Minting Money With Megawatts
How to mine Bitcoin profitably

Sveinn Valfells, PhD1 & Jón Helgi Egilsson2
1
2

linkd.in/wtaHi5

Faculty of Economics
University of Iceland

Presented at Scaling Bitcoin, Montreal
September 13, 2015
c Copyright Sveinn Valfells & Jón Helgi Egilsson 2013-15.
Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA)
Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16Outline

1

How to Mine Bitcoin Profitably

2

About the Authors

3

AppendixSveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

How to Mine Bitcoin Profitably

Outline1

How to Mine Bitcoin Profitably

2

About the Authors

3

Appendix

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

How to Mine Bitcoin Profitably

Mining Defines The Character of Bitcoin
Computational proof secures the Bitcoin blockchain [1]“The solution we propose begins with a timestamp server.”— Satoshi Nakamoto [1]Low-trust solution to double
spending problem.
Miners’ “proof of work” clears andsecures transactions.
New services may expand market.
Financial and technological barriers
to entry.
Consolidation may erode “trustless,decentralized” character of Bitcoin.
Trailing 365 day mining revenues: $386M.

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

How to Mine Bitcoin Profitably

Miners Compete For Network ShareCosts determined by system specifications and deployment environment

X1π(X ) =× B × (S + F ) − X × C − ×
h0 + XT

X+ NREz(1)X Incremental hashing capacity.
B Bitcoin price.
S New supply.
F Transaction fees.
h0 Initial hashing capacity.
C Operational costs.
z Technological factor ofproduction.
NRE Non-Recurring Engineeringcosts.
T Amortisation period.

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

How to Mine Bitcoin Profitably

Profit Function Determines Network Size
Key points depend on technology and investment time horizonMaximum hashrate
hCAP =B(S + F )CHashrate of maximum profitabilitysh0 B(S + F )∗h =(2)
1C + zT(3)

Breakeven hashrate

Upper /LowerhBE= h0 +q±1
(B(S + F ) − h0 (C + zT) − NRE)
T
12(C + zT)

1
1(B(S + F ) − h0 (C + zT) − NRE)2 − 4(C + zT)h0 NRETT(4)

1)
2(C + zT

Implied amortisation TImplied
Calculate shortest profitable payback period or implied amortisation, TImplied(using Equation 4).

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16How to Mine Bitcoin Profitably

Moore’s Law Is Key Efficiency Driver
Semiconductor technology will improve efficiency in near and medium term

C Operational cost ($).
CLC Co-location and power cost ($).
C =POW ASIC energy efficiency ($/PHa/s).

CLC × POW × PUE
UTZ(5)PUE Datacentre energy efficiency (> 1).
UTZ Equipment utilisation (< 1).

Generation One
Generation Two
Generation Three

CLC$/kW/month150
10050NRE$2M
4M8M

INV
$/PHa/s
10M
1M
0.5M

POW
W/GHa/s
0.8
0.4
0.1

PUE
None
1.2
1.1
1.03

UTZ
None
0.8
0.90.99999

Table : Characteristic price and performance numbers for three generations of Bitcoin
mining ASICs and their deployment environments [2, 3].

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

How to Mine Bitcoin Profitably

Network Approaching State Of Current Art
First and second generations outdated at $240 and 396 PHa/s [4]gGen Three has short payback TImplied .
Price volatility influences TMarket .

Gen One no longer profitable.
Gen Two close to economic limit.
Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

How to Mine Bitcoin Profitably

Network Has Room For Growth
Generation Three can double network size at current price

T = 0.5
Generation One
Generation Two
Generation ThreeLower
hBE
PHa/s
nannannan

Upper
hBEPHa/s
nannannanh∗PHa/snannannanhCAP
PHa/s
1465395115

Margin%-172
2692

T =1
Generation One
Generation Two
Generation Threenannan
461

nannan484

nannan
472

146
539
5115

-172
2692

T =3
Generation One
Generation Two
Generation Threenannan
401

nannan1367

nannan
741

146
539
5115

-172
26
92

T =5
Generation One
Generation Two
Generation Threenannan399

nannan1941

nannan
880

146
539
5115

-172
26
92

https://github.com/sweyn/
bitcoin-mining-profitability
Sveinn Valfells, PhD & Jón Helgi Egilsson

Generation Three is “State of the Art”.
Maximum processor power efficiency
doubles every three years [5].

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16How to Mine Bitcoin Profitably

New Strategies Could Change The Game
New technologies or new deployment strategies could disrupt mining“[W]here no player has an incentive to deviate from his or her chosen
strategy after considering an opponent’s choice.”— Nash Equilibrium [6]Amortize NRE over large batch.
Push down variable investment cost with large
volumes.
Minimize system energy dissipation.
Allow discovery of low electricity prices.
Up to ≈10 GHa/s feasible on smartphones(105 phones for 1 PHa/s )X
CLC × POW × PUE
1π(X ) =× B × (S + F ) − X ×− ×h0 + X
UTZ
TSveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

X+ NREz

Presented at Scaling Bitcoin, Montreal September 13,/ 16How to Mine Bitcoin Profitably

Mining Has Room Profitable Growth
Mining will scale with Bitcoin, network will grow and become more efficient

Network size Mining network supports growth up to ≈ 1300 PHa/s.
Efficiency Efficiency can improve substantially while Moore’s Law is valid.
Dynamics Miners will compete on technology, operational efficiency,
deployment strategy, and cost of capital.
Endstate Window to entry has narrowed, market will consolidate.
Revenues Revenues will shift from new issue to transfer fees.
Key factors Expectations of Bitcoin price and volatility will determine level ofinvestment (TMarket versus TImplied ).
Surprises New applications (merged mining); new processor platforms(graphene); new deployment strategies (embedded mining).
Conclusion Bitcoin is a compelling innovation which is likely to scale.

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

About the Authors

Outline1

How to Mine Bitcoin Profitably

2

About the Authors

3

Appendix

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

About the Authors

Some Relevant Previous Remarks
Bitcoin is potential dynamite waiting to be ignited.

— Communication with Teddy Shalon, August, 2011
Bitcoin can easily be projected to rise to $20 – $120 within three years.

— Communication with Pamir Gelenbe, January, 2013
We expect Bitcoin mining revenues to grow to $600M within three years . . . network
capacity will rise 50–300×. The total energy requirement will be at least 12 MW andpossibly as much as 70 MW.

— Memorandum to Landsvirkjun, August, 2013 [7]I encourage people to do their own research and only risk as much as they are willing
to lose in Bitcoin or any other virtual currency.

— BBC Newsnight, November, 2013
MtGox failure is not systemic . . . trend of Bitcoin will continue upwards but will beinterspersed with price spikes and corrections.

— BBC World News & BBC World Business Edition, February, 2014
Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16About the Authors

References[1]

Satoshi Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. http://bitcoin.org. May 24, 2009.

[2]

The Bitcoin Wiki. Mining hardware comparision. https://en.bitcoin.it. Retrieved, August, 2013.

[3]

Nermin Hajdarbegovic. Kncminer plans 16nm bitcoin mining asic launch in 2015. CoinDesk. November 18, 2014.

[4]

Blockchain.info. Bitcoin Block Explorer. https://blockchain.info. Retrieved, April 17, 2015.

[5]

Jonathan Koomey & Samuel Naffziger. Moore’s Law Might Be Slowing Down, But Not Energ Efficiency. IEEE Spectrum. March 31, 2015.

[6]

Investopedia. Nash equilibrium. http://www.investopedia.com. Retrieved, September 2015.

[7]

Jón H Egilsson & Sveinn Valfells. Global Payment Processing Using Icelandic Energy Resources. Memorandum for Landsvirkjun. August, 2013.

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

Appendix

Outline1How to Mine Bitcoin Profitably

2

About the Authors

3Appendix

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16

Appendix

Bigger Blocks Are Better For Bitcoin
1Mb limit is artificial constraint which must be expanded, question is when and how

Block size
Mb
1Mb
8Mb

Max yearly data
Gb
53420

Max growth rate
Mbps
0.013
0.110

Table : Change in blockchain data requirements with increase in blocksize from1Mb to 8Mb.

Compare with retail smartphone:
iPhone6+ storage up to 128Gb.
iPhone6+ bandwidth up to 168/22Mbps.

Sveinn Valfells, PhD & Jón Helgi Egilsson

Minting Money With Megawatts

Presented at Scaling Bitcoin, Montreal September 13,/ 16