One comment which I haven't seen come up much is bitcoin mining doesn't actually have to be "profitable" to be useful. For example, if you live in a country that has restrictions to prevent capital flight (i.e. extra taxes on money transfers to foreign accounts, etc...), ignoring the potential criminality implications, mining bitcoins at a "forex loss" and transferring those bitcoins may still be a better net financial option than just transferring the money in whatever your native currency is.
I believe China used to have some pretty significant restrictions to prevent capital flight - I wonder if that has something to do with this mining operation.
This is actually a remarkably good point. The key concept here is that Bitcoin mining -- even at a "Forex loss" -- will essentially trade electricity for Bitcoins, which can be used to purchase other currencies. Depending on what the miner values their local currency at, this can still make financial sense.
As an example: suppose you are a resident of country X, and you have 1000 XUnits that are valued at 1000 USD, but there are capital flight restrictions such that you can exchange your 1000 XUnits for only 300 USD. And suppose that you need to exchange your XUnits to USD, for whatever reason. You then use your XUnits to buy electricity and mining hardware, and generate Bitcoins, and sell them for 750 USD.
Note that you could try to do the same with e.g. steel, barrels of oil, or widgets, but with hardware you'd be subject to import/export taxes, and the entire operation would have much higher overhead costs (comparatively, setting up a mining farm is pretty cheap).
Bitcoin is a lousy medium for illegal activity. Every transaction is logged for all eternity just waiting to be de-anonymized.
Besides, Singapore implemented this functionality long ago. Sell Chinese goods at breakeven (or even a loss) to a corporation in Singapore, which realizes the profits. Singapore is the busiest trans-shipment port in the world [1].
Do you really think while China has been booming economically for decades - that those with money still didn't know how to off-shore it and were waiting like a bunch of patient school boys for the solution that is bitcoin?
Buying bitcoin might have made sense for a regular chinese lee, but it cannot actually handle any real transaction demands.
I'm Chinese and I don't think this is the case. Investing in mining bitcoins is just like investing in any other industries, in its nature. The reason why some Chinese businessmen prefer this over the others is that it's newer, less competitive, cheaper, more global and under no governmental regulation at all, which makes it a business-as-u-go or a gamble with great odds. Chinese are good at these kinds of things.
So since this video was made, the price has gone down by approx 35% and the difficulty has gone up by approximately 17%, for a total adjustment in revenue of about 50%, unless they added more machines, or upgraded their current ones. That's pretty brutal.
Ultimately (and not long from now if these rates of adjustment continue), mining will be a commodity business with a very small profit margin. When you consider that there are uses for low grade heat (like home and office heating), once the ASICs catch up with Moore's law, it seems likely that the profitability will be slightly negative for someone trying to run this kind of business. (As another reason, there will probably be people who have access to basically free electricity that would have been wasted, and just need to amortize the cost of the ASICS).
However, because mining is a zero sum game, we can conclude that the profitability of mining was very high at the time of the making of this video, or else the margins wouldn't have been able to drop as much as they did. This says that a rational large investor would choose to put their money into mining rather than directly buying bitcoins, if they were interested in getting into this space. That's probably why the price has been falling since the peak early last year.
> there will probably be people who have access to basically free electricity that would have been wasted, and just need to amortize the cost of the ASICS
That's a really interesting point. I wonder if we'll see utility companies get into bitcoin mining as a way of profiting from their excess capacity during non-peak times.
I don't think mining was ever that profitable once it reached industrial scale (it was always a bet on the future, in which case having actual bitcoins is significantly more fungible).
There is a reason cex.io / ghash.io (the biggest mining pool) contracted out their hash power to other suckers (err I mean buyers) instead of mining themselves.
Very misleading title. It's grossing $1.5M per month. You still need to subtract operating costs, which will be substantial in a bitcoin mine. I'm sure power/land/cooling/etc is cheaper in rural China than many other places in the world, but there's no way it's free.
Thanks, we updated the title to be less misleading. The article states, "... generated 4,050 bitcoins a month, equivalent to a monthly gross of $1.5 million".
Not to mention they should've just mentioned 4000 BTC/month, instead of matching it with an USD price. Bitcoin is a currency, its USD value is highly volatile.
Let's not forget the likely multi-million dollar hardware investment as well. They have 3,000 ASIC miners (although investing in mining equipment that can be used for mining multiple currencies is far better imo than simply buying Bitcoins).
Was making $1.5mm, in October of last year. There are some off the cuff calculations in the reddit thread [0] that indicate the same setup would currently be netting only about a tenth of that amount now.
Based on the video, it looks like these guys likely swap out for the newest equipment as soon as it makes sense economically.
If I were making such an investment, I'd think carefully about the rate of computational depreciation (which is predictable) and probably hedge on the price of power. The only unpredictable thing in this setup is the price of bitcoin, which I believe they're extremely bullish on long term. You could probably figure out a way to hedge that, too, if you could find someone to take the action.
Comparing to amount of waste (cost of operations) of regular banking system and direct harm from banking system to society (influencing politics, strong-arming rest of players on the market), cost of bitcoin as network is a chump change. I'm not saying that it replaces banking system and two numbers should not be compared directly, but I believe that it can heal it banking system by introducing greater transparency and taking away control of money from banks.
I wonder if they get new ASIC designs before they ship to consumers. I'm remembering buying mining ASIC and then actually getting shipped them much much later. We thought at the time that they were being held back and 'burned in' at a big mine run by the manufacturers mates. This would explain why they are so hush hush about where the devices come from...
If the ASICs already bought and shipped to consumers later, they would be effectively free!
Alternatively they might be using the low chips that failed QC and never shipped - they might burn out eventually but if you are running them yourself you can be prepared for that.
[+] [-] kitcar|11 years ago|reply
I believe China used to have some pretty significant restrictions to prevent capital flight - I wonder if that has something to do with this mining operation.
[+] [-] johnloeber|11 years ago|reply
As an example: suppose you are a resident of country X, and you have 1000 XUnits that are valued at 1000 USD, but there are capital flight restrictions such that you can exchange your 1000 XUnits for only 300 USD. And suppose that you need to exchange your XUnits to USD, for whatever reason. You then use your XUnits to buy electricity and mining hardware, and generate Bitcoins, and sell them for 750 USD.
Note that you could try to do the same with e.g. steel, barrels of oil, or widgets, but with hardware you'd be subject to import/export taxes, and the entire operation would have much higher overhead costs (comparatively, setting up a mining farm is pretty cheap).
[+] [-] paulsutter|11 years ago|reply
Besides, Singapore implemented this functionality long ago. Sell Chinese goods at breakeven (or even a loss) to a corporation in Singapore, which realizes the profits. Singapore is the busiest trans-shipment port in the world [1].
[1] http://en.wikipedia.org/wiki/Port_of_Singapore
[+] [-] hurin|11 years ago|reply
Buying bitcoin might have made sense for a regular chinese lee, but it cannot actually handle any real transaction demands.
[+] [-] ledzep2|11 years ago|reply
[+] [-] 1053r|11 years ago|reply
Ultimately (and not long from now if these rates of adjustment continue), mining will be a commodity business with a very small profit margin. When you consider that there are uses for low grade heat (like home and office heating), once the ASICs catch up with Moore's law, it seems likely that the profitability will be slightly negative for someone trying to run this kind of business. (As another reason, there will probably be people who have access to basically free electricity that would have been wasted, and just need to amortize the cost of the ASICS).
However, because mining is a zero sum game, we can conclude that the profitability of mining was very high at the time of the making of this video, or else the margins wouldn't have been able to drop as much as they did. This says that a rational large investor would choose to put their money into mining rather than directly buying bitcoins, if they were interested in getting into this space. That's probably why the price has been falling since the peak early last year.
[+] [-] jonas21|11 years ago|reply
That's a really interesting point. I wonder if we'll see utility companies get into bitcoin mining as a way of profiting from their excess capacity during non-peak times.
[+] [-] hurin|11 years ago|reply
There is a reason cex.io / ghash.io (the biggest mining pool) contracted out their hash power to other suckers (err I mean buyers) instead of mining themselves.
[+] [-] slester|11 years ago|reply
This is the main reason I'm highly skeptical of bitcoin, not to mention wildly fluctuating value, little if any privacy gains (http://www.forbes.com/sites/timothylee/2011/07/14/how-privat...), and a host of other problems.
[+] [-] unknown|11 years ago|reply
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[+] [-] jpatokal|11 years ago|reply
http://www.reddit.com/r/Bitcoin/comments/2v02n9/life_inside_...
[+] [-] pstrateman|11 years ago|reply
You can deduce from the video that their utility rate is ~$0.09/kWh.
That's substantially higher than other major bitcoin miners are paying.
[+] [-] GlickWick|11 years ago|reply
[+] [-] wgx|11 years ago|reply
[+] [-] sctb|11 years ago|reply
[+] [-] Cthulhu_|11 years ago|reply
[+] [-] giarc|11 years ago|reply
[+] [-] downandout|11 years ago|reply
[+] [-] unreal37|11 years ago|reply
[+] [-] flatline|11 years ago|reply
0 - http://www.reddit.com/r/Bitcoin/comments/2v02n9/life_inside_...
[+] [-] etrain|11 years ago|reply
If I were making such an investment, I'd think carefully about the rate of computational depreciation (which is predictable) and probably hedge on the price of power. The only unpredictable thing in this setup is the price of bitcoin, which I believe they're extremely bullish on long term. You could probably figure out a way to hedge that, too, if you could find someone to take the action.
[+] [-] big_paps|11 years ago|reply
[+] [-] emiliobumachar|11 years ago|reply
[+] [-] imaginenore|11 years ago|reply
[+] [-] exo762|11 years ago|reply
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[+] [-] criloz2|11 years ago|reply
[+] [-] hristov|11 years ago|reply
[+] [-] shubb|11 years ago|reply
If the ASICs already bought and shipped to consumers later, they would be effectively free!
Alternatively they might be using the low chips that failed QC and never shipped - they might burn out eventually but if you are running them yourself you can be prepared for that.
[+] [-] tacojuan|11 years ago|reply
He didn't seem all that enthusiastic about bitcoin's prospects.
[+] [-] cheez|11 years ago|reply
[+] [-] wildchild|11 years ago|reply
[+] [-] unknown|11 years ago|reply
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