Bitcoin

Bitcoin Prices Are Affected by Several Factors Besides High Costs of Mining

Bitcoin, one of the most popular cryptocurrencies, has always been in the news whether for the right reasons or the wrong ones. This is because Bitcoin has experienced unprecedented growth over the last decade and has drawn attention over various issues like security, anonymity, stability, and volatility of the price. One of the major issues related to Bitcoin’s price has been the cost of energy required in its mining, which is required in a very high amount.

BITCOIN AND ENERGY CONSUMPTION

If one looks at the statistics provided by the Digiconomist, a country that uses Bitcoin would have an average global rank of 64 in overall energy consumption. The relation between energy costs of mining and Bitcoin price has always been talked about as miners have been trying to reduce energy costs for quite some time now. The consumption of energy depends on various factors like availability of economic and sufficient power, to energy-efficient hardware to the complexity of problems being solved by machines to earn Bitcoin rewards. For instance, computation-intensive is a relatively complicated problem and energy usage for its resolution will be higher than an easier one. The difference in the value and cost of production of Bitcoin i.e., seigniorage, has to be made viable; the cost of mining has to be reduced.

WHAT STATISTICS HAS TO SAY ABOUT ENERGY CONSUMPTION

In order to keep track of the energy consumption of Bitcoin, the Bitcoin Energy Consumption Index was created, which has also raised concerns about the proof-of-work algorithm. According to digiconomist.net, “Ever since its inception, Bitcoin’s trust-minimizing consensus has been enabled by its proof-of-work algorithm, the machines performing the work are consuming huge amounts of energy while doing so.” The energy consumed by Bitcoin annually is estimated at around 30 TWh or terawatt hour which is equivalent to a sustained power of 114 megawatts for a one year period. In other words, almost 10 U.S. households can be run for one day, on the energy required for one Bitcoin transaction.

As much as 90% to 95% of energy, mainly electricity, accounts for the cost of Bitcoin mining and therefore is a decisive factor in the number of profits earned by cryptocurrency miners. Profitability is an important factor as it determines whether other miners would be attracted to create a robust and sustainable Bitcoin mining ecosystem to cope with the increasing demand for bitcoins. The data from digiconomist says that Bitcoins’ current estimated annual electricity consumption is 73.12 Twh, minimum annual electricity consumption is 47.8 Twh; currently, annual global mining revenues are approximately $4.92 billion, estimated global mining cost is $3.65 billion, and thus current cost percentage is 74.21%.

WHY BITCOIN CONSUMES SO MUCH ENERGY?

The energy footprint per transaction is 654 KWh, and Bitcoin’s electricity consumption as a value of the world’s electricity consumption is almost 0.33%. According to estimates, more than 6 million US households can be powered by Bitcoin’s total energy consumption. The question that arises naturally is why does Bitcoin consume so much power, where the annual energy consumption of Bitcoin is equal to that of the Czech Republic with a population of 10.6 million people. It is said that “even though bitcoin solely exists in digital zeroes and ones, the computers that run the network are huge energy hogs.” Since Bitcoin is not regulated by a centralized system, it is the distributed ledger technology or blockchain that regulates it, where “every bitcoin transaction is tracked in a public ledger spread across thousands of computers.”

The transactions are grouped into blocks, and verifying the blocks is a difficult process for which the network incentivizes people to contribute computing power, and Bitcoin rewards are given to those who verify the blocks. This process is highly competitive and has pushed the levels of energy consumption exponentially especially with the demand to develop enhanced computer hardware for efficient cryptographic solutions.

RECENT COURSE OF ACTION

In order to deal with the increasing costs on energy, many miners have moved the production to China, where almost 60% of global Bitcoin operations occur, especially in the Sichuan province dominated by hydroelectricity. Similarly, Iceland, with its cool Arctic air and geothermal energy, serves as a preferred location for Bitcoin mining. Adam Hayes, an Investopedia writer, had predicted “a cost production model for bitcoin, and concluded that technological progress, in the form of faster and more energy-efficient hardware, would bring down the market price of bitcoin.”

PRICE OF MINING, ONE AMONG MANY FACTORS AFFECTING BITCOIN PRICE

Bitcoin prices are, however, affected by several factors, other than mining energy costs. For instance, they are influenced by the supply of the Bitcoins and their demand in the market. It also depends on the number of other cryptocurrencies like Ethereum, Litecoin, etc. competing with Bitcoin and the crypto exchanges where the trade takes place. Therefore the cost of production which includes the cost of energy used for mining is one of the several factors that finally affects the price of Bitcoin. The production and price mechanism of Bitcoin is different from those of other produced goods and hence does not depend on the cost of production only. As high amounts of energy are required for production; producers have also started the use of renewable energy resources especially in the face of the growing concern of energy conservation and global warming. Even online casinos are using bitcoin mining for top casino bonus, keeping their players more entertained. A recent report suggests that the electricity used by Bitcoin comes mostly from clean energy sources. However, this does not negate the fact that Bitcoin production does use a good amount of energy, but its prices depend on a host of factors other than the cost of mining.

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David Cox

David is a finance graduate and crypto enthusiast. He projects his expertise in subjects like crypto and Blockchain while writing for CryptoNewsZ. Being from Finance background, he efficiently writes Price Analysis. Apart from writing, he actively nurtures hobbies like sports and movies.
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