Long-term profitability of Bitcoin protocol

Assumptions

  1. The Bitcoin ecosystem must remain stable and profitable for all agents engaged in its day-to-day operations with no extra incentive except transaction (Tx) fees.
  2. Long term means after year 2040, when block reward will be 0 BTC (currently at 50 BTC).
  3. Maximum Bitcoin Tx fee should not exceed 1% of transaction volume. Otherwise it will not be competitive with current fiat-money transaction systems.
  4. Miners’ expect positive average operating profit margin, so let us assume a minimum of 1%. Currently at 29% +/- 30% [i]
  5. Current exchange rates: BTC/EUR 8.39 and BTC/USD 10.74

Let us evaluate current long-term Bitcoin profitability in light of  those assumptions and some statistics.

Bitcoin reality check

Bitcoin was designed to produce roughly 1 verification block every 10 minutes i.e. 6 blocks * 24 hours = 144 blocks / day

Taking:

  1. current Tx volume at: 241,315 BTC (2,024,633 EUR; 2,591,723 USD) [ii]
  2. current miners revenue at: 78,208 USD (7,281 BTC; 46,526 EUR) [iii]
  3. subtracting all BTC awarded to miners throughout 24h period (144 blocks -> 7,200 BTC) gives out 81 BTC (680 EUR; 870 USD), not counting cost of hardware and electricity used.

The conclusion is simple: currently Bitcoin is not yet sustainable in the long-term.

This is further confirmed by Network Deficit graph, that shows difference between transaction fees and cost of Bitcoin mining, currently at: -81,402 USD (-7,579 BTC; -63,588 EUR) [iv]
with Tx fees at: 207 USD (19.27 BTC; 161 EUR) [v]

Lies, bigger lies, statistics

This graph however, illustrates another characteristic of Bitcoin ecosystem, lack of good tools for economic calculation.

Miners revenue including Tx fees at: 7,281 BTC and Tx fees minus mining cost at: -7,579 BTC, gives operating costs at: -7,786 BTC

Combining it with Assumption 4 of operating profit margin at 29% this just does not add up. Either miners’ profit margin is significantly below 0% or current statistics are not very accurate. Maybe I did some error in my calculations or reasoning, if so, please point me to it.

Conclusion

Firstly, year 2040 is still 28 years into the future so there is still time to improve profitability of Bitcoin verification process. It is highly probable that after December when block reward will diminish from 50 BTC to 25 BTC there will be a much more stronger pressure to further optimize the cost structure of Bitcoin mining if not done already by most of the miners.

Secondly, miners/pools should publish their priority queues in regard to Tx fees structure. It could look as simple as this (random data):

min Tx fee [BTC] Tx Count Volume [BTC] Average verification (24h) [hh:mm:ss]
0.1 0 0 N/A
0.01 0 0 N/A
0.001 0 0 N/A
0.0001 1 1984 00:09:57
0.00001 2 2012 00:10:01
0.000001 16 2213 00:10:09
0.0000001 156 2332 00:11:30
0.00000001 1437 2579 00:13:33
0.0 15806 2461 01:08:18
 Sum 17418 13581

Probably with some JSON interface for interoperability.

This would help make educated decisions about Tx fee amount to pay weighted against priority of the payment being made. The more important the transaction is for the client, the more he/she is willing to pay for its verification. The main goal is to somehow relate the transaction fee to the actual cost of doing the verification and possible benefits to the customer of getting the verification sooner than later. Right now it is not very clear as to how does the fee amount influence the priority and verification time.

Thirdly, the bigger the transaction volume, the more revenue for the miners but there is still a problem of wide Bitcoin adoption by merchants. IMHO the fiat money <-> BTC conversion is very inefficient thanks to banks and their huge exchange rate fees but even bigger legal risk from government and central bank intervention in this area as outlined in the last ECB report on virtual currencies [vi]. It effectively hinders Bitcoin growth into the real economy. This is definitely the main issue the community has to address ASAP or Bitcoin’s profitability and stability will decline in the foreseeable future.

As a side note, you can get some free bitcoins every few minutes here ;)



Disclaimer:
Any person can copy and link to this article for non-commercial purposes, provided the article remains unchanged including citations, sources and authorship. For all other forms of use you must first seek permission from the Author.

All views in this article are private opinions of the Author so if you use it as an investment advice be aware you are doing that at your own risk and the Author bears NO responsibility for your actions – you do, 100%.

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