Bitcoin Mining Does Not Make Money – Bitcoin Magazine
This is an opinion piece by Mickey Koss, an educated West Point with a degree in economics. He spent four years in the infantry before joining the Financial Corps.
I have heard some recycled fears, insecurities and doubts recently about transaction fees on the Bitcoin network that can not maintain the miners, and thus maintain security when block support becomes too low and or disappears. This made me think about how incentives can play out.
In addition to the obvious observation that they assume no growth in network usage and constantly low charges on the basic chain, I think there are two important underlying assumptions that need to be addressed:
- Mining hardware will continue to exist in its current form as stand-alone disposable computers.
- Mining companies will continue to exist in their current form as large, independent companies that must constantly strive for profitability or go bankrupt.
Mining Hardware: One Man’s Trash Is Another Man’s Treasure
The name of the game here is to use waste. In its current form, electric heating elements create heat by using resistors. Resistors resist, change the “flow” of electricity and dissipate the electric power in the form of heat. You mainly use bad electrical conductors to create heat. Seems pretty wasted to me.
When it comes to miners, their main waste product is heat. Imagine the applications you can build using Bitcoin-specific ASICs. I see a future when every stove and water heater that is produced uses ASIC chips as a heating element instead of the traditional electrical resistance types that exist today.
MintGreen in Canada is already doing this on a fairly large scale. They use the waste heat from the miners to heat local businesses such as breweries, sea salt distilleries and even greenhouses.
This completely changes the mathematics of home mining and profitability. When you use dual-purpose applications and utilize the heat that was originally characterized as waste, the applications no longer need to be profitable in the traditional sense.
Use of the latest generation of ASIC chips for heating purposes is not necessarily necessary, nor desirable. Bitcoin mining heating applications, especially at the retail level, simply need to use the same amount of power or less than non-mining competitors. The little bitcoin that is extracted is simply an added benefit of upgrading your system or an incentive for builders to invest in new homes.
Why would you buy a home that wastes electricity by simply heating it? It’s old school. I want a home that heats up and pays me when I heat it up. I want a Bitcoin smart home.
Electrical system explained
To understand the second assumption, you must first understand how electricity is generated. Electricity production capacity consists of three main generation sources: basic, peak and medium load generation. Base load power generates the minimum amount of electricity to satisfy the minimum requirement in the system. Peak load generation is used to meet periods of peak demand when demand increases. It is ramped up and down, making it less efficient and more expensive. Intermediate loads are also a variable source that responds to changes in demand, and builds a bridge between base and peak loads.
If we have variable capacity on hand, it means that we have at least some of the time unused capacity – valuable capital – that is not utilized. What this means is that your electricity costs must not only cover the production costs, but also must subsidize the costs of all the unused but necessary capacity the electricity producers must maintain.
US Energy Information Administration, US Hourly Electric Grid Monitor (source)
Why so much complexity? Because demand is not constant. The graphic above shows the average demand for electricity and how volatile it is, not only by region, but also by season. If a power plant produces too much electricity, it can actually damage the grid, leading to power outages.
There are a few techniques for storing excess energy that pumped hydropower, but they all have limitations such as access to water, space and battery technology. Simply put, when the battery is full, there is nowhere else for the energy to go, which eventually leads to a power outage. This is also the reason why intermittent sources such as wind and solar will probably never be a single power source for the grid. There is simply not enough storage capacity to keep the system running when the sun is not shining or the wind is not blowing.
Bitcoin, of course, fixes this.
Miners do not have to be profitable
Right now we see miners as independent companies, buying electricity in the markets from electrical companies. If the bitcoin price goes down and / or the costs go up, miners are pressured and go bankrupt. It’s a competitive industry, but what if it was not? What if mining became a service instead of a stand-alone business?
Service 1: Elimination of energy sources with variable load
In my humble opinion, the only way forward for a truly sustainable energy system is one based on nuclear power. However, nuclear power is an energy generator for base load; you can not really ramp it up and down. The electricity produced must be consumed or literally wasted by sending it to the ground. So what do we use for variable demand?
My answer is bitcoin.
Instead of building capacity in variable forms – using up a bunch of capital for assets that are only used occasionally – why not build a massive base load of nuclear power and use bitcoin mining as variable demand to even out the power demand curve. It turns the paradigm upside down. Not only do we get a huge source of clean and sustainable energy, we also utilize our entire capacity all the time. The only variable is how much hash-rate the power plant produces during the day.
Meanwhile, bitcoin can be used to utilize the entire network’s energy production capacity. This will increase the power companies’ revenues, and give them more capital to invest and expand infrastructure. Through the integration of bitcoin mining and energy production, bitcoin mining no longer needs to be profitable in the traditional sense; it must simply outweigh the opportunity cost of not producing electricity at all.
Furthermore, the increased utilization means that consumers no longer subsidize unused capacity in their monthly bills. Imagine that the price of electricity freezes or even cuts. At least the power rates do not have to rise as fast. What is good for the goose is good for the gander.
If a clean, sustainable, resilient, reliable and affordable electrical network is your goal, bitcoin is the way to go.
Service two: Air purification
Waste products such as natural gas and methane have been nothing more than an expensive business for some time. All this is starting to change at a rapid pace.
Whether the gases are produced through the decomposition of buried rubbish in a landfill, drilling for oil or excrement from livestock and humans, these gases can now be exploited and make money by using generators to extract bitcoin.
It’s already happening.
ExxonMobil is just one of the companies starting to do this. Natural gas is a by-product of oil drilling and extraction. In many cases, it was simply not economical to bring the gas to market, which forced producers to flare, or worse, vent the gas directly into the atmosphere. The exhaust gas can now be routed into a generator and used for bitcoin mining. It encourages companies to be more careful with that waste gas because it has been turned into a lucrative asset instead of an annoying cost to the business.
Landfills also face the same incentives. When rubbish breaks down below the surface, it produces methane gases. These gases, much like oil producers, were often flared up or vented. With bitcoin mining, methane is now a resource for these companies, motivating them to become better managers, reducing air pollution.
Even human waste can make money with bitcoin mining. Sewage treatment plants usually use anaerobic boilers to break down the solids after they are separated from the bulk of the water they treat. This process produces, you guessed it, methane.
Like the power plant examples, bitcoin waste mining creates a situation where miners no longer need to be profitable. Mining must simply offset the opportunity cost of not extracting. In those situations where the gas can not be brought to market, everything is better than nothing. I think I see a world where gas flaring and ventilation is a thing of the past.
No profit? No problem
Satoshi Nakamoto had to think differently to create a completely different network of money and value. We must now think differently to not only ensure that the network survives, but to ensure that human prosperity continues in the foreseeable future.
There is no shortage of energy, nor should there be. Bitcoin is the incentive that the world needs to become truly innovative to ensure that cheap, clean energy is available to everyone. Bitcoin is flourishing people.
This is a guest post by Mickey Koss. Expressed opinions are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
