As the bear market continues, discussions about Bitcoin’s demise are increasing. Thanks to CoinShares, a British crypto-asset investment company who releases bi-annual research on crypto mining, we now can shed some light on the Bitcoin death spiral FUD.
For those of you who are unfamiliar with the FUD surrounding Bitcoin’s incoming death spiral, essentially it is a debate about the price per Bitcoin in which Bitcoin mining is no longer profitable for the miner, which would likely mean the discontinuance of mining. This would lead to an implosion of the network as more and more miners leave the network, leaving the network insecure and possibly causing crypto as a whole to collapse.
The death spiral idea assumes that there is some universal mining cost per Bitcoin that is undesirable for all miners. This idea does not consider such things as the risk/reward considerations of the miner, the different costs of mining in different areas, or the use of renewable energy for mining. CoinShare’s new research on Bitcoin mining offers many insights that often go unconsidered in the death spiral debates.
The introduction of the paper estimates that the current cost to create each Bitcoin is $6,800, which assumes a standard price per kilowatt hour (KWh) of ¢0.5/kwh. This cost of $6,800 is obviously much higher than Bitcoin’s current value, so the paper hypothesizes that “the average miner is either: running at a loss and unable to recover [their Capital Expenditure], mining at electricity costs closer to ¢3/KWh, depreciating mining gear over 24-30 months, or paying less for mining gear than our estimates.” The paper chooses to contextualize the second point and provides some encouraging perspectives on renewable energy uses and the advantages it may have for Bitcoin miners.
Geography of Bitcoin Mining
The paper estimates that around 60% of Bitcoin miners are in China. 80% of these Chinese miners are mining in the Chinese province of Sichuan. The paper explains that this is no coincidence since Sichuan is home to the highest production of renewable energy in the world. Most of the other Bitcoin miners are located in the pacific northwest region of the United States where there is also a large amount of renewable energy being produced.
Environmental Impacts of Bitcoin Mining
According to the paper, 77.6% of the energy used for mining Bitcoin comes from renewable energy sources. This means that mining Bitcoin is greener than most other large-scale industries around the world. The paper even goes as far as to suggest that Bitcoin mining may be inspiring the creation of more renewable energy facilities. While the use of renewable energy usually costs about same as using non-renewable energy, the paper describes that some issues, such as Curtailment, could not only lessen the price of Bitcoin mining but perhaps even further incentivize Bitcoin mining.
One of the most interesting parts of the CoinShares article is the mention of Curtailment. Curtailment is rarely taken into consideration when discussing Bitcoin’s energy cost and usage. Curtailment in this context is a term for the over-generation of renewable energy, which holds consequences for electricity companies such as overloading the power grid. High curtailment rates are usually seen in places with large amounts of renewable energy production whose energy stores are not used up by the locals. Curtailment is commonly seen in Northern and Western China where the Chinese have built infrastructure to make the cities less crowded, but do not have enough residents in the area to use all the produced energy. Curtailment is also common in the western US. Why is this important to Bitcoin mining you may ask? It is important because energy companies need to prevent Curtailment. This means that they can and may currently be offering users of surplus energy supplies lower energy prices, or perhaps even be paying the miners to use the energy for the moment, thus lowering the cost to produce a bitcoin and incentivizing Bitcoin miners to come to these regions.
Due to the abundant production of renewable energy in places like China and the western United States, where the majority of Bitcoin miners are located, and issues like curtailment, it is unfair to assume that there is some precise price point in which Bitcoin will enter a death spiral due to unprofitability. The network is clearly still running, so miners do seem to be comfortable continuing to mine at the moment. They could be mining at a loss, they could not, it all depends on what their energy/hardware costs are, and as explained above this can vary based on electricity surplus.