The Math of Bitcoin – Part II

The earlier blog post had a couple of friends reaching out asking about what bitcoin had to do with the data center, but it’s a hot topic, and should they (as operators) be spending time on chasing the opportunities in that ‘vertical’?

It’s the wild west folks. If you like gunfights, saddle up, pack plenty of ammo and draw faster than the other guy. But realize, yes you’re shooting, but you’re still getting shot at…

Bitcoin is a hot topic. Sure there is ton of negative press – money laundering, being able to buy drugs, bitcoin exchanges imploding, but what is the difference between bitcoin and US Dollars? People and companies launder money and have for years (Scarface?), being able to buy drugs – dealers take 5’s, 10’s and 20’s, exchanges imploding – Lehman Brothers ring a bell?

The bitcoin and cryptocurrency phenomenon fixes a lot of the shenanigans in the financial systems because of how it works. It is distributed, transparent, and lacks central control. It also has quite a steep learning curve attached to it as I have found out in the past couple of months. It is not mature – it has been in existence for only 5 years. So to say that this bitcoin thing is doomed to fail is like saying the automobile will never take off in 1913, five years into the production of the Model T. Prior to the Volkswagen Beetle, it was the most popular production car made.

There are flaws (challenges?) built into how BTC was modeled and what its proposed end state looks like. This is the math of Bitcoin that people don’t talk about much. Math isn’t as sexy and nebulous as buying heroin with crypto currency or exchanges imploding I guess so I don’t see a lot of easily consumable data out there, so this is my quick and dirty follow up…

Right now the amount of BTC that will ever be produced is 21,000,000. That happens in 2033 if things go as expected.  So 19 years from now we will have produced all the BTC that can ever be produced.

BTC equation

There are some interesting variables in the ether that may have a profound impact on the timing and ultimate value of BTC:

1. Hardware – the hardware race is an arms race. ASICs rigs that do the computations that mine (create) BTC are constantly being developed to be faster. They can crunch more numbers and make BTC faster. The regulator on the hardware speed is built in.

2. Complexity – As the hashing power goes up, so does the complexity of the blockchain, which is essentially a receipt for every transaction the BTC has been used in. So as more BTC gets created and used, then the complexity and number of transactions grows adding more numbers that have to be crunched to mine more. This complexity prevents someone from going out and buying 1,000 rigs to control more than half of the BTC mining capabilities and making more BTC and controlling production. The process here is that as time marches on, the complexity goes up, the rigs get less powerful, and you never make more bitcoin than you do your first month, and you won’t cover the cost of the hardware and operations at any point.

3. Costs – the mining rigs are priced right for what they do. That said, their design creates issues for using them at scale. They don’t fit in standard racks and then run 5-10 times hotter than a traditional racks with industry standard servers and corresponding power draws. So you need to add $50 for the rails, and quadruple your power bill.  That’s assuming you can cool the rack… This cost assessment is the reason I believe the exchanges, commercial mining operations and hosters who I could paint as predatory because the math isn’t there to support a profit at any point are doomed. The business model success factor is not one that can be controlled. It is a gamble.

The gamble is whether or not BTC will increase more than the costs to make it. I discussed the business model in the previous post, so I won’t rehash that information but the gist of it is this – if you’re mining BTC you will spend more to make the BTC than its value when you make it. The BTC value may or may not increase to cover your costs, if it does, you’re successful, if not, hopefully you needed the loss anyway…

 

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