How Does The Bitcoin Mining Energy Costs Influence Its Price?

Bitcoin Mining Operations Explained

The industry is flooding with several reports that are drawing attention to the gigantic amounts of energy which are then used for Bitcoin mining operations along with the statistics that are staggering according to Digiconomist website as a Bitcoin country that would rank 64th in the world whereby for overall energy usage. Therefore bitcoin’s annual energy consumption is estimated to be 30 TWh where on a more granular level, approximately 10 US households can be powered for a single day using electricity required for a single Bitcoin transaction. 

Thereby the energy accounts for between 90% to 95% of the Bitcoin mining costs and plays an extremely critical role in determining profitability for the cryptocurrency’s miners. The profitability, in turn, is important to attract more miners and grow the Bitcoin mining ecosystem demand for Bitcoin spirals whereas does the increased cost of Bitcoin translate to higher future prices? 

How Are Mining Energy Costs And Bitcoin Price Related?

It is noted that the energy usage for miners is keenly contingent upon several factors from the availability of cheap and plentiful power to energy-efficient hardware the difficulty of problems is being solved by machines to earn Bitcoin rewards. Where for example a difficult problem is computation-intensive as well as subsequently needing additional energy resources for solving. Through a Forbes post, it was suggested that bitcoin’s seigniorage will surely become unviable unless the mining process becomes more energy efficient.

It was observed over the years that Bitcoin miners have cut back on energy costs thereby moving production to China a country reportedly accounting for 60% of Bitcoin production operations. There are a majority of Chinese Bitcoin mines situated in its Sichuan province where hydropower dominates. 

Another example is Iceland providing naturally cooling Arctic air for overheated systems using geothermal energy with a prominent venue for Bitcoin mining operations. This is happening when those Chinese miners have not provided estimates for Bitcoin production costs, but genesis mining which shifted its mines from China to Iceland estimated that it cost $ 60 for the company producing a single Bitcoin. 

In an article the writer, Adam Hayes has estimated that a cost production model for the Bitcoin and has concluded that technological progress was in the form of faster and more energy-efficient hardware bringing down the market price of Bitcoin. He further noted that real-world mining efficiency increases which are the result of competition with the breakeven price for Bitcoin producers tending to decrease, low-cost producers are competing in the marketplace by offering their product at lower and lower prices. Whereas by now that hasn’t happened and an increasing Bitcoin number has paralleled a jump in bitcoin’s price and the answer to that question is complicated. 

The Reason As To Why An Increase In Bitcoin Production Hasn’t Declined Its Price

With significant improvements in hardware processing power and costs to be sure, there are energy costs that have declined, however, the difficulty levels for Bitcoin mining has increased as the difficulty levels rose consistently over the last year. It is observed that this increases the cryptocurrency’s hash rate as also which is necessary to ensure bitcoin’s security as even though it costs more energy a significantly difficult problem set that further translates to a more secure and robust Bitcoin network. 

According to this, it is in this context that the halving of rewards for Bitcoin mining comes from 25 to 12.5 ensuring that mines have to work harder to earn the same number of bitcoins as earlier. Even if there is speculation it has played a prominent role in driving up prices for the cryptocurrency recent forks within the cryptocurrency have introduced new algorithms requiring less processing power. For example, it is found that when assessing the recent Bitcoin Cash fork it helps adjust the problem difficulty that is solely depending on the hash rate thereby enabling lower power consumption. 

Hereby the net effect is that energy costs still comprise a great deal of the majority component of Bitcoin mining that costs but does exert minimal influence on its price with energy costs associated with Bitcoin mining operations ensuring that it remains a significant barrier to enter the industry.

How Do We Conclude On The Discussion?

Where can we determine if the energy costs significantly influence the cost of the Bitcoin? There are quite a few factors discussed above and still more to be discovered in the future. This brings the need for an energy-efficient hardware system complimenting Bitcoin mining. So miners have to choose intelligently and succeed in finding the right ecosystem comprising Bitcoin. It adds to the profitability of Bitcoin mining while doing away with environmental factors about the mining process. Studies are going on and research is profound with the actual mining options available in the Bitcoin ecosystem.