This quote doesn't take into account the expected deflationary effect
bitcoin will bring. An ever increasing supply of goods and services will
need to compete for a fixed (and slightly diminishing) supply of bitcoin,
which will cause the price of these goods and services to fall relative to
bitcoin, and thus increasing the value of each marginal bitcoin in the
future. It's not just the speculative exchange rate that the miners are
considering, playing the game of the greater fool like this article subtly
hints at (unsurprising as a central bank doesn't understand deflation). The
critical component of this economic calculation in the eyes of the
entrepreneur (ie the miner) is the time scale they are operating under. A
$25 cost to mine 50 bitcoin when the price was $0.1/BTC seemed stupid and
economically irrational a few years ago, but now looks like a genius move
and trivial investment.

Personally, I'm also fully convinced that transaction fees will be more
than sufficient to operate as an incentive after the block reward
diminishes. Actually I wouldn't be surprised fees overtake the block reward
within the next 3 years, especially if the block size is increasing.
Increased adoption also means more transaction, more fees, which will bring
drive the fees towards the marginal cost of mining. Even if it never
reaches that level, or surpasses it, the deflationary effect on the bitcoin
price will recover any losses in the present term over X period of time.

On 06:42, Tue, 28/10/2014 Tim Patrick <judoman589@???> wrote:

> I've heard people say the more in fees, the more in profit = more in
> competition, and hash rate.
>
> On Mon, Oct 27, 2014 at 4:36 PM, Amir Taaki <genjix@???> wrote:
>
>> I saw this thread:
>>
>>
>> http://www.reddit.com/r/Bitcoin/comments/2kerxd/so_ive_heard_both_peter_todd_and_amir_taaki_say/
>>
>> check out "The economics of digital currencies" by the Bank of England,
>> page 5 titled "The sustainability of digital currencies’ low transaction
>> fees"
>>
>>
>> http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q3digitalcurrenciesbitcoin2.pdf
>>
>> Pasted here below:
>>
>> Why transaction fees are currently low
>> ======================================
>>
>> Importantly, fees are low for digital currency payments despite
>> the fact that, as currently designed, the marginal cost of
>> verifying transactions by miners is generally higher than that
>> for centralised payment systems. These higher marginal costs
>> are due to increasing returns to scale in the operation of
>> computer servers: it would generally be more cost efficient
>> to process all transactions centrally. Moreover, while the
>> marginal costs for traditional payment systems may be
>> expected to remain broadly constant over time, those incurred
>> by digital currency miners may be expected to rise as their
>> usage increases and — in addition to that — to increase over
>> time because of an incentive for overinvestment in new
>> equipment. These drivers of marginal costs are explained in
>> more detail in the box on page 7.
>>
>> Low transaction fees for digital currency payments are largely
>> driven by a subsidy that is paid to transaction verifiers (miners)
>> in the form of new currency. The size of this subsidy depends
>> not only on the current price of the digital currency, but also
>> on miners’ beliefs about the future price of the digital
>> currency. Together with the greater competition between
>> miners than exists within centralised payment systems, this
>> extra revenue allows miners to accept transaction fees that
>> are considerably below the expected marginal cost of
>> successfully verifying a block of transactions. (1)
>> The sustainability of low transaction fees
>> In the near term, the subsidies in the form of new currency
>> that miners receive create an incentive for miners to promote
>> the wider adoption of the digital currency they support, since
>> anticipated increases in demand should help to drive up the
>> expected value of their future revenue from new currency.
>> A willingness to accept extremely low transaction fees today
>> can then persist so long as miners’ optimism about future
>> increases in system usage remains.
>>
>> The eventual supply of digital currencies is typically fixed,
>> however, so that in the long run it will not be possible to
>> sustain a subsidy to miners. Digital currencies with an
>> ultimately fixed supply will then be forced to compete with
>> other payment systems on the basis of costs. With their
>> higher marginal costs, digital currencies will struggle to
>> compete with centralised systems unless the number of
>> miners falls, allowing the remaining miners to realise
>> economies of scale. A significant risk to digital currencies’
>> sustained use as payment systems is therefore that they
>> will not be able to compete on cost without degenerating —
>> in the limiting case — to a monopoly miner, thereby
>> defeating their original design goals and exposing them to
>> risk of system-wide fraud.
>>
>>
>>
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