Radeon HD 6990 Bitcoin mining

The value of a Bitcoin seems hard to peg, with the exchange rate to USD reaching above 30 USD/BTC earlier this year, and dropping to below 3 USD/BTC a few months later.The main question discussed in this post is: what determines the value of a Bitcoin? And how significant are the different factors? Yes, we are searching for the Bitcoin price drivers, and we intend to analyse Bitcoins relationship to wholesale energy prices.

Around every 10 minutes 50 BTC are mined, which is the collective target rate of the Bitcoin network. That means 7200 BTC are created per day, and at the current rate, that translates to around $20, 000 USD/day. And with approximately $100, 000 worth of Bitcoins exchanged on the exchanges each day, miners cashing in could account for up to one fifth of the current daily traded volume. This then stands to be a large portion of daily volume, and has the power to be the main price determinant. It should be considered more closely.

Mining also has costs denominated in conventional currencies, and therefore also helps tie the Bitcoin value to conventional currencies. The hardware and energy used for Bitcoin mining must both be purchased with conventional currency. The hardware constitutes a fixed cost, and the energy is the variable cost. Considering that the hardware is a sunk cost for current miners, it will be profitable for them to mine when energy costs are below the value of the resulting Bitcoins, and it will be unprofitable to mine when energy costs are above the value of the resulting Bitcoins.

The behaviour of the miners is therefore determined by the difference between energy cost and Bitcoin value. This is well-known amongst miners. But the aggregate market dynamics it creates is not well investigated, so this is an interesting topic for Bitcoin traders.

Electricity is the commodity consumed by miners, and the wholesale price of electricity is generally determined by a combination of the price of coal, the price of gas, the price of oil/gasoil or the weather. Electricity, energy commodities and weather all have heavily traded futures markets, so discovering a relationship would have great implications for Bitcoins.