Mining Rigs: Remember the Golden Goose?

May 20, 2014 11:00 UTC

So Europe’s Banks have decided to hold some of their wealth in bullion. Under the current Central Bank Gold Agreement, Countries across the EU as well as Sweden and Switzerland have pledged not to sell any more than 400 Tonnes of gold bullion from their combined holdings each year. This should act to ensure that the price of gold is maintained and not diluted by volumes of the precious metal coming onto the market. The combined European banks declared in a statement that they would: “continue to co-ordinate their gold transactions so as to avoid market disturbances.”

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[dropcap size=small]G[/dropcap]old is an excellent hedge of wealth in times of uncertainty and the temptation to sell off and reap the instant rewards should, wherever possible, be avoided. Too much gold entering the market might well cause a glut and lead to a price collapse. The fable told of the (golden goose) goose that laid the golden eggs gives voice to the inherent dangers of instant gratification.  Gold has always been special, synonymous with both misers as well as  the church. It fuses mystical alchemical forces with the principals of physics and maths as well as, and often better than, any cryptocurrency. Izabella Kaminska, writing in today’s Financial Times, has pointed out that the need to keep the golden goose alive, should not be lost on those companies that build our mining rigs.

We can debate all we like about the merits of Bitcoin as an investment in contrast to its merits as a currency, we can follow elderly Japanese engineers around and photograph their houses, we can argue about legislation and taxation, but we should allocate some time to discuss mining rigs and hash power. It is in fact mining rigs that, as Kaminska points out: “decides how and where wealth is allocated within the system. And that’s because they alone determine who gets brand new coins and who otherwise has to compete over existing coins instead.”  It can be argued that Bitcoin, especially historically, is fundamentally a market for hash power.  Hash-power which is now in the hands of large manufacturers that can’t even bother to ship their items in one piece. Now this raises an issue, if companies can build the next bright shiny mining rig, and many indeed do, why do they choose to sell them to us rather than use them themselves?  If you happen to own the goose that lays the golden eggs, why would you choose to sell bits of it? Kaminska points out:

“The only logical reason would either be because you know the productivity of the golden goose will go down over time — something which is the case for bitcoin because its hash rate doubles roughly every month — the goose was faulty or because someone was offering more than its value in the first place. Which means — unless you know how to make a rig yourself — chances are you won’t be making millions from a rig investment any time soon because the Bitcoin system is literally “rigged” against you from the outset.”

Perhaps the best option for harvesting golden eggs is to advertise the benefits of your mining rigs to the people who require mining rigs, but haven’t the capability to build one themselves, and take the money up-front. Welcome to a world where unsuspecting customers pay up-front for a mining rig, one that takes months to arrive, or even one that eventually arrives un-assembled. So the mining rig you’ve bought arrives months later, when the power required for successful mining has doubled or quadrupled in the intervening period. Therefore we have a market saturated with obsolete  mining rigs and miners fighting to gain a share in an ever increasingly competitive market.

Let us just hope that reality will soon set in, bearing in mind past experiences of the Bitcoin Foundation, and hash rate will be subject to a level of control. What we have now is not what Satoshi Nakamoto envisioned in 2009. That golden goose is beginning to look distinctly nervous.

Last modified: May 20, 2014 14:12 UTC

@P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.