But that can't work. It just _can't_. While the cost of producing bitcoins < value of bitcoins, more people will mine. More miners = higher difficulty = lower reward for mining.
Except that it has, at least once that I know of, one a friend who build a 16 video card setup in a re-purposed NetApp filer box, cost them $4,500 to put together all told and they sold enough bitcoin on the first bubble to return a bit more than double that ($10K). That setup is too slow these days (and it ran for about 6 months, so figure the cost of 6 months of electricity at (basically 36kWH/day, which at 25c/kW added another $1638 to his cost, but his heating bills were lower :-)
What happens though is that the goal posts move, and of course if you get yours late and the difficulty has increased after you get one and you're under performing, well you lose. A number of people on the various forums claim to have made money on their miner setups as well but the forums are not really verifiable sources.
As far as I can tell it works when the market price for bitcoin greatly exceeds their cost to produce, and that seems to happen frequently.
Yea, but they're making money BECAUSE THE PRICE OF BITCOINS ROSE. Not because they "created value". That would have made just as much, without all the hassle, just by buying bitcoins at the initial lower price.
Think of it absolutist terms, denominated only in BTC. If you buy a bitcoin miner, today, for 50btc, what do you think your odds are for mining 50btc + enough extra to pay for electricity before the device either fails or is obsolete, or returns at such a low rate you might as well of stuck your money in municipal bonds?
Ah, I see what you were going for there. That is sort of the gold mine / oil well situation too. If you price the activity in the asset, you normalize the result to the asset and are left unitless :-). But since the asset value flows with respect to another measure (in this case dollars) you can profitably arbitrage (in terms of dollars) using btc as a proxy. Just like you can with gold or oil.
Seems like a kind of useless way to look at it though since the goal here seems to be dollars, not btc. So what insight do you gain by evaluating it this way?
That mining bitcoins is dumb, you can access the same potential reward (or loss) with normal speculation without having the money tied up in hardware - put another way, if the BTC market crashes, you have some small window of maybe getting out at 40 or 50 cents on the dollar, but if you spent all your money on asics you're stuck with a bunch of expensive, inexpensive space heaters.
BTW: This is absolutely NOT an arbitrage situation. Arbitrage is when you make 2 (or more) simultaneous transactions to take advantage of market inefficiencies.
Oh, so I don't get it, measured by dollars in vs dollars out my NetApp friend returned 50% on his investment of $4,500 in six months for an annualized rate of return of 100%. How is that not better than 3% municipal bonds?
It isn't 'dumb' its 'normal speculation' but with a different commodity.
I think TylerE's point is that further 50% gains in six months are not guaranteed. You can look at any stock index and find assets that spiked in a similar manner. Had you invested in those, you would have made the same return without having to buy, store and run hardware.
