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Do the energy costs of mining Bitcoin affect its price?
Several recent ones relationships Have attracted attention to the enormous amounts of energy used for bitcoin mining operations. The statistics are staggering. According to the Digiconomist websitea bitcoin-based country would rank 64th in the world in overall energy consumption.
Bitcoin’s annual energy consumption is estimated at 30 TWh. (Wikipedia defines a terawatt-hour as equal to a sustained power output of 114 megawatts over a period of one year.) At a more granular level, approximately 10 US households can be powered for a single day using the electricity required for a single bitcoin transaction. (See also: Is Bitcoin Mining Still Profitable?)
Energy accounts for between 90% to 95% of bitcoin mining costs and plays a critical role in determining profitability for cryptocurrency miners. Profitability, in turn, is important in attracting more miners and growing the bitcoin mining ecosystem as demand for bitcoin skyrockets. (See also: How does Bitcoin mining work?) Does the rising cost of bitcoin translate into higher future prices?
The Relationship Between Mining Energy Costs and the Price of Bitcoin
Miners’ energy usage depends on several factors, from the availability of cheap and abundant energy to low-power hardware to the difficulty of the problems the machines solve to earn bitcoin rewards. For example, a difficult problem requires a lot of processing (compared to an easy problem) and, therefore, will require additional energy resources to solve. A Forbes article Last year he suggested that bitcoin’s seigniorage (the difference between the cost of production and its overall value) will become unsustainable unless the mining process becomes more energy efficient.
Over the years, bitcoin miners have reduced energy costs by moving production to China, a country that reportedly accounts for 60% of bitcoin production operations. Most of China’s bitcoin mines are in Sichuan province, where hydropower is prevalent.
Iceland, which provides naturally cooling Arctic air for overheated systems and uses geothermal energy, is also a major location for bitcoin mining operations. Chinese miners have not provided estimates for bitcoin production costs. But Genesis Mining, which has moved its mines from China to Iceland, estimated that It cost the company $60 to produce a single bitcoin.
In a 2015 article, Investopedia writer Adam Hayes valued a cost-effective production model for bitcoin (where energy was the primary cost) and concluded that technological progress, in the form of faster, more energy-efficient hardware, would drive down the market price of bitcoin.
“As real-world mining efficiency increases, which is likely a result of competition, the breakeven price for bitcoin producers will tend to decline. Low-cost producers will compete in the market by offering their products at increasingly lower prices,” Hayes wrote.
But that didn’t happen. A surge in bitcoin numbers went hand in hand with a jump in bitcoin price. Why? The answer to that question is complicated.
Why an Increase in Bitcoin Production Didn’t Reduce Its Price
Certainly, there have been significant improvements in hardware processing power and costs.
Even as energy costs have decreased, however, the difficulty levels for bitcoin mining have increased. increased on an overall basis. With two exceptions, difficulty levels have been steadily increasing over the past year. This increases the cryptocurrency’s hash rate and is necessary to ensure the security of bitcoin. Although it costs more energy, a significantly harder problem set results in a more secure bitcoin network.
The halving of bitcoin mining rewards from 25 to 12.5 has also ensured that miners have to work harder to earn the same number of bitcoins as before. Then there is speculation, which has played a major role in driving up the cryptocurrency’s prices. Recent forks within the cryptocurrency have introduced new algorithms that require less processing power. For example, the recent Bitcoin Cash fork adjusts the difficulty of the problem based on the hash rate, thus allowing for lower energy consumption.
The net effect is that energy costs still make up the majority of bitcoin mining costs, but have little influence on its price. The energy costs associated with bitcoin mining operations ensure that it remains a significant barrier to entry.