RE: Bitcoin's Unit of Account: The Watt-Hour

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Bitcoin's Unit of Account: The Watt-Hour

in bitcoin •  2 years ago

Interesting way to consider the value of a bitcoin.

Of course not all bitcoins are created Equal. Over time mining difficulty changes as well as differing cost of electricity around the world.

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Which is also exactly why the argument of value-backing through resource input is invalid. Resources and cost per mined bitcoin may vary, 1 bitcoin is worth EXACTLY the same as 1 other bitcoin. Always.

But the value of 1 bitcoin changes immensely over time, the swings are huge both up and down. That element of value also has nothing to do with the amount of resources used to create it.

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The "sunken" production cost of "old" bitcoins is quite irrelevant in this aspect, and most of the mining will always happen where the electricity is cheapest - but for Bitcoins to be a useful "unit of account", the production cost should be fairly constant over time - and it is not.

Actually, I'd argue that the author has put the horse behind the cart in his article, electricity consumption is a function of the bitcoin value, not the other way around. The higher the value of the bitcoin, the more energy will be used on mining, and the higher difficulty level. The lower the value of the bitcoin, the less energy will be used on mining.

I'd also argue that it's a quite bad design choice both to retarget the difficulty after 2016 blocks as well as to halve the reward every 210000 blocks, the algorithms should have been more smooth - now both the difficulty retarget and reward halving can be like major events affecting the market price a lot. Ideally, things should have been done more frequent and in smaller steps, and only external factors should be affecting the market price.

agreed

Thanks @eroche. Yes agreed not all bitcoins are created equal, but the current bitcoin utility value drives the electricity consumption/cost of production and not the other way around.

So rather than use historical input costs for each bitcoin individually, people will use the current electricity consumption as a proxy to value all bitcoins at the same time.