In the bitcoin market, there has been no final conclusion on the factors affecting the price of bitcoin. Where is the value support of bitcoin? What factors affect the currency price? How to estimate the trend of special currency? From the perspective of energy input, the author makes a hypothesis and discusses the relationship between bitcoin price and energy input, hoping to provide some references for bitcoin investors.

The unit of energy input: Joule, which can be used to evaluate the fair value of bitcoin

An increase in energy input will increase the fair value of bitcoin (and vice versa)

The price of bitcoin reflects the average value of its energy consumption cost to some extent

The energy value model shows that the fair value of bitcoin on December 12, 2019 is about $11500, 50% higher than the current currency price.

1. It is found that there is a close relationship between currency price and energy consumption

In the author’s previous article, it was said that the power consumption of bitcoin can be used to estimate the production cost, and then the profitability of miners can be estimated through the production cost. By observing the relationship between bitcoin price and production expenditure, we find that the change of bitcoin production cost is closely related to energy consumption and the efficiency of mining equipment.

Assuming that other factors remain unchanged, let’s consider a question:

Can the basic value of bitcoin be measured only by energy consumption?

2. Model: calculate the fair value of bitcoin

Assumption: the fair value of bitcoin is a constant function of energy input, supply growth rate and legal currency coefficient f representing energy.

These variables can be combined into the following equation, called the energy value of bitcoin (V):

Of which:

Energy consumption (unit: Watt) = hash rate (GH / s) * mining efficiency (J / GH)

Supply growth rate (unit: s-1) = annual growth rate of bitcoin circulation, which is equal to the reciprocal of reserve production model (S2F). Change rate in bitcoin (year) – 1

Legal currency factor (USD / joule) = a constant conversion factor to take into account the legal currency value of energy

Since the hash rate and supply rate of all units can be offset, the equation shows that the fair value (V) of bitcoin can be expressed as the energy consumption of producing a bitcoin:

Energy value formula: the value of bitcoin is a function of energy consumption

3. Calculation: energy value of bitcoin

In order to verify this theory, except for mining energy efficiency, all input data are from: blockchain info。

The most challenging part is the accurate assessment of the energy efficiency of bitcoin mining at different time points.

3.1 evaluating the energy efficiency of bitcoin mining (J / GH)

The energy consumption of bitcoin mining is related to two factors: the hash rate of SHA-256 algorithm and the energy efficiency of the miner itself.

In the early days, bitcoin used high-energy CPU and GPU for mining.

At present, the mining efficiency of ASIC miner is more than 100000 times higher than that of the miner used in 2009. This means that the relatively high part of the average electricity bill of miners has been transformed into effective hashing power.

In order to evaluate the historical overview of bitcoin miner energy efficiency, I calculated from Cambridge (ASICs only), bitcoinwiki (FPGAs) and bitcoin Energy efficiency of 150 bitcoin mining machines of it (ASICs, CPUs and GPUs). All ASICs, FPGAs, Intel, AMD and NVIDIA hardware of energy efficiency (J / GH) are considered, and the approximate launch time of mining machine is found. The common models are grouped, and the average energy efficiency of the model is calculated on the basis of equal weight.

Then, the daily energy efficiency of the bitcoin network is calculated as the weighted average of all hardware, which is within two years after the release of CPU / GPU / FPGA and 1.5 years after the release of ASIC.

The reason for choosing the depreciation period is that:

Mining machines with CPU and GPU are usually used for several years

Bitcoin mining was often uncompetitive in its early days

Other studies also show that in recent years, the depreciation period of ASIC is usually 1.5 years

Finally, the 1-month moving average of energy efficiency is calculated to phase out the model type in stages.

In fact, some mining machines have wider applications and longer service life. However, due to the risk of increasing historical errors in the energy value model and trying to obtain an unbiased result, we did not exclude these mining machines, clean up data or other data operations.

In the above process, over time, bitcoin energy efficiency (J / GH) forms the following trend.

S-curve with the increase of bitcoin mining efficiency (indicating that J / GH gradually decreases over time). Please note that since the introduction of ASIC miner from 2013 to 2014, the mining efficiency has increased sharply.

3.2 # calculate the coefficient of legal currency (USD / joule)

The legal currency coefficient is a constant that converts the energy consumption unit (joule) into legal currency (US dollar). It only indicates the importance “we” attach to energy.

According to the above energy efficiency curve, the legal currency coefficient is 2.0e-15

The value of the French currency coefficient depends on the accuracy of the energy efficiency curve, so the value provided here should be regarded as an approximate estimate. In the long run, the depreciation of the US dollar, hyperinflation or the collapse of the French currency will lead to the increase of the French currency coefficient in a relative way of 1:1.

4. Conclusion: the energy value is consistent with the historical currency price

The mapping results show that the energy value of bitcoin is very consistent with the historical price.

10-year trend of bitcoin energy value

From 2013 to 2014, the energy value of bitcoin fell sharply, which was mainly driven by the transformation from GPU / FPGA to ASIC mining machine. Although there may be a significant decline during this period, this result may be exaggerated due to the hardware usage and depreciation model assumptions outlined above.

5. Market power — building a bridge between supply and demand

The first question is:

Is bitcoin’s energy value model logical?

In the article “bitcoin value model built by scarcity”, plan B found that there is a strong relationship between the market price and the scarcity of bitcoin and other assets. We can assume that this represents the basic relationship between mankind’s “demand” for long-term “hard currency” and hedging assets.

But here’s a problem.

Not all scarce assets have or maintain broad market value. For example, about 3000 cryptocurrencies have a market value of less than $500. Many of these tokens have “limited” supply models, but the market still believes that they have no basic value. Scarce, but not valuable. Scarce assets that can be easily obtained or copied have low market value.

Sustained and high-level human investment is usually related to demand.

When putting energy (energy) into an event, the energy provider (worker) expects others to have a demand for their efforts. When suppliers see the fruits of their labor and the demand for workers increases, workers will work harder to get greater returns. However, if suppliers’ demand for labor decreases, or workers can get better returns elsewhere, they may stop investing in the event.

This can not only explain the dispute over the computing power of bitcoin, but also serve as an argument for the energy value model of bitcoin.

Continuous mining investment represents the balance between supply and demand. The rising price of bitcoin encourages miners to increase mining investment through the growth of computing power and the improvement of technology, so as to improve energy efficiency. Therefore, the sharp rise in market prices will usually promote the increase of mining investment, so it will also improve the energy value of bitcoin. However, when speculation leads to soaring prices, if there is no corresponding increase in energy consumption, according to historical experience, prices will plummet back to energy value.

It represents the phenomenon of mean reversion, as expected by fundamental driven intrinsic value valuations.

The price and energy value of bitcoin are interrelated, just like a magnet. Although there may be deviations between the two, they finally fit. Although the energy value of bitcoin has nothing to do with the transaction price and volume mathematically, the “invisible hand” of the market connects them.

Bitcoin value is based on the reserve production model and mining expenditure to obtain the long-term demand for scarce assets, which represents the symbiotic relationship between bitcoin supply and demand.

6. Measurement: effectiveness of energy value model

According to the daily data in January 2010, R2 of the “energy value” formula is 80% of the actual bitcoin price (the higher R2, the more realistic the model is). In contrast, under the same data, the R2 of the reserve production model under the same data is 88%.

Although it is 8% lower than the reserve production model, there are several points to consider:

The energy value of bitcoin is highly dependent on our estimated mining efficiency. In this analysis, the detailed information of 150 bitcoin mining machines has been manually sorted out, and there is the possibility of data omission or data error. The depreciation period is an approximation of the actual situation. Efficiency may also vary depending on operating conditions and overclocking. It is impossible to perfectly present the mining machines used by every bitcoin miner at every point in history. Therefore, there may be some errors here.

If all miners suddenly stop mining bitcoin, the price of bitcoin will reach infinity according to the prediction of the reserve production model. The energy value prediction is zero. If all miners give up bitcoin (such as catastrophic events: the collapse of SHA-256 algorithm and the generation of better wealth storage methods), no new blocks will be generated and no transactions will be sent, and the blockchain network will be paralyzed. In this case, only the reserve production model (0.4 * SF) is used ³) Bitcoin will be considered to have unlimited value. The energy value model says that if all miners stop mining bitcoin tomorrow, the power input will be zero and bitcoin will be worthless.

The reserve production model is a fitting power law. The price of bitcoin has shown exponential performance, and the reserve production model is specially selected to match it. By optimizing the parameters, a better bitcoin price fitting accuracy is obtained. The energy value has no curve fitting parameters, only a fixed constant, which allows the conversion of pure energy into dollars. In fact, the exponential growth of mining efficiency and the growth of hash rate may explain the exponential relationship between reserves and production.

In conclusion, 80% R2 is considered to be the strong result of energy value.

7. Looking for investment opportunities based on energy value model

Energy value model and reserve production model of bitcoin

From the above figure, we can see that the inflection point and huge gap between bitcoin price and fair value indicate a good time to buy and sell bitcoin.

A sharp drop in energy consumption often means a good time to exit the market, while a strong increase in energy consumption represents a good time to buy.

The energy value formula indicates that the current (December 12, 2019) fair value of bitcoin is about $11500, 50% higher than the current transaction price.

This shows that bitcoin will have a huge risk return in early December 2019. The energy value oscillation chart below also gives a positive signal.

However, energy consumption can decline at any time.

Historically, it is unwise to buy when the hash rate drops, while the risk return is much higher when the hash rate rises.

Energy value oscillation chart

Bitcoin price as a percentage of energy value. The trend in 2019 looks very similar to the characteristics before the bull market began.

8. Enlightenment from energy value model

By considering the growth of energy and supply, we find the internal relationship between the price and value of bitcoin.

The value of bitcoin is a function of its energy input in joules.

Some of the implications of energy value models are:

The health of the mining network is intrinsically linked to the value of bitcoin

The increase in electricity investment will increase the basic value of bitcoin (and vice versa)

A higher hash rate (with constant energy efficiency) means a higher value per bitcoin

Significant improvements in Mining Technology (such as the use of ASICs) have led to considerable fluctuations in the short-term intrinsic value of bitcoin, which is due to the significant improvement of energy efficiency rather than the increase of computing power

If the progress of quantum computer technology (or other major technologies) makes the cost of attacking SHA-256 algorithm lower, the intrinsic value of bitcoin will decline according to the energy value formula

Changing the code of bitcoin to increase the supply growth rate of bitcoin will reduce the basic value of each circulating bitcoin

In 2140, if bitcoin is not dead, its supply growth rate will be zero. The energy value model, like the reserve production model, can predict the ultra-high value of bitcoin at that time (in US dollars). However, unlike the reserve production model, this depends on the development of mining activities.

If bitcoin is widely used as a value storage tool or a global currency, we may have more financial data to show that its value is intrinsically related to the energy consumed in mining activities.

Our time is limited – it is our most valuable resource. We choose to devote our energy and time to this matter, which is our most valuable choice.

The value of bitcoin can be measured by the value of energy. Just as quality can be expressed in energy, so can the price of bitcoin.

Responsible editor; zl