In my previous article empirical research analyzing the data from a number of cryptocurrencies found that value formation occurred at the margin. In other words, it is how many units of a cryptocurrency can be found over some interval with a given amount of mining effort. What's more is that because only Bitcoin has practical use-value for real world applications, a rational, profit-motivated miner will only mine for an altcoin if they can earn effectively more BTC/day than directing their hashing power at Bitcoin directly. As a result, altcoins find themselves always offered in the Altcoin/BTC marketplace and have the tendency to fall in price over time relative to Bitcoin. In fact, this is what has been observed in the market: over the past six months Litecoin is down 41%; Dogecoin -25%; Peercoin -50%; Reddcoin -50%; Namecoin -43%; Nextcoin -40%; Blackcoin -91%; and so on. The Altcoin200 Index, a BTC-denominated market-cap weighted index of the largest 200 cryptocurrencies excluding Litecoin and Ripple is down over 20% since the start of the year.
So the first point is the seemingly downward trend compared to the last 6 months in the pricing of the alt market (after it's EXPLOSION into existence... so perhaps not really a fair correlation) as it finds A RELATIVE value for coins beyond their `trading value'.... Indeed I highlight the above saying that ONLY Bitcoin has `real world applications'..... as IMO that isn't true and a number of coins can now be spent and used in a variety of manners.
And, additionally IMO... some will be finding a value outside of a direct tie to exchanging for bitcoin (but everything is interchangable of course). I think of coins that are moving into the banking arena and such. Other coins for gaming... others for perhaps a Nation such as Maza coin... or even the various niche coins that might serve a noble purpose or two.
The marginal cost, in the case of Bitcoin, is energy. Because miners cannot (yet) pay for their electricity costs in BTC, the dollar- (or euro or yuan etc.) price of electricity becomes an important variable. The energy efficiency of the mining hardware is also important, as it determines how much electricity will be consumed per unit of mining power. Today, the world average price of electricity is somewhere around 12.5 to 13 cents per kilowatt-hour (kWh), and the average efficiency for an ASIC mining rig deployed today is around 0.9 – 1.0 watts per GigaHash/second (or Joules per GigaHash). Knowing these two values, a miner can determine their cost of production per day:
$cost/day = ($price per kWh x 24 hr/day x W per GH/s) x (GH of mining rig / 1000)
It is the average cost across the entire network of miners which regulates the marginal cost for mining. There will be individual mining operations with very low cost of electricity, perhaps in Iceland, or with the latest cutting edge energy-efficient hardware. There will also be miners still running obsolete equipment or in regions with very high electricity cost in hopes that the price of Bitcoin will one day increase sufficiently to cover their daily operating losses. What matters is the average.
This fine article then goes on to point out the seemingly direct price correlation currently to the price o BTC and the price of electricity... not taking into account that the `median' price may not be where BTC is being produced and that therefore many other assumptions get called into question about the ultimate value. But without question slowly the move to efficiency and low production takes place... making the market even more valid and profitable.
The article later continues with:
This is only an objective calculation, and a reasonable explanation of why the actual market price trades consistently above this value is that there exists a number of subjective motivations for mining that also confer value. There is certainly a speculative premium, and many miners hoard either all or part of their production. The assumption in the objective production model is that all miners bring their product to market for sale each day, which is certainly not the case for everybody. Individual decision makers may undertake mining even at a loss if they believe that there will be a large enough potential upside at some point in the future. Others may be drawn to the anonymity or decentralized nature of Bitcoin.
Bingo the `objective' production model assumption is NOT true and is too much of a basis for this total speculation about the ultimate value.
BITCOIN IS HEADED TO $548.00 on 9/2016?
BUT IS ARMAGEDDON COMING?
Unlike most commodities where the supply can change quickly to accommodate fluctuations in demand, the supply of bitcoin is hardwired at a steady rate of one block every ten minutes with the difficulty setting adjusting up and down to maintain that linear rate of production through time. If miners are not able to supply enough new coins to meet an influx of new demand, the market price can see increases while the cost of production remains largely the same – inducing more miners to increase their mining efforts. This will cause the difficulty to increase, raising the cost of production until presumably a new break-even level is reached.
One final insight that could have sizable consequences for the objective value of bitcoin relates to the block reward amount and how changes in it will impact BTC/day production. When bitcoin was launched, each block mined was composed of 50 bitcoins. That amount is set to halve every four years, and in 2012 the block reward became 25. The block reward will again halve to 12.5 bitcoins per block, expected mid-September, 2016, and will again in the year 2020 and so on. If we refer to the illustrative example above and substitute a 12.5 BTC block reward for the current 25, the expected BTC/day' becomes half of 0.010604, which is 0.0005302 per 1,000 GH/s. Given that new BTC/day', the break-even price for a bitcoin increases to $548.30, holding all else constant (the difficulty and cost per day remains the same). If the market price of bitcoin does not increase in turn, it will suggest that the break-even efficiency will also decrease by half. This could have the effect of eliminating all but the most efficient producers all at once.
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So alot could be coming in regards to the value and pricing of Bitcoin... meanwhile... some say things such as will BTC go to 100,000 or will 1000 coins go to 1000? The stuff dreams are made of Bitcoin Dreams.
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More BTC Links Worthy Of Your Read
Mazacoin gets mentioned
100,000.00 Pipedream?
is this to be the NEW standard? (I like it)
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Thanks For Your Readership
MORE VERY SOON