Bitcoin’s Cost of Production – All You Need to Know!

The world’s most popular cryptocurrency, Bitcoin, has always been the talk of the town, mostly for its ever-rising value. In January 2021, the Bitcoin price went over the $40,000 threshold for the first time. Though it gave investors a reason to smile, the historical trends suggest a possible immediate burst of the bubble as was the case in 2017. However, even Bitcoin’s unpredictable nature could not stop it from attracting investments.

In addition to the potential of impressive returns on investments, investors benefit from transparent, secure, and low-cost Bitcoin transactions. With no regulatory authority to back and decentralized design impossible to hack, Bitcoin undoubtedly rules the crypto empire. Those who closely follow the crypto market are aware of the ups and downs in Bitcoin price, but this article intends to help you understand the cost of Bitcoin production.

Bitcoin Price And Its Marginal Cost Of Production

While it is also a fact that Bitcoin gains value from speculative price movements, very few know about the cost involved in its production. Various statistical models have shown that Bitcoin’s cost of production determines its prices. Many experts use this hypothesis to claim that if the cost of production is kept out of the equation, the value of Bitcoin will be zero.

The creation of Bitcoin is known as mining, and those who create it are called miners. Miners are a network of people or computers that engage in cracking a complex mathematical puzzle. The time taken to solve a puzzle is set at 10 minutes regardless of how many miners are attempting this.

The mining of Bitcoin consumes an unimagined amount of electric power. Mining becomes a power-intensive process when the Bitcoin price rises. In simpler words, higher Bitcoin price leads to more transactions over the network, which demands more computational effort and consumes more power. Multiple pricing models have been proposed to quantify the marginal cost of Bitcoin output and refute the arguments that its worth is zero.

1. Vector Auto-Regression (VAR) Model

The VAR model compares the observed price of Bitcoin with the modeled price for a certain period. It helps understand if the Bitcoin price was efficient from the production standpoint and that increased volatility and bubbles make up the marginal cost of production.

2. Stock To Flow (S2F) Model

The S2F model compares the historical and future value of Bitcoin with its scarcity. It projects the only possibility of Bitcoin price dropping to zero if the mining stops before the year 2140.

3. Energy-Value Equivalence Model

A more effective valuation model that considers the cost of energy when predicting the value of Bitcoin and suggests a decline in the Bitcoin price due to premature end to its mining.

How Much Power It Takes To Create A Bitcoin

All the models indicate that by calculating the electricity consumption in Bitcoin mining, it is possible to ascertain the production cost of Bitcoin. But before establishing a connection between Bitcoin production cost and price, it is imperative to know how much electricity is consumed in Bitcoin mining.

As Bitcoin power consumption depends on the number of computers active at one time for mining, energy-efficient hardware becomes critical to the process. That is why many miners turn to Application-Specific Integrated Circuit (ASIC) computers to reduce energy usage during mining. ASIC computers are claimed to use 1W of electricity (1 gigahash per second of computational effort) when mining Bitcoin. A gigahash is 1 billion hashes or sums performed per second to solve the mathematical puzzles.

It was noted that Bitcoin mining computers conducted 120 exahashes (1 exahash per second = 1 quintillion hashes per second or 1 gigawatt) per second in 2020. If we convert this amount to electricity units, it equals 120 gigawatts (GW) per second. It is clear from this figure that solving a mathematical puzzle or mining a Bitcoin will utilize up to 72,000 gigawatts of power every 10 minutes.

Calculating the Cost

When calculating the cost of Bitcoin’s electricity consumption, it is necessary to calculate the number of sums and the power required to execute each sum. In 2019, Cambridge University released a more detailed analysis in this regard, which shows some interesting findings, such as—

• The global average electricity cost for Bitcoin mining stands at $0.05/kWh.
• The global average Power Usage Effectiveness (PUE) for Bitcoin Miners stands at 1.1.

The study also provides a formula for calculating the cost of mining one Bitcoin by considering operating expenditure (OPEX) for electricity and capital expenditure (CAPEX) for miners. It calculates:

• Bitcoin Mined Per Day = Block Reward + Block Frequency.
• Bitcoin Electricity Cost = Daily Electricity Cost of Mining
• Global Average Electricity-to-Total Cost Ratio = Bitcoin Electricity Cost/Daily Cost of Running Mining Computers.

And thus, Bitcoin Production Cost = Daily Electricity Cost/Electricity-to-Total Cost Ratio.

Bitcoin Mining Costs Vary by Region

Bitcoin mining cost entirely depends on the cost of electricity in a specific region, which might not be the same in two different parts of the world. Using an energy-efficient mining machine like ASIC can help reduce the usage and expense of electricity. There are many factors that could have a significant impact on the cost of Bitcoin production in a low-cost country.

The Bottom Line

The marginal cost of production translates to the value of Bitcoin. As the models and hypotheses propose, Energy consumption impacts the marginal output cost of Bitcoin. However, as the Bitcoin prices keep changing, so does the frequency of Bitcoin mining, it would be difficult to predict the power consumption and cost. There is also widespread concern over the environmental aspects of Bitcoin mining, given the increasing price and popularity of Bitcoin. Apart from that, If you believed in Bitcoin and want to make an investment in it then the Bitcoin Circuit platform is for you. It is an automated trading platform that helps you to make good money from Bitcoin trading. Read out the Bitcoin Circuit Review by Expert to get details about its legitimacy and security.