Analysis: Is there a cost to store Bitcoin? Currently 2.1% per year

Using Bitcoin to store wealth is not free. The quantified results show that the current cost of storing bitcoin is about 2.1% per year. Next tell you why.

Screen Shot 2019-10-15 at 8.47.45 AM (Source: pxhere )

cost

The most obvious cost of using Bitcoin to store your wealth is that you have to pay a fee when you deposit Bitcoin into your wallet or when you transfer it out of your wallet. You can see the total transfer fee on the Bitcoin blockchain in the image below, which is the extra profit that the miner has dug out of the new block.

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Fees paid by the Bitcoin exchange

The above fees are paid by the person transferring the bitcoin, and the amount of the payment is proportional to the size of the block space (bytes) occupied by the transaction, not the number of bitcoins transferred. This is the explicit cost (cost) for storing bitcoin.

dilution

According to Bitcoin, a new block is generated every ten minutes, and the miners will dig up new bitcoins.

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The total number of newly generated bitcoins (in millions of bitcoins)

The newly dug coins increase the supply of bitcoin on the market. If there are no other factors that dominate the price change, the value of Bitcoin will decrease. The price of Bitcoin involves the following factors:

Capital flow

Buying bitcoin in other currencies will cause large amounts of capital to flow into the bitcoin market, while selling bitcoin will reduce the capital stock of Bitcoin. These inflows and outflows dominate the price movements of Bitcoin and mask the decline in the price of the currency caused by dilution (more and more bitcoins).

Mining cost

Bitcoin mining requires a huge cost. Miners compensate for their production costs by selling a portion of the bitcoin that they dig. Assuming the price of bitcoin remains the same, the contribution of miners to the capital inflows in the bitcoin market depends only on the cost they pay when selling bitcoin.

Therefore, the miners obtained profit by selling the bitcoin that was dug out by mining. The bitcoin in the market was more, and the wealth in the hands of the holder was diluted. Because if there is no new capital inflow, there is no way to keep the price at the same price.

It is worth noting that if the competition causes the miners' profit margin to fall to zero, in order to make up for the mining cost, they will use the newly dug bitcoin to pay the cost, then their activities will no longer dilute the bitcoin holders. Wealth in the hands. This situation has only briefly appeared in the history of Bitcoin and will not always exist.

We can also observe changes in miners' profit margins through changes in the difficulty of mining. If Bitcoin's current market price is not enough to sustain production, the miners will shut down some equipment to save on electricity bills, which will make mining difficult. Miners who hold backward mining equipment and are unable to obtain cheap energy will give up mining. Industry leaders may still be profitable. As prices rise, the exit of other competitors will give them a higher market share.

Mining cost estimate

The recent recovery in the mining industry began in January 2019, when Bitcoin was priced at $3,400. I assume this is the mining cost required to dig a bitcoin.

Storage cost estimate

Using this mining cost estimate, the current price of Bitcoin is $8,400, so we can assume that the current miner can earn at least $5,000 for every bitcoin dug.

This means that according to the current excavation of a block to obtain 12.5 bitcoins, the miner's profit is about 9 million US dollars / day. This profit dilutes the holder's wealth at a rate of $9 million / $150.3 billion (total market capitalization), calculated at about 2.1% per annum.

As a result, Bitcoin's wealth storage costs are currently 2.1% per year, plus the current negligible transaction costs. When the Bitcoin block rewards are halved next year, the decline in miners' profitability will result in a significant reduction in the cost of storage for the holders.

This cost of holding money will be overshadowed by the greater price volatility caused by the inflow and outflow (speculation) of short-term capital, and investors should be aware of it.