wiki/Labor_theory_of_value. 47 Bendiksen, Christopher. “An Honest Explanation of Price, Hashrate & Bitcoin Mining Network Dynamics.” Medium, CoinShares, 27 Sept. 2019, medium.com/coinshares/an-honest-explanation-of-price-hashrate-bitcoin-mining-network-dynamics-f820d6218bdf. 20PDF Image | Bitcoin Mining
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