February 6, 2023

Bitcoin mining and the price of electricity: a new paradigm

Georgy Kikvadze, Executive Vice Chairman of Bitfury, on changing the mining economy.

As of the end of 2019 it is clear that energy has become one ofthe most important aspects of the profitability of bitcoin mining. This is especially noticeable in the context of the conversation about the relationship between equipment efficiency and return on investment.

Until this year, the most important aspect of buildingA successful Bitcoin mining enterprise was opted for the latest and most efficient equipment, and the cost of electricity was in second place. Now the economy has changed.

This is partly due to a slowdown.the effectiveness of new generations of specialized equipment, as well as “crypto-winter”, as a result of which a large amount of relevant equipment was bought and commissioned at a significant discount. This has led us into a new era of bitcoin mining, in which the cost of electricity outweighs the importance of the efficiency of the equipment used.

Let's see why this happens.

Equipment efficiency

In the early years of ASIC mining, every newthe generation of equipment provided a significant increase in efficiency. New generations of chips could be two or even three times more productive than their predecessors. These new generations have benefited from improved semiconductor manufacturing and the use of the best and most mature processes available.

Evaluation of the energy efficiency of mining equipment

: Cambridge Center for Alternative Finance

This trend began to weaken in 2017. New generations of chips still provided an increase in performance, but the difference was not so radical (40–50% compared with 200–300% in previous years). This slowdown in productivity growth, however, went unnoticed against the background of 2017 cryptohaip. The increased interest in cryptocurrencies has become a source of incredible demand for mining equipment. Manufacturers began to place pre-orders for huge numbers of wafers for chips, creating reserves in anticipation of future demand. As a result, when “cryptozyme” arrived in 2018, a large amount of equipment accumulated in the warehouses, which lay there without use and depreciated. Most of it was sold at a significant discount later in 2018, and the remainder was already sold during the summer rally of 2019.

Market Ripening

Mining profitability declined year after year,despite rising Bitcoin prices, due to growing complexity and competition. In 2018, the average income per petaheesh / sec. mining equipment amounted to $ 16,800 / month. By the end of 2019, this figure dropped to $ 5,000 / month, despite an almost twofold increase in the price of bitcoin.

Business logic suggests that if profitabilityproduction is falling, the only way to make a profit is to cut costs. The cost of electricity here is a key factor that can seriously affect the profitability of your company. The uniqueness of bitcoin mining lies in the fact that the algorithm does not care about the price of BTC. It contains the number of coins received by miners in the form of a reward for each block mined. If you have low operating costs, then your business model is more flexible, which allows you to continue mining for a longer time, as well as claim the market share freed by less effective competitors.

The table below compares two-year operating expenses for various mining equipment with different efficiency.

Two-year operating costs for mining equipment by efficiency. : Bitfury

A biennium is a common targetreference point for the equipment life cycle and calculation of the expected return on investment in it. However, equipment can operate - with less profitability - and for a significantly longer time.

When using machines with an industry average60 J / Thes in an area with an electricity cost of about 3 cents / kWh, your operating costs will be approximately $ 32 / Thes.

If you buy more efficient equipment(say, from 40 J / Thes) and if you locate it in an area with an average industry cost of electricity of about 6 cents / kWh, then your operating expenses will increase by about 30 percent, to $ 42 / Thes.

Most impressive if you purchase alreadyalmost obsolete cars with 100 J / Tesh, but the electricity in the place of their operation will cost 2 cents / kWh, then your operating expenses in the next two years will be only about $ 35 / Thesh. Economically, this is more profitable than using much faster cars.

From these examples, it is clear that the cost of electricity has become a key factor for the mining economy.

Success in the new Bitcoin mining ecosystem

In a nutshell, new entrantsBitcoin mining does not need to worry about using only the latest generation of machines. As we mentioned above, the evolution of technology has slowed, and this means that the equipment will have a longer service life (as significant equipment updates will occur at longer intervals).

In the long run, we expectthe energy efficiency of new miners will increase slowly, with an interval between the release of new generations of equipment of 2.5 years or more. Moreover, we are already seeing less energy-efficient updates. For new entrants, this implies a wider range of viable equipment choices. In 2016, buying the miners of the previous generation seemed unthinkable; now they often offer an attractive alternative to more expensive and most “advanced” equipment.

Miners also need to pay more attention.macroeconomic and regulatory factors. Investing in mining-unfriendly jurisdictions can be unprofitable, regardless of the technological level, if local authorities are hostile to cryptocurrency mining in the long term.

In summary, the smart mining strategy is no longerinvolves chasing after each new release of equipment. Instead, potential bitcoin miners should think first of all about the cost of electricity in the long term in mining-friendly jurisdictions, thus adapting to a new reality in which mining is a longer-term investment.