Bitcoin Miners Aren’t Phased By These Soaring Energy Prices

Bitcoin Miners Aren’t Phased By These Soaring Energy Prices
Jonathan Hobbs

almost 2 years ago4 mins

  • Bitcoin mining uses a lot of electricity – and relative to other industries, bitcoin miners’ energy costs account for a larger share of expenses.

  • But bitcoin miners can set up anywhere in the world, including places where electricity is cheaper and cleaner.

  • The bitcoin hash rate suggests that rising energy prices have not reduced mining demand, which is good for long-term bitcoin investment.

Bitcoin mining uses a lot of electricity – and relative to other industries, bitcoin miners’ energy costs account for a larger share of expenses.

But bitcoin miners can set up anywhere in the world, including places where electricity is cheaper and cleaner.

The bitcoin hash rate suggests that rising energy prices have not reduced mining demand, which is good for long-term bitcoin investment.

It’s no secret that bitcoin mining uses a lot of electricity. And with energy costs soaring, you could argue that more miners will unplug from the blockchain and direct their resources elsewhere. But I reckon the industry can take rising energy costs in stride – and shake off bitcoin’s bad environmental rap at the same time. Yep: this could actually be good for your long-term bitcoin investment.

Why does bitcoin consume so much electricity in the first place?

Mining is a key part of the bitcoin network. As well as producing new coins, it lets you send, receive, and store bitcoin on the blockchain. That’s because bitcoin transactions are grouped together into blocks. And every ten minutes, one of those transaction blocks is permanently attached to the blockchain through the mining process.

Bitcoin mining runs on “proof of work,” where miners compete to solve complex cryptographic puzzles and unlock each block one by one. The first miner to solve the puzzle is awarded freshly minted coins, as well as the fees from every transaction in the block. But given how complicated these puzzles are, they can only be solved with vast computing power – a.k.a. obscene amounts of electricity.

It’s difficult to calculate exactly how much electricity bitcoin mining consumes, but we do know that it’s substantial. The Cambridge Bitcoin Electricity Consumption Index, for one, puts bitcoin’s electricity meter at about 130 terawatt-hours per year – that’s a bit more than the entire country of Norway. That may seem shocking, but Cambridge estimates it’s about the same amount of electricity it takes to mine gold. And unlike gold mining, bitcoin mining doesn’t destroy land or produce toxic waste and acid mine drainage.

Be that as it may, bitcoin’s electricity usage is still running rampant. It’s been trending higher ever since the first block. And the cryptographic puzzles are only becoming more complex – that’s how the network will stay decentralized and secure – meaning they’ll need even more computer power to crack.

Bitcoin annualized electricity consumption estimates. Source: Cambridge Bitcoin Electricity Consumption Index
Bitcoin annualized electricity consumption estimates. Source: Cambridge Bitcoin Electricity Consumption Index

So, are rising energy costs hurting bitcoin miners?

Compared to other industries, bitcoin miners’ energy bills make up a much larger share of their overall expenses. So you’d think that if electricity costs go up, bitcoin miners would suffer more than other businesses. But there’s a lot more to this than meets the eye.

See, in oil drilling, gold mining, and other commodity industries, the location of resources dictates the place of business – and the cost of energy. But bitcoin miners can set up shop anywhere in the world: they’re free to work wherever electricity is the cheapest. And that can mean using wasted, recycled, and more sustainable energy sources – often off-grid.

According to recent studies, that’s exactly what bitcoin miners are doing. The Bitcoin Mining Council’s Q4 2021 survey gathered energy usage data from nearly half of bitcoin miners, and found that 66% of their power came from sustainable energy sources. Based on that data, the survey estimated the total network’s sustainable energy mix at 58.5% – up 1% from the quarter before.

You’re likely to see this trend continue: just like other businesses, bitcoin miners are driven by profits. And since renewable energy sources are usually cheaper, miners will probably keep flocking to them. Plus, governments will increase subsidies for green energy projects, incentivizing a global shift towards green energy. That’ll give bitcoin miners an even bigger basket of cheap and sustainable electricity sources to choose from.

A number of bitcoin mining companies have listed on stock markets in recent years too. If these companies want to boost their share prices with institutional-grade capital, they’ll need to stay as green as possible: institutional investors often have ESG (environmental, social and governance) mandates, which restrict investment in environmentally damaging companies.

That’s a win-win for publicly traded miners: they can seek out cheaper, cleaner energy sources and attract more capital at the same time.

So what does this all mean for the bitcoin price?

Like it or not, electricity consumption is a prerequisite for bitcoin’s success. Without it, network security would falter, rendering the blockchain unusable. But if bitcoin miners can consume a greener energy diet, the network will be a lot healthier for it.

This brings us to the bitcoin hash rate: the total amount of computational resources that miners dedicate to bitcoin mining. The hash rate goes up when miners think it’s easier to turn a profit – that happens when the bitcoin price goes up, or the cost of mining is relatively low.

The chart below shows how the hash rate has continued to climb lately, while bitcoin’s price has dimmed its lights real low. This suggests that rising energy prices have not reduced mining demand for bitcoin.

Bitcoin hash rate vs bitcoin price. Source: blockchain.com
Bitcoin hash rate vs bitcoin price. Source: blockchain.com

And sure, the bitcoin price is down this year. But these are turbulent economic and geopolitical times. And high hash rates accompanied by relatively low prices have often presented long-term opportunities to buy bitcoin. So I’ll be keeping a close eye on this relationship to see how it holds up in the coming months.

If you’d like to go straight to the source, VanEck’s just launched the Digital Assets Mining ETF (Ticker: DAM, expense ratio: 0.5%), which tracks the MVIS Global Digital Assets Mining Index. You could also check out the Valkyrie Bitcoin Miners ETF (Ticker: WGMI, expense ratio: 0.75%) – its bitcoin miner portfolio uses around 77% renewable energy.

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