Complex Made Simple

Mining high priced bitcoins gaining energy and losing power

Miners are busy minting new coins trying to take advantage of the crypto’s elevated price, which is way above the breakeven price of $5-6K needed to mine the coin. For power networks, it's a dilemma, and here's why

Iran’s combination of cheap electricity and high inflation has made it an ideal destination for mining A global chip shortage is choking the production of machines used to “mine” bitcoin mining currently consumes 77.78 terawatt-hours per year

Bitcoin’s price has leveled off at around $30k, but not before taking the world on an incredible ride.

And despite this price correction period, miners are busy minting new coins trying to take advantage of the crypto’s elevated price, which is way above the breakeven price of $5-6K needed to mine the coin.   

For power networks, this could be a problem, and it’s already being felt in Iran.

Coin mining cause behind Iranian power blackouts 

Government officials say that bitcoin mining is partly to blame.

Iran’s state-owned electricity firm Tanavir recently announced that it had shut down a large Chinese-Iranian-run cyber currency center in the southeastern province of Kerman because of its heavy energy consumption.

But Iranians in the bitcoin industry reject the government’s accusations, saying the industry is being blamed for a broader problem.

“The miners have nothing to do with the blackouts,” Ziya Sadr, a cryptocurrency researcher in Tehran, told The Washington Post. “Mining is a very small percentage of the overall electricity capacity in Iran.”

Bitcoin has been welcomed as an alternative banking system to bypass U.S. sanctions.

Iran’s combination of cheap electricity and high inflation has made it an ideal destination for the energy-intensive process of creating, or mining, digital currencies like bitcoin.

Mining units of digital coins is a potentially lucrative business that’s taken off in recent years in Iran, as firms in countries such as China and Russia have partnered with Iranian entrepreneurs to create bitcoin “farms” made up of specialized computers.

Chips are down, mining machines’ costs are up  

A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of computer equipment soaring as a surge in the cryptocurrency drives demand.

The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.

Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process that produces newly minted bitcoins, or a “block” of transactions.

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.

Bitcoin is up some 700-750% from its March 2020 low of $3,850, depending on which recent day of the month you choose.

Demand for rigs has boomed as bitcoin prices soared. 

Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”

“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September 2021.

Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according to the company’s website.

A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.

Bitcoin and energy

Bitcoin is computational strength.

Miners compete with one another so that their computers are chosen to record the most recent transactions in the next block that will be included in the network. And the best way to win this competition is by solving the algorithms as many times as possible (before someone else reaches the correct result, called a “nonce”).

As it takes trillions of attempts to guess the correct nonce, only those who have more computational strength to win this competition will be awarded Bitcoin as a reward for their efforts.

Miners must burn real computing energy with each attempt and find the nonce to have a chance to win Bitcoin. As electricity to supply miners is not free, proof-of-work, therefore, generates a financial cost for Bitcoin mining.

Cambridge University has been operating a live Bitcoin network energy estimator since 2015.  

Hash power applied to the network is usually measured in the number of hashes per second that the network is performing as part of the mining process.

According to Digiconomist’s Bitcoin energy consumption tracker, mining currently consumes 77.78 terawatt-hours per year. That is comparable to the total energy consumption of countries such as the Netherlands and the Czech Republic.

Bitcoin is an energy hog, but… renewable

Recent research published by CoinShares Research found that most of the electricity consumed to mine Bitcoin, in fact, comes from clean sources, such as wind, solar and hydroelectric.

To be more specific, 60% of global mining takes place in China, where Sichuan alone produces 50% of the global hash rate, with the remaining 10% divided more or less evenly among the Yunnan, Xinjiang provinces, and Mongolia.

During the rainy season, Sichuan’s electricity prices are among the lowest in the world, making it one of the most attractive global mining regions available.

On the other hand, of the remaining 40% of mining companies, 35% of the global hash rate production is equally divided among Washington, New York, British Columbia, Alberta, Quebec, Newfoundland and Labrador, Iceland, Norway, Sweden, Georgia, and Iran.

In this context, the research concludes that the Bitcoin network obtains 74% of its electricity from renewable sources, making it more focused on clean energy sources than almost all other large-scale industries in the world.