Landlords Focus On The Electric Bill
The purpose of Bitcoin mining is to ensure the integrity of the publicly visible distributed transaction ledger (blockchain) without the existance of a central authority. The Bitcoin protocol achieves this by requiring that miners complete of a proof of work computation which, at its essence, sends electrons through the gauntlet and in exchange the miner receives a cash award.
Never before has there been a cottage industry that simply monetizes electricity. Mining consumes power in a manner in which it can nearly directly be converted to cash.
All miners compete for a relatively fixed amount of bitcoins produced which are worth roughly $1.4 million each month using the current BTC/USD exchange rate of about $6.40 USD.
As a result of this competition, mining for profit is generally only viable in certain situations that are available only to certain individuals. This situation specifically refers to those who either build massive operations and enjoy the resulting economy of scale or, increasingly so, to those who aren’t directly paying for the cost of electricity.
There haven’t been enough FGPAs for mining shipped yet to knock the GPU off its pedestal as the technology responsible for the vast majority of hashing that occurs today.
Other than the hobbyist-level mining that occurs, success at mining commercially has meant the procurement, deployment and administration of large amounts of GPU equipment. Because of the noise, heat and physical accommodations necessary to support such a mining operation, only a relatively small number (perhaps in the low hundreds) of these operations exist. An even fewer number are enjoying the benefit where electricity is included in the lease agreement.
That is about to change.
The arrival of specialized hardware, such as the Bitforce single from Butterfly Labs (BFL) and Enterpoint’s Cairnsmore1 put out much less heat (each about the same as a light bulb) and noise so they are more suitable for use in a residential home-office setting or college dorm even. Details on ASIC designs promised by BFL have not yet been released but they too might become suitable for use at your home office desk.
Faced with the competition from these more power-efficient methods, GPU mining has not been shutting down but instead has been shifting. Mining operators paying for electricity at average or above average utility rates (e.g., $0.15 per kWh or higher) have been selling off their GPU equipment and buying FPGAs. There is still a healthy market for this used GPU hardware from those operators whose electric costs are much lower and from those whose power consumption is included in their residential or commercial lease.
This in effect transfers much of the cost of mining to the landlords who receive none of the benefit except, perhaps, in the greater likelihood that the mining operator pays the rent on time.
Most landlords who include power in the rent only know power consumption levels for the entire property and not on a per-unit basis. While smart meters provide landlords with the technical ability to do utility submetering, rent controls and housing regulations often prohibit the use of submetering.
Bitcoin mining has not even been discovered by most landlords as being a contributor to utility expenses so there aren’t even clauses in most residential lease agreements which prohibit consumption of power for non-residential purposes.
That doesn’t mean landlords are not taking action to lower their electric costs. Sustainability consultants and regulators promote a green lease to landlords and building owners as a tool to help share the burden for improving energy efficiency with the aim of reducing consumption.
Because Bitcoin mining is a 24/7 operation, it can easily represent half or more of a residence’s power consumption. It is only a matter of time before the landlords that have been unwittingly subsidizing these commercial endeavors notice an increase in power consumption and begin to investigate.
Before investing significant amounts in mining equipment those operators who rent and plan to take advantage of utilities being included might wish to review the lease documents to become aware of any “commercial use” exclusions. Also they should be aware of the potential that a month-to-month lease could suddenly change where utility submetering or other cost transfer might be imposed.
As far as those who mine using GPUs and pay directly for the electricity themselves? Unless the electric rate billed is well below the average rate, now might be a good time to start thinking of where a better home might be for those inefficient GPUs.
Bitcoin Ends Month Up 28%, Quarter Up 36%, Year Up 41%
Though Bitcoin may never again see gains in a quarter like it had seen in last year’s second quarter, the chart for this April through June period on the calendar which just ended saw a pretty decent gain as well.
For the month of June, 2012 the closing price of $6.69 was a dollar and a half above the previous month’s close giving a 28% gain for the month. The first quarter had closed at $4.90 so the closing price for 2Q2012 shows a gain of 36%. For 2012, where the price opened at a $4.72 level, the price rise from January 1st now exceeds 41%.
Unlike previous rallies for Bitcoin, this one occurred without there being a major story or significant level of media attention. With Bitcoin being new to most people yet, such attention normally draws interest from a wider community who then wish to own some of the digital currency .
This doesn’t mean that June was a particularly quiet month for Bitcoin though.
Instability in Europe due their financial crisis made Bitcoin useful as both a store of value and also as a tool for transferring money to other destinations. The Bitcoin exchanges offering BTC/EUR trading all saw record monthly trading volume levels and most of the other European currency markets such as the BTC/GBP (British pound sterling) and the BTC/PLN (Polish zloty) broke monthly volume records as well.
Even exchanges that trade bitcoins against non-European currencies but cater to customers from the region saw record months. BitStamp, known for having a very accommodating SEPA payments policy, traded more through its BTC/USD market in June than it had in all previous months combined. VirWoX monthly volume broke its previous record and BTC-e, home for the second largest BTC/USD market, nearly tied its previous monthly volume high as well.
This doesn’t mean trading market share at other exchanges was simply just grabbed from the leading exchange, Mt. Gox, however. Though Mt. Gox’s monthly volumes are still down more than half from where they were in January, volume on its BTC/USD market saw $8.3 million worth of trades occurring in June — a 32% increase over May 2012’s monthly volume.
Though the reasons for the increase in volume at the exchanges can be easily explained, the reasons for the increase in the price are more difficult to pin down.
Of course, the upcoming drop in the block reward (expected to occur in early December) is likely one reason. When that event occurs, the rate of currency inflation will drop from the 25% per-year level to just 12.5%. Because this is known in advance, however, speculators may already have this change priced in to the exchange rate and thus no further price appreciation will necessarily occur after that event occurs.
Another factor affecting price may be just a one-time event.
Since May when Bitcoinica suffered a security breach that keeps it shuttered yet today, there remain few methods to go short on Bitcoin — to speculate that the future price of bitcoins will go down from current levels. Ironically, most of the funds from traders wiling to take that bet are still stuck at Bitcoinica which only recently starting returning some funds as it continues to work at reconciling its customer accounts.
While aspirations to fill the void that followed Bitcoinica’s exit are numerous (Kronos.io, options at MPeX, BitcoinOPX, various approaches involving assets listed at GLBSE, and binary options through predictions markets even) traction anywhere near the level Bitcoinica held remains far off, at best.
But there’s a more immediate development likely affecting the price as well.
The most significant conversion of funds out of bitcoin occurring today happens to be coming from those who are, ironically, enthusiastically showing their trust in Bitcoin’s future!
Announced formally in June was the new product line from Butterfly Labs for their ASIC-based hardware. This development changes the landscape for Bitcoin mining operators entirely.
Because of the profit potential in being among the first to start mining with these breakthrough devices, pre-order sales placed just to get a position in line have been at astounding levels.
Mining operators who held bitcoins are now spending them (particularly because priority processing on orders is given to those paying with bitcoins), but the proceeds from each sale are then converted to dollars. Even that significant new supply of bitcoins being sold at market appears to not have much of an impact on the exchange rate as the the June month-end level is near its mid-month high.
Miners took in the 226,750 bitcoins that were issued (also referred to as being “mined”) during the month. Using the average daily valuation of $5.99 the value of these bitcoins issued totals a little over $1.35 million. Along with the rising exchange rate, mining profitability has been rising as well. Offsetting the rise in the exchange rate was an 8.5% increase in the mining difficulty but even so miners milking their GPUs a while longer yet have little to complain about.
But Bitcoin does not and cannot exist solely to benefit those mining and though millions of dollars worth of trades are occurring on the exchanges each week, those trading volume levels are likely for the most part due primarily to speculation.
Even if these trades were entirely for funds passing through the exchanges to facilitate commerce made using bitcoins, the actual transaction volumes seen on the Bitcoin payment network today are likely still too low to justify the current $62 million USD aggregate currency valuation for Bitcoin.
The use of the currency is showing evidence of it gaining traction, particularly as its footprint expands globally and also for its use in gaming. Taking advantage of Bitcoin’s blockchain for accepting wagers, SatoshiDICE is alone responsible for more than half of all bitcoin transactions occurring each day,
Though Bitcoin is an ideal payment network for eCommerce (evidenced in part with BitPay's merchant base now exceeding 600 merchants) it also has the technical ability to function well for retail point-of-sale. Such use is not common though yet. Even claims of fantastic Bitcoin uptake at PorcFest aren’t enough to attract retailers in any significant number.
A hurdle needing a breakthrough is the resistance by Apple which evicted all Bitcoin wallet apps from its App Store.
Bitcoin will be hamstrung if all users of iOS devices would be excluded from participating due to this anti-competitive action from Apple.
In the absence of a mobile app, alternative methods including Blockchain.info’s new send bitcoins via SMS service won’t mean all iPhone users will be completely left behind.
And though consumer grade Bitcoin apps are flourishing on Android the point-of-sale options available to merchants just aren’t there yet to cause widespread adoption.
This situation could change entirely though if the BitcoinCard, expected early in 2013, ends up gaining traction.
The question as to what caused this past quarter’s exchange rate boost remains unanswered though for most of us. Even more baffled as to what propels Bitcoin forward are the skeptics and those formerly skeptical about bitcoin’s chances of staying strong.
While there’s nothing new about a volatile financial instrument gaining 30% in a month, what becomes interesting is that this gain occurs at the same time other commodities such as precious metals and crude struggle.
The Bitcoin community has been growing, that’s been obvious. This chart, for example, shows that traffic on the BitcoinTalk forum is up over 50% from levels seen at the beginning of the year.
Thanks to easier methods to acquire, store and transact in bitcoins, the currency can expand beyond its bleeding edge early adopters and become usable to those who are less-technical and to those whose motivation is not mainly political.
With a wider base holding bitcoins, the currency becomes less vulnerable to selloffs. A speculator unloading bitcoins generally has one option — to cash out at an exchange, whereas smaller investors and consumers holding bitcoins can cash out by spending their coins on goods and services.
Whatever the reason for the second quarter gains, it may finally be time that expansion of the Bitcoin economy will occur from these gains as well.
Bitcoin Ends January Up 51%, Largest Monthly Increase Since 2011
For the month of January, 2013 the closing price of $20.41 USD was up nearly seven dollars from the 2012 year-end close resulting in more than a 51% increase for the month — Bitcoin’s largest monthly gain since December 2011. The one-year gain, calculated from the January 2012 close of $5.48 is whopping 272% and is illustrated in this chart of month-end closing prices:
January was a good month for other assets including stocks, the precious metal silver, and WTI crude. However not only did Bitcoin trounce them for January 2013, it dominated over them throughout much of 2012 as well:
The 111,100 bitcoins issued which Bitcoin miners took in during the month is valued at $1.72 million using the average daily valuation for the month of $15.49. Miners had been suffering ever since the block reward subsidy “halving” that occurred in November last year. With this spike in the exchange rate mining profitability for GPU miners is again at respectable levels, However that will soon change again now that there is at least one ASIC mining hardware manufacturer that has begun shipping.
Mining results will vary based on the Bitcoin mining difficulty, with automatic periodic adjustments that re-calibrate production so that it resumes at the targeted rate. The biggest adjustment to difficulty in 2012 was under 15% and at the end-of-year the difficulty was not even three times the level it was at when the year started. ASICs have the potential to do that same level of an increase (tripling) in just a matter of a couple months. A dollar’s worth of ASIC hardware performs hashing at the rate that is nearly two orders of magnitude over what a dollar’s worth of GPU hardware does so we are likely just a couple months (or less) away from seeing the end of any GPU mining that is profitable.
The total value of all bitcoins issued as-of the end of January (a metric that some refer to as Bitcoin’s “market cap”) is a number just under $220 milliion USD, more than $75 million greater than where it started at for the month. Certainly greater demand occurring due to Bitcoin gaining traction as a payments and money transfer system is partly responsible for a higher valuation but there appeared to be no massive jump that would account for the need for an additional $75 million worth of the currency. Thus a significant portion of the rise can only be attributed to speculative interest.
An attempt to quantify how much of a valuation rise was necessary to accommodate the rise in the use of bitcoin for transactions would require reliable data on the behavior of consumers who use bitcoins. Those procuring bitcoins for use in money transfer or for paying for purchases do impact the monetary velocity of the currency in a way much different from how those who are acquiring bitcoins for long term investment or for short term speculation even.
If this velocity metric has been studied, the results have not been shared publicly. What is shared publicly is transaction data that crosses the Bitcoin network. However since that data is both pseudonymous and includes indistinguishable “change transactions” which are sent back to the party making the payment, very little information about Bitcoin’s economy can be reliably gleened from it.
Most bitcoin market exchanges provide feeds with trading results in real-time and many volume records were broken in January. Additionally, several bitcoin-related companies have started sharing their results. The numbers coming out include BitPay’s announcement of having processed 10,000 transactions cumulatively from their 2011 launch through mid-January. Other metrics include impressive volume and growth numbers coming from online casinos — the first industry that cannot ignore Bitcoin.
Early in January Bitcoin Foundation executive director Peter Vessenes published his Quarterly Update in which he describes an increasing level of interest from investors and shared his prediction that in 2013 there would be Bitcoin “liquidity problems” (price increases).
With Bitcoin trading markets only having existed for a few years there isn’t enough data to conclude that there is a seasonal trading pattern. In 2012 the exchange rate dropped in February after a strong couple of months prior but then stayed level for a few months after that.
Those buying or holding bitcoins are trusting that Bitcoin’s current scalability problems are about to be resolved, that its exchanges are handling security better (the successful January hack against VirCurEx barely slowed them down), and that Bitcoin will not immediately see intervention by governments (being completely ignored by them is probably a temporary, one-time bonus).
But Bitcoin remains an experimental currency. As the software gets poked and prodded, new vulnerabilities are discovered. Some vulnerabilities will result in funds being lost while others — initially appearing to be quite scary will receive further analysis and be found to be inert. But most bitcoin users and investors and aren’t going to be monitoring chat channels or forum threads to determine if an event has occurred in which selling some coins would be a wise move.
Yet tremendous upside may remain that could be overshadowing the risks. Payments startups like Square, Stripe, Braintree, Dwolla and mFoundry aren’t publicly traded so their shareholders mostly consist of angels and venture capital investors. When any of these startups hits a “home run” (their product succeeds tremendously, or the organization is acquired, or they go public) it is the founders and shareholders who enjoy the tremendous financial gains. When a SatoshiDICE, BitInstant, CoinBase, or BitPay (all angel- and venture capital-backed Bitcoin-related startups) hits a home run, every person holding a bitcoin likely sees a rising valuation due to the increased demand for Bitcoin as a currency resulting from that startup’s success.
Bitcoin speculators also could benefit from another characteristic of the nascent digital currency. Without Wall Street’s participation there are few affordable methods to take a short position or to perform price hedging. Without this relief valve, wild volatility occurs as the market tries to discover Bitcoin’s price. It could go high, "really high" explains Trace Mayer of RunToGold.com.
With the last edit before publishing this monthly summary being composed nearly a week into the month of February and the exchange rate continuing to rise past the January close, there could be much more left to this rally.