“Beware of little expenses, a small leak will sink a great ship” - Benjamin Franklin

Traditional businesses manage a multitude of risks and challenges to engage in the exchange of goods and/or services to achieve revenue and maximize profit. ASICs, on the other hand, are an idealized and self-contained business that avoid many of the risks and challenges associated with ‘traditional’ businesses. This is why Bitcoin miners, leveraging ASICs, have a potentially near “perfect business” that can entirely focus on how to make their mining operations more profitable.

To analogize this concept, one can think of an ASIC as blackbox containing a business. The box (plus some cabling + software) is mostly homogenous,  simply consuming energy and earning revenue on a consistent basis (when apart of a mining pool). Unlike a ‘traditional’ business, the black box contains everything needed to process inputs into outputs and outputs into revenue.

Before we analyze Bitcoin mining, let’s look at a ‘traditional’ business which, regardless of its scale, is subject to fundamental principles that govern its operations, risks and challenges:

Consumer(s):

• Consumers have changing preferences and can choose competing products, combining to create uncertainty for the business's ability to generate future revenue. These risks are managed through operational activities such as marketing, sales and product innovation to improve the receptiveness of the company’s outputs. Each customer needs to be obtained and potentially retained, both of which require operational expenses.

Market Structure:

• Different markets require different types of strategies to maximize profit. Markets can vary by their jurisdictional reach, the number and size of competitors, and various legal or financial entry barriers. Regulatory barriers can be complex and challenging to navigate. For example, here are the US regulations on egg production.

Supply and Demand:

• Businesses are at the whim of the demand of the consumer and competing businesses. Supply represents the limit of goods or services (output) the business can profitably produce.

Profit Maximization:

• Every business has the goal of profit. Profit is a function of revenue and expenses. As a business grows and the market matures, the methods to achieve profits may evolve.

Resource Allocation:

• Businesses deploy resources in a profit-maximizing manner. Resource allocation is typically distributed between labor (workers) and capital (machinery, buildings, software). Resource allocation to capital, while typically more productive than labor, can pose unique risks. Capital tends to cost more than labor and the investment can depreciate or be lost entirely. Further exacerbating this risk, capital can suffer from liquidity constraints.
• Businesses also deploy resources to operations such as marketing and sales. Resources spent on operations that do not achieve revenue or on unsold products and services are wasted.

Margin Analysis:

• Businesses will often assess options based on a marginal basis. For example, a business will always increase its output if it can do so profitably.
  

Now that we’ve analyzed ‘traditional’ businesses, it’s time to dive into what makes Bitcoin mining operations via ASICs special. To do so, let's evaluate the ASIC as a business through the same lens as we did for ‘traditional’ businesses above:

Consumer(s):

• As discussed in Bitcoin Mining as a Model of Perfect Competition (BMMPC), the ASIC's good/service is hashing, and the bitcoin protocol is the sole customer. This enables a level of predictability that only bitcoin miners enjoy. A correct hash is a product/output that the consumer will always purchase for a BTC reward (revenue): a (diminishing) block subsidy + block fees.

Market Structure:

• As discussed in BMMPC, bitcoin miners benefit from the lowest entry barriers of any industry. This means that not only do miners benefit from minimal barriers to becoming a miner, but they can also exit the industry at an easier rate than any other. (This is due to the density, the interchangeability and the deployability of capital. Miners also benefit from the Giffen good phenomenon, meaning their capital value can increase tremendously with an ever-increasing group of future miners eager to purchase used ASICs.)

Supply and Demand:

• The consumer has zero ability to change its preferences. The protocol will always purchase a 'correct hash'. The 'correct hash' is the product (output) bitcoin miners sell to the consumer (the protocol). While miners compete with other miners for the reward, similar to how other businesses compete among one another, bitcoin miners benefit from near perfectly transparent competitive data, such as total hashrate, hashprice, mining difficulty, block subsidies and fees. Unlike ‘traditional’ businesses, bitcoin miners enjoy less risk and greater transparency that enables them to optimize operational strategies.

Profit Maximization:

• ASICs and their accompanying software suite enable miners to select the most valuable transactions to automatically maximize profit. ASICs can also toggle their operations off or on by the minute depending upon market conditions and profitability. Most businesses, especially as the scale of capital increases, lose this operational flexibility. The efficiency and responsiveness of bitcoin miners is rivaled by none.

Resource Allocation:

• Bitcoin mining operations benefit from an incredible high capital/labor ratio that enables unrivaled scalability and profitability opportunities. Marketing and sales expenses are unnecessary due to the protocol being the customer. It is impossible for a bitcoin miner to have an unsold ‘correct hash’, so there is zero risk of inventory loss. Unlike regular consumers with changing tastes, ASICs do not conform to a typical technology product life cycle where their usefulness decreases excessively to the point of redundancy. ASICs are perfectly efficient in the sense that hashing output is perfectly proportional to their ability to generate revenue. The only expense (input) an ASIC incurs is its energy consumption; however, with miner resourcefulness, marginal energy costs can reach zero.

Margin Analysis

• Margin analysis for ASICs is simpler than ‘traditional’ businesses because ASICs do not contain an array of operational expenses. ASICs only have energy input costs and maintenance costs. Miners can manage these costs by setting their ASIC to different hash rates and levels of energy consumption. The limited operational expenses (inputs) enable miners to focus on lowering their marginal costs through efficient energy management and sourcing.

Bitcoin mining takes place within a perfectly competitive market, where there are minimal entry barriers for miners to start a bitcoin mining business. While a perfect business is not a term in an economist’s lexicon, it can describe an entity that better satisfies the fundamental business principles mentioned above than any other profit-seeking endeavor.

ASICs are ‘Perfect Businesses’ because they avoid many fundamental challenges that govern how ‘traditional’ businesses operate. Instead of allocating resources to activities such as sales, product R&D, human resources or marketing, bitcoin miners can concentrate on increasing operational efficiency or further scaling their operations. This narrow range of activities allows bitcoin miners to focus entirely on operational improvements to increase revenue and profitability. As a result, the incentive for miners to pursue renewable or untapped energy resources to realize lower operational costs in the search of greater profitability makes Bitcoin Mining a second-to-none business model.