Bitcoin production costs: reviewed

Bitcoin mining is the process of providing hashrate to the bitcoin network and receiving a bitcoin block reward for that. In this article we want to look at the costs for receiving the bitcoin reward and the profit margin. Last year that margin was very small as we discussed here, but we wanted to review the margin over time in this article.

There are, of course, multiple factors impacting the production costs. For one, hardware needs to be bought and electricity, storage and maintenance costs added. After that, the production is relatively straightforward as the block reward depends on the provided hashrate over the global hashrate multiplied by 6.25 BTC per block (about every 10 minutes) at the moment.

Model

Efficient miners receive electricity for about 5 ct/kWh and then need to finance their hardware, staff and storage which will usually take an efficiency of about 60% away from their production (see research here). Since the bitcoin mining hardware changed substantially from CPU to GPU to ASIC, we think the best estimator is the total energy consumed by the miners over time, for example provided by Cambridge Bitcoin Electricity Consumption Index. Given the electricity consumption, we can calculate the bitcoin production cost as:

Daily BTC Cost = Daily power demand (GW) * Power cost (GWh) * 24h * Efficiency / Daily BTC reward (BTC)

Given the bitcoin electricity consumption, the electricity cost of 5 ct/kWh and efficiency of 60%, the total bitcoin production cost for 12/7/21 can be estimated to $28,862,385.71 USD. On 12/7/21 also 900 bitcoins (6.25 btc for every 10 minutes) were mined and therefore the bitcoin production cost can be estimated at $32,069.32 versus the traded bitcoin price of $49,253.86. Hence the margin on that day was $17,184.54, which the miner collected after accounting for all their cost of hardware, electricity, maintenance and storage given our assumptions.

Results

We have also calculated the production cost using this model since 7/18/2010 shown in the graph below. In fact the bitcoin market price (red line) was almost always above the bitcoin production cost (blue line) and therefore the bitcoin mining companies were profitable most of the time. There were only two noticeable periods that they were making daily losses. These periods were in 2016 and 2020, where the energy consumption increased dramatically in a short period of time. Although the bitcoin price was rising as well, this did not offset the increased production cost given our model.

Otherwise bitcoin mining was mostly profitable, which also increased sometimes dramatically such as periods at the end of 2017 and into 2021. Overall the average margin was $1,934.60 per bitcoin since inception of the graph.

Summary

In summary, we have estimated the bitcoin production cost using the global energy consumption for bitcoin mining and given electricity costs and efficiency. Interestingly, the bitcoin price stayed mostly above the production cost with a current margin of $17,184.54 on 12/7/21 for every produced bitcoin.

Given that market participants can either produce or buy bitcoin on the secondary market, this would suggest that more market participants will buy hardware and drive up the global hashrate and therefore the production price. Overall, the production cost remained mostly below the traded bitcoin prices, which makes sense as producing bitcoins is a large effort and includes long-term investments as well as building up a team and knowledge.

Of course the production costs vary dramatically depending on different hardware, electricity costs and operational efficiency. However, we have taken into account data from some of the most efficient miners that are also listed on major global stock exchanges.

Overall the bitcoin mining margin has varied largely since 2010, but it seems like the business remains efficiently inefficient to attract investment and be able to earn a margin, while on average the margin cannot stay too large before the global hashrate increases and the production cost catch up. We can also not conclude wheter the bitcoin price predicts the costs or vice versa and therefore did not determine the causal relationship between the two variables.