Mining
Will the price of Bitcoin recover?
Historically, Bitcoin was seen as a hedge against potential economic downturn; operating outside of market cycles and offering investors an opportunity to diversify their portfolios. More recently, however, we have seen that Bitcoin – now considered an asset class by many – is inextricably linked with the macroeconomic environment. The price of Bitcoin is now expected to correlate with the wider markets – a recovery in the price of other currencies and indices may return bullish sentiment which, in turn, should then filter into crypto as an asset class.
There are also other factors to consider, such as halving, which will see rewards for miners continue to decrease. This should, in theory, see demand outpace supply, creating a more bullish market for Bitcoin in particular. It’s always difficult to predict the price movements of cryptocurrencies but, for Bitcoin at least, there are a number of factors that would indicate that, once the markets recover, we should see the price begin to go up.
A lot of energy goes into mining
It’s no secret that Bitcoin mining consumes a lot of energy. So much so that Elon Musk famously reneged on his promise to allow Tesla cars to be purchased using the currency as it was at odds with his vision to create a more sustainable car industry. Not only does verifying a transaction consume a lot of energy, it also generates a lot of heat. In fact, a big percentage of energy usage is allocated to the cooling systems that are needed to cool down the “rigs” that mine Bitcoin. While the rigs do have built-in fans, larger mining operations will often have hundreds of rigs in a single room, which require external cooling.
On a macro-level, energy consumption will also continue to grow as the price of Bitcoin begins to increase. Bitcoin mining is an incredibly competitive industry, with comparatively very high barriers to entry. Revenue for miners is determined directly by bitcoin price; as the block reward for validating transactions is fixed, it is the price of Bitcoin that governs that value of that reward.
Can Bitcoin miners stay profitable?
This question rests on a double-edged sword. Inflated energy prices have the ability to cripple the industry; we only need to look at Compass Mining’s operations needing to shut down because of high energy costs in Georgia.
When profit margins do begin to rise, this demand for energy will only increase. Estimates vary, but a recent report from JP Morgan puts the price of mining one single Bitcoin at approximately $15,000; down from previous estimates of $20,000. This is largely due to many of the more inefficient miners failing to survive with Bitcoin prices decreasing and energy prices increasing. This new line in the sand represents a very real benchmark for efficiency for those Bitcoin miners that did make the cut.
Profitability is now being squeezed on both sides; the price of Bitcoin is at a relatively low level, and electricity prices are on the rise. It becomes a case of “last man standing” as those miners under pressure are turning off their machines one by one. This decrease of competitors in the market is lowering the hashrate for Bitcoin too; a metric which measures the computing power active on the network, and a barometer to measure current mining difficulty.
A decrease in hashrate will, however, eventually lead to more participants in Bitcoin mining as rewards are easier to come by; thus creating the bottom end of the cycle which should see an increase in participants which then should drive profitability back up.
The role of renewable energy in Bitcoin mining
Across Europe we are seeing the seismic consequences of a shortage in supply of traditional energy such as gas and oil. Renewable energy hasn’t escaped unscathed from this imbalance between supply and demand, however we have seen increased investment in infrastructure. As a result, renewable energy is uniquely placed in that capacity for energy sources such as wind, solar and hydroelectric continues to increase, right as access to traditional energy is, quite literally, being switched off.
Surprisingly, given the volatility of energy prices in 2022, a recent study by the University of Cambridge found that only 30% of miners chose which coin to mine based on the cost of energy to do so. Even for those miners who are seeking cheaper energy, this doesn’t always equate to cleaner energy. History tells us that Bitcoin miners would rather look to source (traditional) energy from cheaper regions, or look to acquire mining rigs at cheaper prices. The latter isn’t without its shortcomings; during the 2020 halving, a lot of old models had to be shut down as mining was no longer profitable with this technology.
It wouldn’t be a complete surprise to see that, three to five years down the line, Bitcoin mining in Europe will only be approved or allowed under the condition that it uses only abundant renewable energy. It is also safe to assume that heat recovery efforts would become an integral and mandatory part of every Bitcoin mining operation. As pioneers of zero-carbon Bitcoin mining, this is something we are already actively engaged in at COWA, and we hope that the industry as a whole soon follows suit.
