Bitcoin is an energy arbitrage

&gt; What this all tells us is that we can watch the relationship between Bitcoin’s price and difficulty to see situations where Bitcoin is overvalued. These situations would be times where the difficulty rate stayed the same while the price continued to go up.<p>That seems backwards. Miners will adjust their costs until marginal cost equals marginal revenue. In other words, if the Bitcoin price goes up and the hash power does not follow suit, that doesn&#x27;t mean Bitcoin is overvalued, it means that there&#x27;s an opportunity to profit from running more miners.

&quot;One of their functions, which Wall Streeters call arbitrage, was to try to buy power at a low price in one place and sell it at a higher price somewhere else.&quot;<p><a href="http:&#x2F;&#x2F;articles.latimes.com&#x2F;2002&#x2F;may&#x2F;09&#x2F;business&#x2F;fi-scheme9" rel="nofollow">http:&#x2F;&#x2F;articles.latimes.com&#x2F;2002&#x2F;may&#x2F;09&#x2F;business&#x2F;fi-scheme9</a><p>Worked great for Enron.<p>Also, China&#x27;s energy is cheap because 75% of their grid is powered by burning coal. He doesn&#x27;t mention climate change at all in this article.

This is basically a post describing micro-economics (if I have capacity I’ll continue to produce as long as my marginal revenue exceeds my marginal cost). That’s fine and I agree those are the costs of Bitcoin.<p>I think the author is missing more pieces when it comes to fundamental value.<p>Namely, “I’ll pay x dollars to clear my transaction with the next block and “My holding costs are y” in the context of switching costs (i.e. using USD instead).

This article seems silly to me, because it tries to conflate the wasted energy that went into &quot;mining&quot; bitcoins with their value.<p>It&#x27;s like an update of hoary old Marxist notions, but for cryptocurrency: <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Labor_theory_of_value" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Labor_theory_of_value</a>

So - and maybe this is a stupid question - how do I go about converting my Bitcoin back to electricity?<p>Say 1 kWh costs $0.20 in the US and $0.04 in China. I am in the US, and I have a machine that requires exactly 1kW to run. How does Bitcoin mining in China allow me to run this machine for $0.04&#x2F;hr? Or am I misunderstanding what &quot;arbitrage&quot; means?

<i>Put in plain terms since minimum wage in the US labor market is $7.35, $1 USD is “worth” hiring a worker for about 1&#x2F;7 of an hour. This means that for 1&#x2F;7th of an hour you can get some “stuff” done. For instance you could hire someone for 1&#x2F;7th of an hour to pick 2 apples from your Apple tree so you can have apples with dinner.<p>So really you could say that $1 USD is “worth” 2 apples. </i><p>This is whole example is so contrived to arrive at a simple point.<p>If we follow your point then the difficulty adds some degree of inflation to the price. I might mine x amount of BTC for y amount of power (hashes) but tomorrow I will be able to mine x-t for y power. This means today&#x27;s bitcoin is more valuable than tomorrow&#x27;s bitcoin.<p>There was an awesome derivative allowing people to bet on which might have clarified this difference but sadly it is gone.

This is an interesting way to try to figure out a way to value bitcoin based on a cost of a resource. The only thing I could think that might be another thing to consider is cost of moving money or the inability to do so.

Bitcoin mining is an energy arbitrage. The value of bitcoin once generated is about demand for moving cash-like instruments while bypassing capital controls.

Just remember that those who last tried to arbitrage energy costs (Iceland with Aluminium) went bankrupt<p>I&#x27;m also skeptical that the difficulty scales linearly, it might be that as it gets more difficult it won&#x27;t be as linear (we are probably getting to this point)<p>Also, you&#x27;re obtaining coins with mining but you also need to do that work again to spend the coin obtained (or pay the fees, which are climbing).

I think this piece is more along the lines of establishing the supply curve without taking into account the demand curve. So perhaps production is indeed something of an energy arbitrage, but that&#x27;s without accounting for demand. Though maybe meaningful demand has to be assumed for for the premise of functioning as a vehicle for arbitrage to hold at all?

In addition to relocating to where energy is the least expensive, Bitcoin creates incentive for miners to lower the local cost of energy: invest in renewable energy.<p>Renewable Energy &#x2F; Clean Energy is now less expensive than alternatives; with continued demand, the margins are at least maintained.

Hard to take him seriously when he thinks 1&#x2F;6th of an hour &lt; 1&#x2F;7th of an hour

X-posting here from the article&#x27;s comments:<p>The price reflects the confidence investors have in the security&#x27;s ability to meet or exceed inflation and in the information security of the network.<p>Volatility adds value for algo traders: say the prices are [1, 101, 51, 101, 51, 201]:<p>(101-1)+(101-51)+(201-51)=300<p>(201-1)=200<p>For the average Joe looking at the vested options they&#x27;re hodling, though, volatility is unfriendly.<p>When e.g. algo-traders are willing to buy in when the price starts to fall, they&#x27;re <i>making</i> liquidity; which some exchanges charge less for.<p>Enigma Catalyst (Zipline) is one way to backtest and live-trade cryptocurrencies algorithmically.

No, no, no. The marginal revolution of the 19th century solved that question. Value is not determined by what it cost to do something. For eg. You can dig deep in south Africa to mine diamonds, but the bits of subterranean rock that emerges along with it doesn&#x27;t have the same value. Value is always subjective. If you paint Monalisa it has a different value from the one in the Louvre

Did this guy just finish up his first year of Econ? Pretty pseudo-intellectual article if you ask me

This article is enormously confused, even by bitcoin standards.

&quot;Market&quot; is not a fancy word.

Hard to take him seriously when he thinks 1&#x2F;6 of an hour is less than 1&#x2F;7th of an hour...

Old fallacies that keep coming back.

&gt; If you take $10,000 USD in cash and put it in the freezer, in a year it would be worth $9,700 of today’s value.<p>&gt; Yep you read that right. Holding USD means the cash will be “worth” less next year. This is because of a 3% inflation rate.<p>USD inflation is effectively dead ATM and has been since at least the early 2000s.

&gt; If you take $10,000 USD in cash and put it in the freezer, in a year it would be worth $9,700 of today’s value.<p>&gt; Yep you read that right. Holding USD means the cash will be “worth” less next year. This is because of a 3% inflation rate.<p>This math is wrong. The value in today’s dollars will be 10,000 &#x2F; (10,000 * 1.03) * 10,000 ~= 9,708.74