The Cost of Bitcoin

How the structure of the ‘proof of work’ has driven the price

Bitcoin continues to provide interesting data on the way value is determined. As a reminder the Bitcoin algorithm automatically adjusts its ‘proof of work’ calculation system so that a ‘winner’ is selected about every 10 minutes. So no matter how much computing horsepower is thrown at the problem, Bitcoin alters the difficulty of the problem to hit the 10 minute target every couple of weeks.

Despite this, competition deploys more and more physical computing power to the Bitcoin system, drawing ever more power to run the network.

I found a link today describing the cost of power to mine Bitcoin back in 2011 using the best technology of the day, and I thought it would be fun to re-run the calculation using an example of the best available technology today (the Antminer S9). The results are as follows:

Apart from realising that the Bitcoin network has gone from consuming 62kWh every 10 minutes to 167MWh (yes that is a GW of power), the running cost of electricity used to create a block has stayed a relatively constant percentage of the price of Bitcoin in US dollars. More so when you consider that the cost of power in the network is available at industrial prices.

Once again this demonstrates how the effort of mining Bitcoins feeds back into the value in USD terms because the real resources required to run the network are not available in the Bitcoin currency zone. One of the functions of taxes and fees in a proper currency is to ensure a wide availability of real goods and services for sale in the currency.

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