The Math of Bitcoin

Withe recent implosion of MtGox –– A Bitcoin Exchange in Japan – the spotlight is back on Bitcoin. The discussions are ranging from who can hurl the most insults and blame who the most, or hand wringing about what the future holds. I will suggest another way to look at bitcoin (BTC) and focus the discussion on math based reality.

I have looked into BTC and even modeled out a hosting offering for it because as you might not expect, a lot of the BTC miners are 20 somethings with a mining rig plugged into their apartment wall socket. I expect the latest implosion of price will wash a few dozen miners out and they will go do something else, or have an axe to grind with BTC and want to get it all back without changing the fundamentals of their efforts. I will share some of the business modeling I have done (no secret sauce here). These are based on the latest and greatest hardware rigs you can buy – the CoinTerra, TeraMiner IV:

  • A single terra miner has a 2-terrahash per second hash rate and costs $6,000.
  • For $6 million, you could acquire 2-Petahashes with one thousand of these machines.
  • $60 million doubles the entire current network hash rate of roughly 20 petahash per second. (This will probably change as miners wash out)
  • The monthly quantity of all bitcoins mined is 108,000 BTC. Globally, that’s it, every 30 days

So to turn up some hashing capabilities it’s $6M for the rigs. That’s the easy part. Lets look at where you put them because these are not your average pizza boxes…

The rigs are custom built to hash numbers. They draw 2.2Kw per rig. Ten of the rigs fit inside a single 42 U cabinet that are $3,000 a piece, pegging power draw out at 22Kw per rack. That is a TON of heat to have to deal with, and few data centers can. So 1,000 of these rigs is 100 cabinets at 22Kw/cabinet. That means 2.2MW of power for the rigs. Add another 30% for cooling overhead (minimum) and that’s another 660Kw, bringing the total power footprint to 2.66MW. Every month. 

At 5 cents per kwh, that’s 1,941,800 Kwh or $97,090 in power bills per month. Plus $6M in hardware, plus $300,000 in cabinets, plus rent at a facility that can handle the heat at $125/kw so that’s $332,500/month for at least a 3 year term.

Let’s check the costs so far:

Hardware (CapEx): $6M

Rent & power for 36 months (OpEx): $11,970,000 (rent), $3,495,240 (power) Total= $15,465,240

$21.5M to get in the game

Now, I assume you’ll need people to keep things running smoothly, so for a fully burdened team I would allocate $1.2M/year to keep things running smoothly. That’s $25M to launch a mining company.

The gotchas – The first month you mine will be the month that you make the most BTC. Every month the payouts get smaller and the hashrate difficulty goes up, so you need better hardware. All. The. Time. Better hardware to chase diminishing returns. 

Speaking of returns… The chart below was taken just moments before publishing. It shows revenue falling 50% over a few days time from $4.5M to $2.3M. Ouch. Fortunately that tank is spread across the world, but getting cut in half is getting cut in half. 

Image

So what is the point of all of this?

You can make money at this, and the old adage of ‘it takes money to make money’ rings true, but only if the value of money holds up. Giving someone a dollar today that is worth 50 cents by Friday is not a good business model. 

 

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One thought on “The Math of Bitcoin

  1. […] earlier blog post had a couple of friends reaching out asking about what bitcoin had to do with the data center, but […]

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