Where is the money in Bitcoin mining?
An in-depth (peer-reviewed) overview of the bitcoin mining business.
In the five years after it broke the $5 value (2012–2016), the Bitcoin network hash rate increased over 300,000 times. This was spurred by an arms race of miners competing for the newly minted coins with rapidly evolving mining hardware.
The over two billion dollar (+$2,000,000,000) of bitcoin revenues did not end up enriching the miners, though. Our research suggests most money flowed to the hardware manufacturers and energy companies.
While many people deemed this weird digital currency a dead project, the publicly available data clearly showed a still vibrant and growing network. Hash rates were increasing, companies emerged solely focusing on providing specialized hardware and the bitcoins were still bought far above the $0 some people assumed it to be worth. The data suggested people were still competing over these newly minted bitcoins. I had to find out what was going on here. (in cooperation with two associate professors at the Vrije Universiteit Amsterdam) This research continued after completing my Masters and was just published in the peer-reviewed journal Electronic Markets.
By collecting a lot of data, we estimated which hardware was purchased and for how long to hardware remained profitable (mining rewards higher than the energy cost). We reverse engineered how much money was invested amd how much value in bitcoin this created.
IN SHORT
We estimate that between 2012 and 2016:
- Two billion dollar of bitcoin was mined ($2,007,950,000, based on daily price)
- The miners ran a communal deficit of approximately $558 mln at an energy cost of $0.12 per kWh. An energy price of $0.03 per kWh is required to run a small profit.
- Approximately $2.1 bln was invested in hardware. (of which $330 mln was still operational at the end of the measurement period)
- Bitcoin hash rate increased by a factor 347,000
- Electricity costs increased rapidly and amounted to almost 900 million dollars.
- The estimates of energy consumption of the network are in line with De Vries (2018) and Bitcoin Energy Consumption Index(BECI).
- Payback time for hardware was usually between 100 to 300 days, but could be as short as three days. However, his time was often too short to earn the investment back before the mining ceased to be profitable due to increased network hash rate
The rapid evolution of mining hardware leads to a very short window of profitability for mining hardware to get a positive return on investment and an unsustainable increase in the energy demand of the network. This makes the business of bitcoin mining a very risky one, as it requires a large investment upfront and the profitability of the purchased hardware can be cut very short when a more powerful and energy efficient generation of miners is released.
For bitcoin mining to be a sustainable business (in an economic sense), it requires one or several of the following:
- Very low energy price (below $0.04 per KwH)
- An increase in bitcoin price (2017–2018 peak was not in our data period)
- Increased transaction fees
- More efficient consensus mechanism like Proof-of-Stake to counter decentralization that results from high upfront investments and risk.
What do you think about this? A clap or share is much appreciated!
References:
Derks, J., Gordijn, J., & Siegmann, A. (2018). From chaining blocks to breaking even: A study on the profitability of bitcoin mining from 2012 to 2016. Electronic Markets 28(3).
https://link.springer.com/article/10.1007/s12525-018-0308-3
