As The Bitcoin Bubble Bursts, Digital Currencies Have A Dilution Problem

Tyler Durden's picture

There was a time when people followed every gyration of bitcoin with pathological curiosity, peaking roughly five months ago when after having generated an epic return for 2013 as more and more momentum chasers got on board, the digital currency flirted with the $1000 (in USD terms) level on a daily basis. Then it peaked, almost to the day when this article came out, and ever since then it has been a slow, painful grind lower both for its holders and for its proponents, as can be seen on the chart below.

Needless to say, now that the bitcoin bubble popped, both the interest, and the momentum has been lost, as has the desire to "mine" bitcoin, which as we profiled previously, requires massive, expensive computer workstations. Or rather required. Because as Bloomberg reports, the Bitcoin mining bubble has also burst.

Speculators, known as miners, use powerful computers to solve complex software problems and verify transactions to unlock new bitcoins. They’re finding that the enterprise isn’t as profitable as it once was.

 

Drawn by the virtual currency’s jump in value last year, digital prospectors have turned the mining industry into an arms race as they buy expensive computing equipment and gobble up electricity. While that worked well as long as bitcoin’s value kept rising, smaller players are now being crowded out by bigger competition, high utility bills and declining prices.

 

If you mine at the moment, you have to be very lucky to get anything,” said Mehmet Vatansever, who bought $16,000 worth of mining computers in February to chase after new bitcoins. “It’s a very difficult business.”

End result: Ebay is suddenly flooded with supercomputers whose only purpose was to create more bitcoins, and whose upkeep now that the price of bitcoin has tumbled, costs more than the profit from selling mined bitcoins.

While he has been able to create new bitcoins, Vatansever soon discovered that his equipment was on track to earn less than his monthly utility bill of $480. After selling his computers on EBay Inc. in April, Vatansever estimates that he lost a total of about $6,000 on his mining adventure.

 

In the past week, miners made $14.9 million in revenue, compared with a weekly average of $25.2 million in December, according to Blockchain.info, an bitcoin-data aggregator. The figures represent the number of bitcoins mined plus transaction fees, multiplied by the dollar-based market price.

 

EBay now features more than 1,600 listings for mining computers, many of them used.

To be sure, while smaller operators have thrown in the flag, mining is still profitable for the scale operators who are crowding out minor players.

While individuals give up prospecting, at least two other larger mining companies, KnCMiner and Cloud Hashing, are still generating profits. By scaling up operations, they’ve been able to save costs on cooling and power, making their computers more efficient and cost-effective. KnCMiner also sells mining computers to other miners.

 

KnCMiner, based in Stockholm, operates about 7,000 machines. While the mining company’s electric bill in March came to $450,000, the computers mined 21,000 bitcoins, according to co-founder Sam Cole.

However, the biggest losers are not the miners, especially if they can take the accelerated tax depreciation write off on their supercomputers (unless these can somehow be converted into HFT trading machines), but the sellers of these same machines.

Mining-equipment suppliers are feeling the cool-down firsthand. CoinTerra Inc., a manufacturer of the powerful computers used to crunch numbers for new bitcoins, has seen new sales shrink by 30 percent in the past three weeks from the preceding period, according to CEO Ravi Iyengar.

 

Mining-equipment suppliers are also detecting early signs of a shift to new virtual currencies. Approximately 250 KnCMiner customers switched their orders from $10,000 computers to similarly priced alternative-currency mining machines in the past three weeks, according to Cole.

And there is of course AMD, whose Radeon video cards experienced a dramatic surge in popularity as a cheaper alternative to self contained workstations, only to feel the sudden pullback in demand now (and if it hasn't yet, it will soon).

But the biggest irony is the following:

Because they are newer, designed differently and currently mined by fewer people, currencies such as Litecoin can be more profitable, according to CoinWarz, which tracks mining activity. “The new rush right now is Litecoin,” Colin Lusk, a network engineer in Portland, Oregon, said in an interview.

 

While he once mined only bitcoins, Lusk now uses five of his eight machines to produce Litecoins and other virtual currencies. Created in 2011, Litecoin is similar in design to bitcoin yet requires less computing power. A $3,500 computer can produce $25 worth of Litecoins a day for $3 in electricity, while producing $20 worth of bitcoins would cost $17, Lusk said.

Spot the irony yet? As the bitcoin bubble bursts, the residual price momentum and "mining" bubbles remain only in those currencies where the "mining" of bitcoin is easier. This explains the shift from bitcoin to litecoin. In other words, where it is easier to create digital currencies out of thin air and where there is still a momentum-based surge in popularity. In yet other words - to permit a faster dilution of the existing currency pool.

But what is it that those who oppose fiar rage against? Why the eagerness and desire of central bankers to dilute said fiat at the first deflationary whim in order to protect their banking "custodians."

Who would have though that the digital currency crew would so promptly fall for the same "dangling carrot" incentives that all the fiat proponents are so tempted by on a daily basis...

Then again, monetary alchemy is nothing new - after all people were trying to convert lead into gold centuries before the US Dollar was the reserve currency. Luckily, they failed.

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kaiserhoff's picture

Of course.  As Boris pointed out a few weeks ago, the fundamental problem with virtual currencies is that there is no scarcity. 

And as always, Gresham's Law applies.

Bad money drives out the good.

tmosley's picture

Not one mention of the actual use of bitcoin--bypassing currency controls.

Long Bitcoin is long currency controls and short central banks.

Tyler is a piece of shit for writing this article like this.  Bitcoin was never about "returns".  Those were just a nice side effect.  The point was that you could transact over long distances without using "trusted" third parties like piece of shit banks.

Tinky's picture

Your bitterness, which obviously stems from BC losses, is palpable.

You were a fool to imagine that BC would thrive precisely because of its potential to circumvent the banking system. It is/was ludicrous to believe that TPTB would sit back and allow it to be used unchecked in that manner. 

tmosley's picture

You sound like a beaten dog, hoping his master drops some scraps.

Pathetic.

Tinky's picture

It's even more sad you would confuse those who were correctly skeptical of BC with supporters of the current system. I have always maintained (on ZH) that PMs were preferable to BC.

tmosley's picture

You are correct about nothing.  Just because something was in a bubble doesn't mean it will disappear.  We still have internets, railroads, and yes, even tulips.  I suspect bitcoin will mirror the former two more than the latter.

That said, I'm sure you don't use precious metals for day to day transactions.  Why do you continue to use (and de facto defend) the dollar when you have an alternative?  ANY alternative.

Bitcoin was never meant to be an alternative to gold.  It is meant to be first and foremost an alternative to SWIFT type systems and secondarily an alternative to fiat currency.  Hell, it makes Freegold from a lunatic fantasy into something resembling inevitable.

knukles's picture

Gresham's Law (A Subset of Unintended Consequences)

wallstreetaposteriori's picture

HAHAHHAHAHHAHAH.....foneystar....

CH1's picture

So, for the 10th time Bitcoin has died?

Is it 11? Or 12?

Harlequin001's picture

'Who would have though that the digital currency crew would so promptly fall for the same "dangling carrot" incentives that all the fiat proponents are so tempted by on a daily basis...'

I did, and have openly been saying so since day 1.

Bitcoin is as fiat as any paper currency but in unlimited multiples.

Do yourselves a favour, buy gold.

Stackers's picture

Unimpressed Tyler

1. BTCGuild total hash rate went up by 1 full petahash in the past week alone. Hardly indicative of decreased mining.

2. Cointerra is losing sales because they just finally delivered their first miner and it was well below all advertised specs in both performance and power effiiceincy.

3. When bitcoiners talk about coin dilution, they are talking about spreading the hoarding by a small group, not the dilution by creating more currency units. Very weak

4. The price action is completely in line with what BTC did after the 3 other times it spiked 1000%

Come on you can do better than this fluff work

ElvisDog's picture

Jesus Christ, look at that fucking chart. What about that chart indicates an imminent 1000% jump? Bitcoin's 15 minutes are over. It was a momentum play from the very beginning and the momo boys and girls have moved on. Fat, drunk, and stupid is no way to go through life.

wintermute's picture

Do you ever bother learning about something before mouthing off against it?

https://en.bitcoin.it/wiki/Faq

ElvisDog's picture

Um, for the same reason I don't have to go to the Scientology Wiki page to mouth off against it. Do you want to know why bitcoin is dying? Because other than Internet fools who think they will take over the world, on a gut level people know that bitcoins dont represent anything real and aren't worth anything.

aminorex's picture

Bitcoins represent reified scarcity.  The world faces a peak scarcity situation.  Bitcoin is there to save the world.  The current price trend has been anticipated by all informed players since 2012.  Everything is proceeding according to plan.  In 2015 bitcoin will never trade at less that USD 2000.  The first 1 million USD bitcoin trade will occur in 2017.

Prisoners_dilemna's picture

This article is an attempt to sucker people into litecoin.

Who is Olga Kharif? She is from Portland Oregon.

Why is Portland mentioned so often?

Everyone cited in this article is from Portland.

Something fishy going on here.

Scarlett's picture

 

 

BECAUSE a fucking asset that goes up 100x will never see ANY PROFIT-TAKING.  

 

YEAH RIGHT.  All you're seeing are the yatchs of the new BTC millionaires.  

 

DEAL WITH IT.

tmosley's picture

$1 million/BTC, absent a USD collapse, implies world reserve currency status for bitcoin.

I'm not that bullish.  This will be a long, hard fight, and that fight won't end until governments around the world have been shattered and reduced to more proper roles by the vigorous right hook of the cryptoanarchists.

Godspeed to those fine men.

CognacAndMencken's picture

 

 

Hey TMosley!  I've got a few questions for you.  

In the conversation below, you condescendingly say: "participation in the system is SUPPORT for the system."  If I remember correctly, not only are you a chemist but you also spend quite a lot of time applying for government grants.  In fact, in one conversation, you even said that you helped write the government grants; you're basically an academic welfare queen.  So.... using your own words, does this mean that you SUPPORT the federal government and the federal taxation needed to fund your grants? After all, participation is support... right? 

Also, a week before Mt. Gox imploded, you were arguing that bitcoins "could not be stolen on a systematic basis."  Here's your exact quote:

http://www.zerohedge.com/news/2014-02-11/another-bitcoin-flash-crash-imm...

However, as everyone knows, one week after your comment Mt. Gox - the largest, most popular bitcoin exchange - imploded in a firestorm of fraud and theft.  Do you think your comment from the prior week was foolish?

Another question.... In December 2013, you suggested that bitcoin could leapfrog in value by 1000X and you also equated bitcoin to the settling of America and the distribution of American land.  Here's what I'm referring to: 

http://www.zerohedge.com/news/2013-12-03/another-central-bank-warns-bitc...

Looking back 4 months, do you feel like a total fucking idiot or just 90% of a total fucking idiot?  May I remind you, at the time, bitcoin was at $1100+.  This reminds me of when you said silver was going to par with gold because of a supposed industrial panic right around the corner.  Pure lunacy.  

Also, here you are in December -- with bitcoin over $1100 -- pumping bitcoin like you did with silver, when silver was at $50. Better get it now, because it's running out!!!  Silver shortage it imminent!  Same with bitcoin!!  

http://www.zerohedge.com/news/2013-12-03/another-central-bank-warns-bitc...

Again, looking back after a 70% collapse in price, do you feel idiotic telling everyone that pretty soon no one will be able to buy bitcoin "in size?"  

Here you say that bitcoin is fully transparent:

http://www.zerohedge.com/news/2013-12-03/another-central-bank-warns-bitc...

But two months later, the largest bitcoin exchange imploded and no one knows where all the bitcoins went?  Does this also make you feel like an idiot?

In the past 5 years, you could have put your money into virtually ANY asset and you would have made lots of money.  You choose two: silver and bitcoin - the two BIGGEST LOSERS out there.  I mean, seriously, mosley....  you picked the two biggest, most spectacular crashes the markets has seen in the past 5 years.  How do you feel about that?  Do you think it's possible that you're totally blinded by momentum trades, and stupid enough to chase them straight into the ditch?  

Last question... when is the COMEX going to implode?  I thought it was imminent three years ago..... 

 

manofthenorth's picture

Calling Silver a looser because of its contrived FIAT price in a rigged game is foolish and 100% stupid,unless you were "trading" on margin and got your face melted off. The drop in price is fine by me. I have added more to my pile in the last year than in the previous 4 put together. Sold some of those lovely paper assets that the FED resurrected from the dead to do so. I should write those criminal bastards a thank you note.Considering the world has doubled the money supply since the last time I was buying at $19 it is a screaming BUY so far as I am concerned.. Make no mistake, Silver is in a class of its own, and is already more rare above ground than Gold.

Bad mouthing a miracle metal makes you sound kind off like a "100% idiot".

I am sorry to argue but what the fuck is it that YOU like ? Stocks , bonds , ETFs , CDOs, CDSs, FIAT , CDs ,real estate, guns, beans ,bullets ,cognac, smokes , pot, oil ?

I am just curios, for the record, what horse are you betting on ?

You sound so sure of YOURSELF that I would be happy to hear your insight of what a buy is now that I know what you think the biggest losers are.

I have to be honest, you sound like such a fucking know it all asshole I could not care less what you think , I just would like for you to state your position , for the record , so that we can revisit your bets with the benefit of hindsight at some point in the future.

I_rikey_lice's picture

tmosley on bitcoin june 14, 2011

"I have read some on bitcoin.  I suggest people read the wiki article on it, ESPECIALLY the "Outcome" section, which lists possible failure modes.  This is very important.  This is basically a virtual currency similar to gold from WoW, or Linden dollars.  If interest wanes, then the currency is likely to fail, or even hyperinflate, as a rush to the exits will create rapidly escalating monetary velocity."

 

Here is the link

Bendromeda Strain's picture

I am not sure what happened to the tmosley I used to read, but in his/her honor I am changing my description of the trap known as cryptocurrency from Beastcoin to Douchecoin.

giggler321's picture

>>Everything is proceeding according to plan

Who's plan?  Satoshi (while playing with his OO trains)?  Rothschild's?  Rockerfeller's?  both? or some other criminally minded, world dominating power?

I just figured a non-centrally planned currency would, well not be planned by a group who might try and profit just like those, ye'old central planners of old.

aminorex's picture

Bitcoins represent reified scarcity.  The world faces a peak scarcity situation.  Bitcoin is there to save the world.  The current price trend has been anticipated by all informed players since 2012.  Everything is proceeding according to plan.  In 2015 bitcoin will never trade at less that USD 2000.  The first 1 million USD bitcoin trade will occur in 2017.

TheHound73's picture

Looks different in logarithmic scale and fits a pattern.  Who knows what the future holds but I'm betting long BTC.

Stackers's picture

Exactly what everyone said after it crashed back 80% the other 3 ti es it spiked up by 1000%. Every other time, it spikes, collapses, goes sideways for 6-12 months and then spikes again.

TheHound73's picture

Been crunching some numbers... If a person bought a bitcoin on any day and held it for 1 year, the worst performance possible has been a 58% gain.  Coincidentally that was yesterday's dump and 1 year ago's peak of the April 2013 Cyprus bubble.

ElvisDog's picture

That's funny, because your "1 year" comparisons are going to deteriorate steadily in the coming months. You could have done the same thing with AOL stock in the late 90's, but that didn't mean that AOL stock was a good investment at the time or that it wasn't going to continue to go down.

manofthenorth's picture

The one big problem with Bitcoin is not the idea, the technology or the need for such a system outside of "the system". It is that it is not widely accepted enough to be very useful. Of all the transactions that I was a part of in the last year Bitcoin was accepted at exactly ZERO of those businesses. For a payment protocol , which is really all that Bitcoin is, that is a MAJOR problem for growth in users which is VITAL to its long term success. I like the idea but would not dare bet on the winner at this early stage of the game. I could be wrong but it seems like a terrible place to park much money unless you like to gamble on horse races. I hope not to piss anyone off with my humble opinion but rather continue to try to understand the evolution that this idea represents.

Kindest regards to the ZH brain trust.

Cheers and a great weekend to you all.

TheHound73's picture

Coinmap.org just registered the 4,000th merchant that accepts BTC.  Last year there were about 100.  I expect this trend to continue.

Scarlett's picture

 

 

 

Those who bought bitcoin at 2012 are getting 1oz Au (if they want it) for $13.00

 

Do not underestimate exponential ADOPTION curves.  

Bendromeda Strain's picture

Do not underestimate exponential REVULSION curves

fify

Skin666's picture

Yeah stackers. As much as I love the Tyler(s) they have been and are fucking clueless when it comes to Crypto.

 

I will laugh long and hard when bitcoin starts spiking next time

ElvisDog's picture

With a complete absence of snarkiness, what is going to drive the next bitcoin spike? The zealots are already invested in bitcoin. There is no evidence that big money is moving in even as a momentum play (the last four months of that chart indicates that). Bitcoin hasn't caught the attention of mom-and-pop investors. A spike requires people willing to trade a lot more of their mainstream fiat currencies for bitcoin on a large scale. What group is going to do that?

TheHound73's picture

Patience, grasshopper!

One problem is U.S. investors do not have a trustworthy exchange to trade on.  I know of 3 industrial exchanges on U.S. soil that are in the works.  One by Google Ventures, another being created by 2nd Market and one by Circle.  

Of course, if you know the price is going down you should short it...  

Bunga Bunga's picture

If it's so easy to create digital "fiat" currencies out of thin air, why don't you do that yourself big and collect $400+ for each coin which you can convert into gold.

 

 

 

 

 

OpenThePodBayDoorHAL's picture

OMG PANIC BITCOIN IS $400, IT'S DEAD!!!!!!! Um hello it was $85 bucks 8 months ago.

People saying there's no scarcity have no clue. It's a protocol, not a website. Websites take two clicks to switch away, Friendster, MySpace, Facebook, whatever. Try switching away from TCP/IP or HTTP. Once people coalesce around a protocol, use it, build stuff on top...it tends to be very hard to dislodge.

Looks like your shiny stuff is the thing that is no longer scarce. 100:1 LBMA leverage, unlimited paper gold financial products, 20,000 naked short gold contracts dropped on a Sunday night...

Freewheelin Franklin's picture

It strikes me as odd how on any other thread, the goldbugs will complain to no end how the price of gold is manipulated by TPTB. 

 

Inconsitency in arguments is an easy way to sniff out bullshit. 

Ness.'s picture

He didn't commit suicide.  His mom grounded him and he doesn't get interweb privileges for 3 whole months.

 

 

Slave's picture

For what? Using her credit card to buy bitcoins @ $900?

Scarlett's picture

 

 

would you be so kind as to tell us for how long a period those people that are selling BTC for $400+ have been losing money?

 

By the end of 2015 1btc>>1 oz Au, and what will you be "reporting" then?

ElvisDog's picture

It's not so much that they're losing money, because any gains or losses are paper gains/losses until you sell. The point is that the meme that bitcoin was going to 5 and 6 figures and all the people who bought bitcoin at $50 were going to be rich, rich, rich is evaporating like snow on a sunny day.

As far as 1 btc = 1 oz Au by Dec, 2015, I'll ask you - what dynamic is going to drive that? What group is going to move into bitcoin in a big enough way to reverse the downtrend? It's no longer the new kid on the block, and once rotation occurs out of the new, hot asset, it's hard to turn that around. Silver in the past 2-3 years is a great example of that.

Tinky's picture

Strawman. I didn't assert that it would necessarily disappear.

I use a variety of mediums for day to day transactions, include fiat currencies and credit cards only when necessary.

I'm all for the collapse of the current fiat/banking system, and am pulling further and further away from it, but I'll certainly try to avoid throwing money away in the process.

 

tmosley's picture

So you are saying that you have a bitcoin wallet so you can avoid transacting in dollars when the merchant takes them?

Or are you just lying to a stranger on the internet because you suddenly realize that your position is nonsensical?

Tinky's picture

Ad hominem attacks won't strengthen your case, nor your reputation.

I have not supported BC because I am not comfortable with it, and the notion that anyone who doesn't use it by definition supports TPTB is nonsense.

tmosley's picture

Not knowing the meaning of the term "ad hominem" won't strengthen yours.  I don't care about reputation.  I'm not a kid in high school.  I care about the TRUTH.

I can imagine you living back in the days of the Aztec blood cult rejecting the crazy new religion of Christianity even as you claim to hate all the murders carried out by the preists, even as you attend their events and pay your tithes.  Participation in the system is SUPPORT of the system.  The little thoughts fliting about in your brain don't change the fact that you pull out a credit card and pay a fee to Jamie for every transaction you make.

Recognizing that you are a slave in chains is only the first step.  You have to get those shackles completely off if you want to be free.  You can't do that while you are still making dollar transaction.  Bitcoin at least offers you an alternative for certain types of transactions.

But resisting social pressure is hard, so fack that.  Fuck transacting in PMs too.  Wouldn't want to look like a crazy person, after all.

Tinky's picture

Your use of Christianity in your analogy is perfect given the religious fervor with which you proselytize for BC.

tmosley's picture

Now THAT is ad hominem.