welcome to part 4 of our 10 part series
on calculating the economic
environmental cost of Bitcoin
I'm your host Hass and today we're
talking economics again and we'll
specifically look at perfect competition
and the Bitcoin microeconomy the
example of a hypothetical firm in a
perfectly competitive market is taught
in most introductory economics classes
there are effectively nine conditions
that define a perfectly competitive
market homogeneous products guaranteed
property rights non increasing returns
to scale zero or near zero transaction
costs perfect factor mobility no
barriers to entry or exit many buyers
and sellers perfect information and no
externalities when compared with
real-world data the Bitcoin mining
market doesn't meet all our mentioned
conditions of perfect competition due to
a relatively low number of ecosystem
participants currently resulting in
wealth and information asymmetry however
the Bitcoin mining market is trending
towards becoming perfectly competitive
as the wider Bitcoin macroeconomy grows
which will now demonstrate
as at the date of this video the Bitcoin
mining market satisfies six criteria of
a perfectly competitive market Bitcoin's
nature is an open source encrypted
distributed ledger means that the
Blockchain guarantees property rights
and homogeneity zero or near zero
transaction and storage cost the factors
of production that is labor equipment
capital are mobile to the extent that
only a communication link and a power
source is required to participate in the
ecosystem due to its economic incentive
mechanisms any mining entity approaching
50 percent of the network hash rate
would experience non increasing returns
to scale if not jeopardize its own
existence as witnessed during the GigaHash.io saga of 2014 developing on top
of Bitcoin requires no permission and if
entrepreneurs have a good enough idea
securing startup capital is not a
difficult barrier to entry to overcome
with over 1 billion US dollars invested
in Bitcoin startups today low barriers
are also a commonplace in very young
markets with copycat companies popping
up en-masse conversely barriers tags that
are quite low for most market
participants except for heavily
leveraged or undiversified miners who
risk holding highly specialized
computing equipment that may be unable
to mine other digital commodities this
is no different to traditional
undiversified commodity miners
the satisfaction of the final three
conditions relies solely on the growth
of the network and the passing of time
and we'll spend a little time discussing
each one of these things the current
size of Bitcoin's user base is
speculative and always will be due to
its pseudonymous nature CNBC reported
that 8% of American adults
had invested in cryptocurrency Yahoo
Finance reported that 16.3 million Americans buy and sell
Bitcoin frequently Coinbase reports
that they have over 20 million users
meanwhile in some parts of Europe it's
estimated that an average of 4% of
consumers use cryptocurrency as a
payment method every day as of 2016 with
Eastern Europe leading the charge at 11%
when adding US and European numbers and
noting that data for Asia Africa Latin
America and Oceania are omitted a higher
estimate of over 50 million users can be
made although this sounds like a market
with many buyers and sellers 50 million
people only accounts for about 0.8%
of the world's adult population
a much lower estimate of between 2.9 and
5.8 million has been highlighted in a
very detailed assessment of the global
cryptocurrency market produced by
Cambridge University in April 2017 but
note that things have changed quite
dramatically since April 2017 when price
was only about a thousand bucks right
before the big hike of late 2017 where a
significant number of new users would
have come into the ecosystem
from a commercial markets point of view
a strong case can be made that only a
few participants have an inordinate
albeit temporary grip over pricing and
information the temporary nature is
shown by looking at the evolution of the
distribution of coins by wallet balance
we can see that there has been a
flattening of the distribution of coin
holdings away from large wallet balances
to much lower balances over the past
four years with the orange line
representing 2018 and the blue line
representing 2014 we can see that coins
held in wallets with balances containing
between 0.001 to 10 bitcoins have grown
dramatically
this movement is backed up by a study of
Bitcoin unspent transaction outputs by
Unchained Capital studying the shift of
old coins into new hands over time they
noted that 15% of bitcoin moved out of
wallets that had been dormant for two to
five years during the 2017 rally this
trend of a flattening and distribution
is expected to continue as spent Bitcoin
is spent forever and needs to be earned
back it should be noted that all wallets
with a balance of over a hundred
thousand coins are verifiably held by
identified exchanges or custodial
wallets this is unlikely to change for a
while and skews the graph quite a bit
bitcoins current major externality is
the carbon dioxide admitted by hardware
operating and securing the network which
is discussed in great depth at the back
end of this series therefore as the
world moves towards carbon free energy
sources over the coming centuries in
addition to cleaner and more efficient
mineral mining and e-waste recycling
technology bitcoins carbon dioxide
emission externalities will eventually
tend towards zero to sum up
Bitcoin is not perfectly competitive in
its current state but it's very close to
becoming so the first six of the above
conditions are met in the short term
with the last three destined to be met
if not already partially met should
Bitcoin have a long term most
importantly in a perfectly competitive
environment marginal costs to produce a
good is equal to the marginal revenue
earned from selling that good that is in
long term equilibrium cost to mine will
be equal to the price of a Bitcoin and
in the short term this equilibrium point
will be established by the market next
week will be the final part of the
series on economics but we start getting
into the good stuff after that we'll be
talking about perfect competition and
Bitcoin managerial economics and we hope
that you'll join us again then too as
always thanks for watching
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until next time
