Early When I pondered the relationship between Bitcoin and Energy, it was clear to me that bitcoin’s value is fundamentally based on the energy used in its production. As With any free-market system, the price of a widget is determined by its cost to produce plus various profit margins needed from the manufacturing stage to the end consumer. If When someone can supply something that nobody else is capable of and when there is high demand, then the profit margins are higher because the product has a limited supply. If If the invention isn’t sufficiently exclusive, then other people will see this as an arbitrage and try to meet some or even all the demand. Over We expect that over time the producers will compete for the market until the price reflects a profit level acceptable to all parties in the supply chain, production and sales. Additional innovations in production technique, material sourcing, or labour costs may give a temporary advantage to one producer over others and they can enjoy a period of greater profitability – that is until the other producers implement similar advantages and the overall price for the product gets driven lower.
This What is it? Adam Smith The invisible hand, or as modern economists call it the principle of economic equilibrium. If In a free-market system, actors act to their advantage by seeking profits. This will lead ultimately to the benefit of society through satisfying the demand at its optimal economic value. While Although we will never achieve a true optimal exchange rate of economic values, the benefits of decreasing costs and increasing quality are evident in many industries from computing to transportation. My Father bought an IBM PS/2 Model 25 with a 16 colour display and 10MB of storage space in the late 1980’s for around $7,000. TodayA $70 bill was issued forty years after the original. Asian For a fraction of the price, a smartphone can perform many times better than that IBM. This Technology can have a deflationary affect on the economy. Jeff Booth In his book, he discusses The Price The following are some examples of how to use Tomorrow.
While a computing device can increase in capabilities by 100,000% while decreasing in cost by 99% in the space of 40 years, why can’t we say the same thing of the automobile?
My 1977 Toyota Is my car Range Rover When it was brand new, this car cost about $14,000. Nearly After 50 years, today’s model still holds true to its original design. Range Rover Costs about ten times as much but only slightly increased capability. Why Did automobiles experience the same deflationary impact as computers in terms of technology? In The cost of raw materials used to make a vehicle, such as steel, aluminum, and copper, has increased during that time period. In The cost to run a factory that produces cars, and to transport a vehicle weighing 2 tons from its manufacturing location to the retail point has all increased dramatically in the last decade.
While you can’t get a comparable Asian SUV brand new for $14,000 today, you can get a very capable SUV for about twice that amount with significantly greater comfort and technical features versus my spartan 70’s off roader. In VW 1977 – The basic model Beetle cost around $3,000. Similar Low-end vehicles today starting at Asian Prices for manufacturers with similar sparse specs tend to hover around $6,000 per unit. What is hard to see with these numbers is the inflationary effect of the devaluation of currency – in this case the US dollar. The dollar of 1977 had a spending power equivalent to $5.19, or in other words, the dollar of 2024 has the same purchasing power as $0.19 of 1977. That This is a 80% decrease in purchasing power. This This means that in 1977, a car costing $6,000 would have been worth $1140. By In 2024, the IBM smartphone would have been worth over $35,000. The Samsung phone is an absolute bargain!
What Is it the computer which allowed the technical deflationary impact to far exceed inflation but not the automobile? In Short, there are two reasons: Energy and the scarcity or resources. It One smartphone requires 278kWh energy and about 120g raw material. MDPI estimates that it takes approximately 17,000kWh energy to make a car and 5,000,000g in raw materials. Both Products will have a margin of profit for the producer that is similar to 10%. While Although technology is able to address many of the challenges associated with efficiency and miniaturisation it does not reduce the physical or energy resources that are required for something as large as a car.
In In the same manner, the cost of bitcoin production is determined by how much energy it takes to make one bitcoin. While We are constantly improving the efficiency of machines that convert energy to bitcoin. (We have seen an improvement in efficiency from 2019-2024 of 83%). However, the increase of network hashrate still drives up the energy required to produce one bitcoin. That Sets the intrinsic value a Bitcoin Produced in late 2024 for around $66,000, including a margin of profit of approximately 10%.
Does Does this mean the price of Bitcoin is solely determined by the production cost?
Of No, of course. But it plays a crucial role in determining the value of Bitcoin. The The cost of production has reached an equilibrium with the current price of the product. This allows the producer to profit enough to keep producing in his own interest while the consumer can benefit from the fair pricing. The The bitcoin network has one of the few true markets in the world. Absent The invisible hand continues to drive these forces to equilibrium, whether it is an actor’s ability to monopolise the market or a government’s control of the marketplace. This It means that the price of energy to produce one bitcoin can be used as a guide for determining the value. In This is how energy can be valued in bitcoin.
Since You have been introduced to my way of seeing the world and thinking. Land RoverI will continue to use this approach in order to look at the opposite side. Joule Paradox. As I drove a 1977 Range Rover What is now called a Range Rover Classic Suffix D). The truck I purchased was here. Kenya About five years ago you can get a new car for just $5,000. It The vehicle was 100% free of rust, completely unmolested and in perfect condition. It was You can also find out more about the following: equivalent of what is often referred to as a barn find – a perfect specimen for a functional restoration. In the Kenyan Due to the condition of my car, I ended up paying a little more than what was expected. If It would have been significantly more expensive if I tried to purchase the same vehicle on the UK market. Fully Restored to original condition Kenya A truck that is in perfect condition would cost at least 10 times as much. Why Why is the price of two almost identical items so different? In Short, the reason is that economies are isolated.
The What is the economic pool in which I must work? Kenya This vehicle is not valued in the UK at the same level as the UK economic pool. If The truck could be sent across the street. Starlink With my connection to UK I can make lots of money with this arbitrage. However, vehicle shipping doesn’t work like that. For This truck is in my driveway. Kenyan It would be a huge undertaking to transfer the UK’s economic pool into the economic pool of the USA. This involves a great deal of paperwork, travel expenses and many other unforeseeable costs. KenyanWork performed in Britain would be sufficient to meet much more strict requirements. Would Does it make sense to invest? Possibly. Is Does it make sense to me to invest in my business? Definitely not. PlusThe truck is something I love so much that I overvalue it.
Energy This same economic isolation is a major problem for the United States. If Natural gas producers in West Texas If a company tries to sell energy into their regional pool when the sun and wind are both shining in the state at the same moment, their value per unit can go down. This Meaning that the person would be required to pay someone for their energy. At Exactly at the same moment, someone charged their electric car. California Some people pay a surcharge on electricity at peak demand that can double their energy costs. The Californian Tesla The owner of a home would be delighted to receive cheaper energy. Texas Then, there is the Texas Producers would be happy to sell their electricity for even just a few pennies to any buyer. UnfortunatelyThese two pools of energy operate independently. You can’t move a joule of energy from the Texas Pool to the side California It is possible to pool your money without having to deal with a great deal of government paperwork or transportation expenses. The arbitrage opportunity can’t be realised.
The The same holds true for small hydro power producers in Northwestern ZambiaThey are isolated within a small pool of economic activity. They The local community is the only one who can buy the electricity produced by the generators. Even No one would accept it if it was offered for only $0.01. MeanwhileAnother village, located 100 km away, is paying nearly $1.00 for each kWh of electricity generated by a mini-grid powered by solar energy. Those The villagers are eager to get some electricity at a low price. Unfortunately, you can’t move a joule of energy across 100km of bumpy, dusty African roads. The Economic isolation is a major cause of lost arbitrage opportunities.
Although You are wrong. Satoshi Think about it in this way The bitcoin network acts as an adapter that connects any isolated pool of energy into a global market. By You can sell electricity by simply connecting a miner to the Internet and plugging it in. These two simple pieces of technology allow for energy pools to be linked in a way that hasn’t really existed before. Bitcoin is a non-government-controlled, internet-enabled, real-time energy market that is open 24/7, 365 days a year.
At The invisible hand of market forces will always determine the current hash price. This This is the bitcoin amount that a miner receives after submitting 1TH/s compute power in a single day. This value represents how much a miner can earn from running their machines and – thanks to mining pools – this amount is payable in very small units of work. If If you operate a 100TH/s for an hour, you’ll earn 1/4th of the price paid to you directly in your Bitcoin wallet. This It is possible to be anywhere and at any time. Using This hashprice, and the efficiency of the mining machine you use will allow you to know exactly how much bitcoin is willing to offer you per kWh for electricity you wish to sell.
As As of 7:34am, an example East Africa Time On, October On the 5th of 2024, if you have a 24J/T, you will receive $0.078 per hour. Whatsminer If you use a 18J/T, M50s will cost $0.103 per kWh. Antminer S21. Those The numbers may fluctuate as the price of bitcoin changes, but it is your decision whether or not you want to take advantage of a local economic pool that offers a more competitive offer. Willing As they say, buyer is willing to sell.
By The bitcoin network, which acts as a real-time market for energy enabled by the internet, allows us to finish the transaction. Joule ParadoxEnergy sets the price of Bitcoin and Bitcoin sets the energy value.
Notice It is important to note that value, not price was the word I used. An My old friend used to say, “Price is what you spend and value is the thing you get.” The It is the same here. The The market sets the bitcoin price, but it is determined by the input costs and energy. SimilarlyBitcoin determines the value of a unit, but it is up to the seller whether they accept this price or want to sell for more.
In The proof-ofwork model, which is based on the energy paradox of bitcoin, has been a major factor in the development and growth of the cryptocurrency. Satoshi It is genius that you chose to implement the automated market regulation system through difficulty adjustment. If If any of these features were missing, bitcoin would not be the high-value asset it is today. It All comes down to this simple realization. Energy is the base, fundamental commodity on which all value-added products are produced The bitcoin currency is the purest form of energy. If Bitcoin would no longer be superior to any fiat currency if we were to remove the energy. Remember When someone tells you that Ethereum is the most environmentally friendly cryptocurrency, they are lying. Energy No other currency system is based on energy.
This This is a post written by a guest. Philip Walton. Opinions The views and opinions expressed by BTC customers are theirs alone. Inc You can also find out more about Bitcoin Magazine.
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