Why isn’t the cost of mining Bitcoin more or less equal to the current price of Bitcoin?

A comment on Is inflation already at 15-30 percent if we hold delivery time constant?:

GPU scarcity is entirely due to the growth of digital currency mining and the corresponding increase in demand for the chips that do the mining most efficiently. A top-end GPU can recoup the list price from digital currency mining in two months.

Why is the return on investment quick/high for Bitcoin mining? If the price of Bitcoin goes up, shouldn’t there be an almost immediate flood of people into the mining business such that the cost of mining rises to just below the selling price of Bitcoin?

An explanation of the mining process:

Once miners have verified 1 MB (megabyte) worth of Bitcoin transactions, known as a “block,” those miners are eligible to be rewarded with a quantity of bitcoin (more about the bitcoin reward below as well). The 1 MB limit was set by Satoshi Nakamoto, and is a matter of controversy, as some miners believe the block size should be increased to accommodate more data, which would effectively mean that the bitcoin network could process and verify transactions more quickly.

Note that verifying 1 MB worth of transactions makes a coin miner eligible to earn bitcoin—not everyone who verifies transactions will get paid out.

To earn bitcoins, you need to meet two conditions. One is a matter of effort; one is a matter of luck.

2) You have to be the first miner to arrive at the right answer, or closest answer, to a numeric problem. This process is also known as proof of work.

If mining is lucrative, e.g., because mining costs $5,000 in carbon-spewing electricity while Bitcoin is selling for $40,000, shouldn’t so many new miners flood in that it would be less probable to “be the first miner to arrive at the right answer”? This would effectively raise the cost of mining and the process should continue until mining costs $39,000+.

I suspect that I’m missing something. “Why The Actual Cost Of Mining Bitcoin Can Leave It Vulnerable To A Deep Correction” (mid-2020):

In early 2020, researchers predicted the cost to mine Bitcoin will be at around $12,000 to $15,000 after the block reward halving in May. But, it is now much cheaper to mine BTC than the initial estimates. The low breakeven price to mine Bitcoin may leave it vulnerable to a correction.

Bitcoin has become more affordable to mine in recent weeks due to two main factors: difficulty adjustments and cheaper electricity in Sichuan, China due to the rainy season.

A low breakeven price of Bitcoin can raise the probability of a price pullback because miners have more incentive to sell BTC, which may increase selling pressure in the short-term.

“To be completely accurate: Given current difficulty, 0.04$/kWh and S9 running custom firmware bringing it down to 71W per TH efficiency. The cost to mine 1 BTC is 8206.64$. Meaning its still profitable,” one miner said.

Maybe my theory isn’t contradicted by this article. At the time it was written, the market price of Bitcoin was $9,626. But what is the cost of mining today relative to the market price of existing Bitcoin?

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Is the crypto crash a buying opportunity?

Bitcoin and Ethereum have been down lately, right?

Could this be the right time to buy for those of us who have mostly missed the cryptocurrency wave?

I recently heard about an alternative to Bitcoin that is also popular with criminals seeking ransom. Here are the characteristics:

  • administered from central server
  • no limit to supply
  • 25 percent of the supply minted in last 6 months
  • 1 percent of holders control 30 percent of the currency
  • 27 trillion units circulating in the system

A good time to jump in?

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Is cryptocurrency the ultimate estate tax avoidance tool?

President Biden has promised to raise estate taxes (but wouldn’t it make more sense to get money from Melinda Gates, MacKenzie Bezos, et al.? See Would limiting charitable deductions raise more than a wealth tax?).

Crytocurrency has become more mainstream.

Could these two be put together?

Let’s go back to the family in Can billionaires marry their children to avoid Joe Biden’s new estate taxes? Jack and Jill have a lot of money that they want to transfer to children. Why can’t they buy cryptocurrency and give their children, Morgan and Parker, the relevant passphrases? After Jack and Jill die, if the IRS asks what happened to a big chunk of money that was wired to a crypto exchange overseas some years earlier, the survivors can say “Jack and Jill must have bought some crypto and lost the password” or “The password died with them.”

Morgan and Parker can quietly spend cryptocurrency for the rest of their lives, so long as they don’t lose the passphrase or spend so much in a short amount of time that they draw IRS attention.

Readers who are experts on crypto: What am I missing?


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Will people who get paid in cryptocurrency share with the IRS?

A friend has been selling NFTs and getting paid in cryptocurrency. He thought that he didn’t have to pay tax on this income until the cryptocurrency was finally cashed in for dollars. I did a bit of searching and told him that the IRS wants him to pay tax in the year that the cryptocoins were received. I directed him to “Virtual Currencies” and an IRS FAQ from 2014:

Q–3: Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

A–3: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.

How many people will do this? Maybe there will be a 1099 when coins are exchanged for cash and then the holder will be motivated to declare this as a capital gain (at President Harris’s new 75 percent rate plus 13.3 percent California tax?). But if there is no reporting to the IRS of any of the flows that stay in the crypto world, isn’t there a high likelihood that people won’t pay tax either because they don’t know that they should or because they don’t think they’ll get caught?

What’s the percentage of income received in cash that gets reported to the IRS? If Hunter Biden put a $100 bill into the hands of a hard-working dancer, for example, what is the chance that she reported that $100 and paid income tax on it? (Of course, when a friend said that the Daily Mail figured out that Hunter Biden’s laptop showed epic spending on hookers and booze, I responded “And he wasted the rest of his money?”)

From Tampa, 2014:

Disclaimer: I own no cryptocurrency and am bitterly envious of all of the people who were smarter than I!

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