CoinShares Highlights the State of Renewables and Profitability for Miners

Research published in the journal Joule provides evidence that Bitcoin mining accounts for 0.2% of global electricity consumption. This research comes just a week after CoinShares put forward evidence that 74% of bitcoin mining is powered by renewable energy sources.

Quick take;

  • Research studies suggest that mining on the Bitcoin network consumes approximately 41 TWh to 45.8 TWh annually
  • CoinShares estimates that 74% of bitcoin mining is powered through renewable energy sources
  • At current prices, there is strong evidence that bitcoin miners are highly profitable even if they are operating with outdated hardware at less than optimal electricity rates

Research published this week on the 12th of June in the energy research journal Joule has estimated the global electricity consumption of the Bitcoin network to be 45.8 TWh. Such a figure represents 0.2% of global electricity consumption. The study, completed by Stoll et al. (2019), used data included in the IPO applications of major mining hardware companies to derive their figures.

However, the accuracy of the findings has been scrutinised by researcher Jonathan Koomey and the paper has also been published just a week after CoinShares released their bi-annual report of the mining industry. Findings from the CoinShares report presented evidence that 74% of bitcoin mining operations are being powered by renewable energy sources.

State of Renewables

The estimated percentage of bitcoin miners powering operations through renewables was derived by CoinShares through analysing the geographic distribution of miners and cross-referencing this with data on the prevalence of renewable energy use in each location. The renewables penetration in each jurisdiction was based on research completed by institutions such as Morgan Stanley and the EIA.

When the percentage of hash rate estimated to be in each location was multiplied by the reported renewables penetration percentage in that location, the final figure estimated that 74.1% of mining was powered by renewables. This is a decline from the 77.6% estimate in the November 2018 report.

CoinShares estimated the annualized electricity consumption of Bitcoin mining to be approximately 41 TWh, roughly 10% lower than the estimate put forward in the Stoll et al. (2019) paper. CoinShares noted the following regarding the electricity consumption of the Bitcoin network:

the Bitcoin mining network will consume as much electricity as the market is willing to sell it in return for the total value of the block reward… This means that increasing the efficiency of mining gear has no impact on the total electricity draw of the network”

CoinShares May 2019 Report, p. 6

Profitability for Miners

Another area explored in the CoinShares research is whether miners are currently profitable. CoinShares estimate how much it costs miners to produce one bitcoin based on capital expenditure and operating expenditure assumptions at varying electricity costs and depreciation schedules.

Capital expenditure assumptions were derived by estimating the volume weighted average of the price paid by current operators of the hardware. Christopher Bendiksen (@C_Bendiksen), head of research at CoinShares, informed MinerUpdate that the estimates of the prices paid by current operators were made through a mix of researching articles, researching message boards, and directly communicating with miners.

At an eighteen-month depreciation schedule with an electricity rate of 5 cents per KWh, miners are believed to be producing one bitcoin for approximately $5,600. For more well-capitalised miners that have availed of discounts on accumulated hardware and accessing the lowest electricity rates, it is put forward that these miners may be producing one bitcoin for less than $3,500 at a two to three-year depreciation schedule. The takeaway here is that there is strong evidence to suggest that miners are currently highly profitable with the recent increase in prices playing a significant role.

“Considering the recent relief rally in Bitcoin prices, we believe the mining industry is currently highly profitable, with both previous-generation hardware-though only at relatively cheap electricity costs (<¢5/kWh) – and next-generation hardware – even at relatively expensive electricity costs (>¢5/kWh) – currently able to generate a positive ROI”

CoinShares May 2019 Report, p. 4

Although current conditions are benefitting miners using a wide variety of hardware models, those utilising outdated hardware are more vulnerable to price decreases as revealed in research by TokenInsight. This was demonstrated last week when miner profitability decreased as a result of price drops.

The following table published in the CoinMetrics newsletter on June 11th showed the week-on-week change in mining revenue. Over the preceding week, the price of bitcoin had declined from opening at $8,735 on June 3rd to opening at $7,642 on June 10th.

Prices have since recovered and are currently trading at $9,176 at the time of writing on the 17th of June. Throughout 2018, downward price movements put pressure on miners that were not operating at economies of scale with a market shakeout taking place whereby more well-capitalized miners acquired hardware from miners exiting the market. CoinShares noted a macro trend of a “large number of bankruptcies, liquidations, and ownership transfers of mining units, often to more well-situated and capitalised miners”. In line with the cyclical nature of markets, the opposite is now taking place with miners who are currently utilizing outdated hardware at less than optimal electricity costs materializing a profit. The difficulty level has been adjusting to reflect these more lucrative conditions for miners with the last adjustment resulting in all-time highs being observed for the difficulty level.