Sam Doctor, a quantitative analyst at Fundstrat this Monday released a rough cost analysis of the enormously electricity intensive mining process that secures the Bitcoin network. According to this analysis, the mining – which has doubled in hashpower since May to using some 57 exahash per second, now costs over $4000 per new coin in electricity and over $7000 once you factor in overhead costs and wear and tear on the specialized hardware used for mining.
Bitcoin Mining More Expensive
Nine months into the 2018 bear market, daddy Bitcoin (BTC) remains the safest port in the storm. Throughout the year Bitcoin dominance has been on the rise and has now reached a whopping 56%. It is by far the most well-known coin in crypto, and also the main one being pushed for ETFs and other indirect investments. And it’s not very hard to see why. It’s the original cryptocurrency and the natural Schelling point for anyone wanting to invest in crypto.
The congestion issues we had in December have receded and won’t trouble us again until the market recovers – at which point the Lightning Network may have solved the issue (maybe). Beyond that, the overwhelming hashing power being invested in securing the network makes it almost impossible to mount a 51% attack on the network. The few entities that reasonably could – the owners of the largest mining pools, have incredibly strong incentives to remain honest.
That incentive is predicated on the long-term stability or rise in the price of Bitcoin, however, and according to an analysis by a quantitative analyst at Fundstrat, a market strategy firm based out of New York, 2018 is cutting the miners’ profit clean to the bone.
Majority of all Mining comes from China
Some 81% of the hashing power is coming out of China, where electricity is relatively cheap (And less than fantastic for the environment), but even so, electrical bills burn through an estimated 4,400 USD per Bitcoin mined. $4,400 is still a lot less than the going rate of $6,300/BTC, but when you add to that overhead and the wear and tear of ASICs, the mining costs may reach as high as $7,300 per coin.
$7,300, you may be thinking, is more than the price of buying Bitcoin on exchanges. And so it is. But remember, the electricity cost is only $4,400; the rest of the cost is either overhead and has to be paid regardless of whether mining is happening or not, or has already been invested in ASICs. ASICs that may wear out sooner when in use, but if they sit unused, they are still slowly aging and approaching the day when new and better ASICs are added to competing for mining pools. In other words, even if mining is not profitable, running mining operations at full speed is still less costly than sitting on unused ASICs.
Of course, long-term the amount of mining being done will adjust in the direction of the market price of Bitcoin – mining operations will slow down, or the bleed continue until some of the miners run out of money, and the process is once again profitable for the survivors.
Hashing Power still Rising
But what may be most interesting about the current situation is that hashing power is not standing still or slowly falling – it is rising. As of today Bitcoin mining measures an astronomical 57 exahash – that’s 57,000,000,000,000,000,000 hashes per second. Some portion of that will have to do with worn out hardware being replaced with the newest ASICs, but it is also most certainly the case that some companies are expanding their mining operations.
After all, either the market starts recovering soon, and Bitcoin prices make it profitable to mine once more, or their added hashing power makes it that much more unprofitable for competitors with smaller money reserves, hastening the day when competitors start dropping out.
On the whole hashing power has doubled since May. Some of that is down to superior new hardware in the form of S9 ASICs, but total Bitcoin energy consumption has still risen by ~20%, to a new height of 6.2 GW – more than 150% of the output of the largest nuclear power plant in the US, the Palo Verde, which at three reactors sits at just under 4 GW.
One final thing to note is that Doctor’s calculations assume an average electricity cost for these operations of $0.06/kWh. You can find places where electricity is cheaper than that, though you may struggle to see such a place where the supply is both reliable 24/7 and enough of it is produced to feed a whole mining farm.
Still, the mining pools are notoriously secretive about their cash flows, and it is possible some of these companies are paying less. For them, bleeding prices in the short term may be less than an issue, especially if it ends up killing some of the competition for when the market recovers.
