What is the future of Bitcoin mining?

Will the price of Bitcoin recover?

Historically, Bitcoin was seen as a hedge against potential economic downturn; operates outside of market cycles and provides investors with an opportunity to diversify their portfolios. Recently, however, we have seen that Bitcoin – now considered an asset class by many – is inextricably linked to the macroeconomic environment. The price of Bitcoin is now expected to correlate with the broader markets – an improvement in the price of other currencies and indices could return bullish sentiment which should in turn filter into crypto as an asset class.

There are also other factors to consider, such as halving, which will see miner rewards continue to decrease. This should, in theory, see demand outpace supply, creating a more bullish market for Bitcoin in particular. It is always difficult to predict the price movements of cryptocurrencies, but at least for Bitcoin, there are a number of factors that suggest that once the markets have recovered, we should see the price start to rise.

A lot of energy goes into mining

It’s no secret that Bitcoin mining uses a lot of energy. So much so that Elon Musk famously reneged on his promise to allow Tesla cars to be bought with the currency, as it conflicted with his vision of creating a more sustainable car industry. Not only does it take a lot of energy to verify a transaction, it also generates a lot of heat. In fact, a large percentage of energy use is allocated to the cooling systems necessary to cool the “rigs” that mine Bitcoin. While the rigs have built-in fans, larger mining operations will often have hundreds of rigs in a single room, requiring external cooling.

On a macro level, energy consumption will also continue to grow as the price of Bitcoin begins to rise. Bitcoin mining is an incredibly competitive industry, with relatively high barriers to entry. Earnings for miners are directly determined by the bitcoin price; as the block reward for validating transactions is fixed, the price of Bitcoin governs it value of that reward.

Can Bitcoin Miners Stay Profitable?

This question rests on a double-edged sword. Inflated energy prices have the ability to cripple industry; we only need to look at Compass Mining’s operations that have to be closed due to high energy costs in Georgia.

As profit margins begin to rise, the demand for energy will only increase. Estimates vary, but a recent report from JP Morgan estimates the price of mining a single Bitcoin at approx $15,000; down from previous estimates of $20,000. This is largely due to many of the more inefficient miners not being able to survive with falling Bitcoin prices and rising energy prices. This new line in the sand represents a very real measure of efficiency for those Bitcoin miners who managed to make the cut.

Profitability is now under pressure on both sides; the price of Bitcoin is at a relatively low level, and electricity prices are on the rise. It becomes a case of “last man standing” as the miners under pressure turn off their machines one by one. This decrease of competitors in the market lowers the hashrate of Bitcoin as well; a metric that measures the computing power active on the network, and a barometer to measure current mining difficulty.

However, a decrease in hashrate will eventually lead to more participants in Bitcoin mining as rewards are easier to obtain; thus creating the bottom end of the cycle which should see an increase in participants which should then drive profitability back up.

The Role of Renewable Energy in Bitcoin Mining

All over Europe we see the seismic consequences of a lack of supply of traditional energy such as gas and oil. Renewable energy has not escaped unscathed from this imbalance between supply and demand, but we have seen increased investment in infrastructure. As a result, renewable energy is uniquely positioned in that the capacity of energy sources such as wind, solar and hydropower continues to increase, just as access to traditional energy is, quite literally, shut down.

Surprisingly, given the volatility of energy prices in 2022, a recent study from the University of Cambridge found that only 30% of miners chose which coin to mine based on the energy cost of doing so. Even for those miners seeking cheaper energy, this is not always the same as cleaner energy. History tells us that Bitcoin miners will rather look to source (traditional) energy from cheaper regions, or look to acquire mining rigs at cheaper prices. The latter is not without its shortcomings; during the 2020 halving, many old models had to be discontinued as mining was no longer profitable with this technology.

It wouldn’t be a complete surprise to see that, three to five years from now, Bitcoin mining in Europe will only be approved or allowed on the condition that it only uses plenty of renewable energy. It is also safe to assume that heat recovery efforts will become an integral and mandatory part of every Bitcoin mining operation. As pioneers for zero-carbon Bitcoin mining, this is something we are already actively engaged in COWAand we hope that the industry as a whole will soon follow suit.