Bitcoin Mining and the beauty of capitalism

The price of the bitcoin is crashing; opponents and doomsayers have a field day. The end of the dominant cryptocurrency is finally happening, or not?

Bitcoin has been buried hundreds of times, especially during the brutal 90 percent decline from 2013 to 2015. Yet it has always made a comeback.

Where the skeptics are correct: the second bitcoin bubble burst in December last year and the price fell about 80% from its maximum of $ 20,000. Nobody knows if and when he will see these high heights again.

As a result, millions of speculators were burned and large institutions did not come to close the gap.

This happened even on a small scale in 2013 after a similar 100x run-up, and it was necessary.

Time to recover

What most speculators and even some serious proponents of the independent and decentralized monetary system do not understand: Bitcoin needs these pauses to improve its infrastructure.

The exchanges, which have not been able to manage trade volumes at the height of the frenzy and have not returned customer service requests, can take a break and update their systems and hire capable people.

Technology itself needs to make progress and this needs time. Projects such as the lightening network, a system that offers instant bitcoin payments at very low costs and on a virtually unlimited scale, is now available only to experienced programmers.

A higher evaluation is justified only if these improvements reach the mass market.

And since we live in a world where everything that is financial is strictly regulated, for better or for worse, this sector must also recover, since regulators are chronically behind the curve of technological progress.

And of course, there is the bitcoin mining. The vital infrastructure to protect the bitcoin network and to process its transactions has been concentrated in a few hands and in very few places, in particular China, which still hosts about 70% of the extraction capacity.

The case for mining

Critics have always complained that bitcoin mining consumes "too much" electricity, just as much now as the Czech Republic. In terms of energy, this is about 65 terawatt hours or 230,000,000 gigajoules, which cost $ 3.3 billion according to estimates by the Digiconomo.

For the non-physicists among us, this is equal to that consumed by six million US households that consume energy in the year.

All these estimates are inaccurate because the aggregate can not know how much energy each of the different bitcoin miners consumes and how much it costs electricity. But I am a reasonable approximate estimate.

So it is worth exploring because the mining sector is necessary to start with and if the consumption of electricity is justified.

All and all human beings consume resources. So the question is always: is it worth it? And: who decides?

This question then leads to the next question: is it worth having and using money? Most people would say yes, because using money instead of bartering makes economic transactions faster and cheaper and thus saves natural and human resources.

If we are generous, we will guarantee bitcoin the status of a type of currency or at least currency as it meets the general requirements to be recognizable, divisible, portable, durable, is accepted in exchange for other goods and services, and in this case it is even limited supply.

So having any kind of money has a price, whether it's gold coins, dollar bills or numbers on the screen of your online banking system. In the case of bitcoin, it is electricity and capital for information technology equipment, as well as human resources to perform these operations.

If we think that having money in general is a good idea and that some people appreciate the decentralized and independent nature of bitcoin, then it would be worth paying to verify transactions on the bitcoin network and keep the network safe and sound: to the point where resources consumed would exceed the benefits of efficiency. Just like many people do not think it's a bad idea to use credit cards and banks, which also consume electricity.

However, bitcoin is a newcomer and that is why it is examined even more than the established old players.

Different money, different costs

How many people know how much electricity, human lives and other resources that the extraction of gold consumes or has consumed throughout history? And the banking system? Branches, servers, air conditioning, staff? How about printing dollar bills and driving them in armored trucks?

What about the social effects of poor monetary management of bank and government funds such as inflation and credit deflation? Gold gets a ride here.

Most people did not ask this question, which is why it is worth highlighting the only comprehensive study carried out on the subject in 2014. In "An order of magnitude" the engineer Hass McCook analyzes the different monetary systems and reaches staggering conclusions.

The study is a little dated and, of course, the aggregations are also very rough estimates, but the numbers of the playground are reasonable and the methodology is valid.

In fact, according to the study, bitcoin is the cheapest of all the different forms of money.

The 2014 gold mining used 475 million GJ, compared to 230 million bitcoins in 2018. The banking system in 2014 used 2.3 billion gigajoules.

More than 100 people per year die trying to extract gold. But mining is more expensive than electricity. It consumes about 300,000 liters of water per kg of extracted gold and 150 kg of cyanide and 1500 tons of waste and rubble.

The international banking system has been used in all types of fraudulent activity throughout history: terrorist financing, money laundering and any other criminal activity under the sun at a cost of trillions of dollars and an order of magnitude higher than the same transactions made with cryptocurrency and bitcoins.

And of course, while gold has a relatively stable value over time, our bank and the government have issued money losing about 90% of its purchasing power in the last century, because it can be created from nothing . This leads to inflation and the waste of physical and human resources because it distorts the process of capital allocation.

This is on top of the hundreds of thousands of bank branches, millions of ATMs and employees who consume electricity and other resources, 10 times more electricity than the bitcoin network alone.

According to the monetary philosopher Saifedean Ammous, author of "The Bitcoin Standard", the social benefit of hard money, ie money that can not be printed by the government decree, can not even be plumbed; conversely, the true costs of easy money – created by government fiat and bank credit – are difficult to calculate.

According to Ammous, bitcoin is the hardest money in circulation, even harder than gold because its total supply is limited, while the gold supply continues to increase by around 1-2% every year.

"Look at the era of the classic gold standard, from 1871, the end of the Franco-Prussian war, until the start of the First World War.There is a reason why this is known as the it was gold, the golden age and La Belle Epoque, it was a period of unparalleled human prosperity all over the world, economic growth was everywhere, technology was spread all over the world. Prosperity was increasing everywhere in the world.Technological innovations were advancing.

"I think it's not a coincidence." What the gold standard has enabled people to do is to have a value deposit that would retain its value in the future, and this gave people a low time preference, which they gave people the incentive to think long-term, and this has pushed people to invest in things that could pay off in the long run … bitcoin is much closer to gold.It's a digital equivalent of the gold, "he said in an interview with The Epoch Times.

Obviously, contrary to the gold standard mentioned by Ammous, the bitcoin does not have a track record of real money in practice. In theory it meets all the criteria, but in the real world it has not been widely adopted and has been so volatile as to be useless as a reliable deposit of value or as the underlying currency of a productive lending market.

Advocates say that over time these problems will be solved in the same way that gold spreads throughout the monetary sphere by replacing copper and shells, but Ammous also admits that the process could take decades and the result is all-and-all. other than certain. Gold is the safe bet for sound money, bitcoin has potential.

This is another measure in which the bitcoin loses, according to a recent study by researchers at the Oak Ridge Institute in Cincinnati, Ohio.

It is the amount of energy spent per dollar for different monetary instruments. A dollar value of bitcoin costs 17 megajoules to my against five for gold and seven for platinum. But the study omits the use of cyanide, water and other physical resources in the extraction of physical metals.

In general, comparisons in terms of dollars go against bitcoin because it is worth less than $ 73 billion in total at the time of writing. A problem that could easily be solved at a higher price, but a higher price is justified only if the infrastructure improves, the adoption increases, volatility decreases and the network demonstrates its ability to resist attacks in time.

Meanwhile, market participants still appreciate the fact that they own a government-independent, fully digital, easily fungible and limited supply and relatively decentralized currency. And the market as a whole is willing to pay a premium for these factors that are reflected in the highest dollar prices for the mining bitcoin.

The creativity of Bitcoin Mining

But where bitcoin mining does not have dimensions, it compensates for it in creativity.

In theory, and in practice, bitcoin mining can be done wherever there is cheap electricity. So bitcoin mining operations can be conducted not where people are (banking) or where the government is (cash money) or where the gold is (gold mining) – can be done anywhere where there is low-cost electricity

Some miners are flocking the heat of the Texan desert where gas is virtually free, thanks to another oil revolution.

Other miners go to places where there is wind, water or other low-cost renewable energy.

This is because they do not have to build bank branches, typographies and government buildings, or they have to mount excavators and conveyor belts to dig gold from the ground.

All they need is Internet access and a home for computers that look like a shipping container, each of which has about 200 specialized bitcoin mining computers.

"The beauty of bitcoin mining is that no matter where a transaction takes place, we can check it in our data center here." Miners are part of the decentralized bitcoin philosophy, it's completely independent of your position, "said Moritz Jäger, chief technology officer at Bitcoin Mining, Northern Bitcoin AG.

Centralized extraction

But so far, this decentralization has not worked as it seems in theory.

Since local Chinese governments have access to subsidized electricity, it has been profitable for officials to cut deals with bitcoin mining companies and provide them with cheap electricity in exchange for jobs and cuts. Sometimes prices were low from 2 cents to 4 cents per kilowatt hour.

This is why most of the bitcoin mining is still concentrated in China (around 70%) where it was the most profitable, but only because the Chinese central planners subsidized the price of electricity.

This approach has led to the great unwanted result that the biggest bitcoin miner, a company called Bitmain, is also the largest manufacturer of computer equipment specializing in bitcoin extraction. The company posted revenues of $ 2.8 billion for the first half of 2018.

Centralized mining is a problem because every time there is a player or a conglomerate of players who control more than 50% of the computing power of the network, they could theoretically cause the network to crash by spending the same bitcoin twice, the so-called "double expense problem".

They do not have an incentive to do so because they would probably ruin the price of bitcoins and their business, but it's better not to have to rely on a group of people who control an entire monetary system. After all, we have the exact same system with the central banking system and bitcoin has been created as a decentralized alternative.

So far, no player or conglomerate has ever reached the 51% threshold, at least not since the early days of Bitcoin, but many market participants have always thought that the corner of the Bitmain market is a little too close for convenience.

This favorable environment for the extraction of Chinese bitcoins is changing with a reduction in the electricity capacity of the local government and a cession of the cryptocurrency.

Bitcoin itself and bitcoin mining remain legal in China but the cryptocurrency trade has been banned since the end of 2017.

But there is still much to be done because bitcoin becomes independent of the whim of a centralized oppressive regime and local government bureaucrats.

Case study of Northern Bitcoin

Enter Northern Bitcoin AG. The company is not the only one that is exploring mining opportunities with renewable energy in places other than China.

But it is special for the extraordinary organization it has for its operations, for the fact that it is listed on the stock exchange in Germany and for the scalability opportunities it has discovered.

Northern Bitcoin operations combine the beauties of bitcoin and capitalism into one.

As Texas has a lot of oil and free gas and it makes sense to use gas rather than burn it, Norway has a lot of water, especially the water that moves down from the mountains because of the rains and melting snow.

And it makes sense to use the power of the movement of water, to channel it through the tubes into generators to create very cheap and almost unlimited electricity. Norway generates 95% of its total electricity from hydropower in the north.

Capitalism does not distinguish between renewables and fossils. Use what is the most convenient. In this case, it is clearly water in Norway and gas in Texas.

As a side note on the beauties of real capital and on the fact that capital and the environment should not be enemies, water in one of the hydroelectric plants near the northern Bitcoin plant is channeled through a generator built in 1920 by JM Voith AG, a Heidenheim company in Germany.

The company was founded in 1867 and is still located today. The generator was produced in 1920 and still produces electricity today.

Excess power

In the remote regions of northern Norway, there are not many people or industries that use electricity. And instead of transporting it for hundreds of miles to European industrial centers, the industries of the future are moving to Norway at the source of cheap electricity.

Of course, it's not just bitcoin mining, but other data and heavy processing operations such as cloud computing server farms that can be neatly packaged in one of these containers and shipped north.

"The containers are beautiful, they are produced in central Germany, where the hardware is enabled and tested, then we put it on a truck and we ship it here." When the truck arrives outside, we lift it onto the container vehicle. Two hours after the container arrives, it's in the container rack, and 40 hours later we enable cooling, the grid, the power, other systems and it's online, "said Mats Andersson, spokesperson for Måløy's Lefdal Mine data center. Norway, where the Northern Bitcoin operates. Connect and use.

If cheap electricity was not enough, about 5 cents per kilowatt hour compared to 17 cents in Germany, Norway also provides perfect storage for these data containers, which are normally stored in open parks above the earth.

Even here, the allocation of resources is beautiful. Instead of occupying otherwise useful and beautiful packages of land and nature, the Northern Bitcoin containers and others are stored in the old Lefdal olive mine.

Olivine is a mineral used for steel production and looks green. Very suitable. Hence also the name of the data center: Lefdal Mine.

"We take the green mineral and we take the green IT," Andersson said.

Efficiency, efficiency

The use of the old mine as storage for the data center makes the whole process even more resource efficient.

Why? So far, we've only talked about bitcoin mining using a lot of energy. But for what? Before you have actually seen the process in action – and it is similar to other calculations – you can not imagine how bizarre it is.

Most of the electricity is used to prevent computers from overheating. So neither are the processors themselves; they are the fans who cool the computer that uses more juice.

This is where the mine helps, because it is quite cool at 160 meters (525 feet) below sea level; certainly cooler than in the Texas desert.

But it gets even better. In addition to computer air cooling, the Lefdal data center uses a fresh water system to pump through the pipe containers.

The fans can then circulate the air above the cold pipes which transfer the heat to the water. You can feel the difference when you touch the different tubes.

The closed circular cycle of fresh water then completes the "green" or resource efficiency cycle by transferring its heat into ice water from the nearby fjord.

The water is sucked through a pipe by the fjord, the heat is transferred without the water being mixed and the water flows to the fjord, with no impact on the environment.

Finally, the mine has a far better natural physical security than open air data centers and is even protected by an outbreak of electromagnetic pulses because it is underground.

Business dynamics

Given this superlative configuration, Northern Bitcoin wants to increase production as quickly as possible in the Lefdal mine and other similar locations in Norway, which have more mountains where data centers can be hosted.

At the moment, Northern Bitcoin has 15 containers with 210 mining machines each. The 15 containers produce about 5 bitcoins a day for a total cost of about $ 2,500 dollars at the end of November 2018 and after the difficulty of solving math problems has decreased by ~ 17%.

Most are for electricity; the rest is for the leasing of containers, to rent the space of the mine, to buy and write computers, personnel, overheads, etc.

Even at the current relatively low prices of around $ 4000, this is a profit of $ 1500 per bitcoin or $ 7,500 a day.

But the goal is to make it rise to 280 containers up to 2019, producing 100 bitcoins a day. Once again, the company is in the right place to do it.

Contrary to the beginning of the year when one could not get a computer from Bitmain, even if one's life depended on it, the current bear market made them cheap and relatively available both new and second to part of miners who had to cease operations because they can not produce at low bitcoin prices.

And the shipping containers of data? They are produced by a company called Rittal, world market leader. So it helps the owner of Rittal to own 30 percent of the Lefdal mine, providing preferential access to the containers.

Northern Bitcoin said it had sufficient capital for the intermediate goal of rising to 50 containers until the end of the year, but could draw back to the capital markets for the next step.

The company can also take advantage of the lower German company tax rate since revenue is only recorded when bitcoins are sold in Germany, not when they are mined in Norway.

Of course, all small-cap stocks, particularly bitcoin companies, have their own peculiarities and very high risks. For example, the financial statements of Northern Bitcoin, even if public, are not controlled.

The equipment in the Lefdal mine in Norway is real and the operations are controlled by the Lefdal staff, but you must rely on exclusive information of the company for financial data and costs, so the buyer must be careful .

Norway power plant?

Northern Bitcoin wants to have 280 containers, which represent about 5% of the computing power of the network.

But the Lefdal mine has a capacity to feed and cool 1,500 containers in a 200-megawatt facility, once it is completely built.

"Here you have all the space, power and cooling you need. … Here you can grow," said Lefdal's Andersson.

The Norwegian government was behind an initiative to bring computing power to Norway and make it one of the main destinations for data centers at the start of this decade.

To this end, local administrations own part of the public utility companies that manage the power plants and own part of the Lefdal mine and other localities. But even without major subsidies (ie cash payments to companies), market players were able to understand it, to the benefit of everyone.

Utilities win because they can sell their electricity at low cost close to home. IT companies like IBM and Northern Bitcoin win because they can get cheap electricity, storage and security. Data center operators like Lefdal win because they can charge the rent for otherwise unused and unnecessary space.

However, in a recent debate, the central government in Oslo decided to remove the cryptocurrency miners from the list of companies that pay a preferential tax rate on electricity consumption.

Normally, energy-intensive companies, including data centers, pay a preferential tax on electricity consumed by 0.48 øre ($ 0.00056). According to a report by the Norwegian media Aftenposten, this tax will rise to 16.58 øre ($ 0.019) in 2019 exclusively for cryptocurrency miners.

The subject of leftist politician Lars Haltbrekken who sponsored the initiative: "Norway can not continue to provide huge tax incentives for the dirtiest form of cryptocurrency output […] [bitcoin] it requires a lot of energy and generates large global greenhouse gas emissions ".

Since Norway generates electricity using hydropower, the opposite is true: greenhouse gas emissions, or emissions for that matter would not be produced if all the cryptomining was done in Norway. In contrast to China, where the extraction is carried out with coal and with emissions.

But not only in Norway the share of renewable and emission-free energy is high. According to Coinshares research, Bitcoin consumes about 77.6 percent of its energy in the form of renewable sources globally.

However, by defeating the bitcoin mining arguments on their own in Norway, the political initiative is moving forward. What this means for Northern Bitcoin is not clear, as they host their containers in the mixed data center of Lefdal, which also has other customers, such as IBM.

"It's not decided yet, there's still a lot of effort from the IT and parties that are trying to change it – if the decision is made, it could apply to pure cryptography sites rather than to mixed data centers like ours," said Andersson of Lefdal.

Even in the worst case scenario, it would mean an increase from ~ 5 cents to ~ 6.9 cents per kilowatt hour, or 30 percent more paid on electricity from Northern Bitcoin, which at ~ $ 3250 would still rank it among the most competitive producers in the world.

Coinshares estimates the average production price at $ 6.800 per Bitcoin at $ 0.05 per kilowatt hour of electricity and an 18-month amortization schedule, but admits that a profitable miner could "[depreciate] mining equipment over 24-30 months, or [pay] less for mining equipment than our estimates. "

Jäger says that Northern Bitcoin amortized the equipment for three years and obtained very favorable prices from Bitmain, making its production much more competitive than the average despite the same cost of electricity. Furthermore, the natural cooling of the mine also reduces electricity costs in general.

Economic advantage of the manufacturer

At the moment, however, the tax may be the last of the miners to worry, since the price of bitcoin is in freefall.

But what happens when the price collapses further? Suffice it to say that it was the bitcoin mining when the dollar price was less than 1 cent and there would be bitcoin mining at lower prices thanks to the design of the network.

Mao Shixing, the founder of the F2pool mining pool, estimated Coindesk to close 600,000 miners from the November crash.

As it should be in a competitive system, the most energy-consuming and obsolete machines are first turned off.

Like any other commodity, when the price drops, some miners will leave the market, leaving room for cheaper competitors to capture a larger share. But with bitcoin this is a bit easier than with copper or gold, for example.

When a big copper player goes bankrupt, his competitors have to increase production and increase costs to increase their market share. With bitcoins, if 3,000 computers are removed from the total mine pool, they will no longer be able to extract the approximately 5 bitcoins.

However, because the difficulty of solving the computationally intensive cryptographic activities of bitcoin decreases automatically when there are fewer computers involved in the activity, the other players simply have to leave their machines running at the same speed for the same cost and divide the 5 bitcoins between them.

"At a time when the price drops, our production price will also fall," said Jäger, a process that has already happened from November to December, when the difficulty decreased twice in November and at the beginning of December. .

This naturally favors players like the Northern Bitcoin, which are producing at the lower end of the cost spectrum. They will be the ones who go out last.

And this is a good thing. More companies like northern Bitcoin and countries like Norway, even with extra-tax, the bitcoin system is more decentralized.

The more computers there are in different hands that extract bitcoins, the more secure the system becomes, because it will be increasingly difficult for a player to reach the 50 percent threshold to crash the system.

È questa filosofia decentralizzata che ha mantenuto il sistema bitcoin in esecuzione per 10 anni. Se a $ 1 o $ 20.000.

Disclaimer: Northern Bitcoin ha pagato il viaggio per visitare le strutture in Norvegia.