The Bitcoin price may fall below the global electricity cost

There has been a lot of talk about the danger of a situation where the mining costs would be higher than the bitcoin spot market value. However, ignorant people waive off speculation, claiming that at the current level of complexity, the break-even cost of mining is about $4,000 per 1 BTC. It will never drop to that level!

What's wrong with this calculation?

How does Bitcoin use energy?

The BTC blockchain relies on thousands of miners running energy-intensive machines 24/7 to validate transactions. This system is called POW.

Bitcoin's energy consumption depends on how many miners are operating on its network. They compete with each other to win the right to add the next block and earn rewards. The competitive structure causes a lot of energy waste since only one miner is allowed to confirm a new block every 10 minutes. 

To maintain their advantage, many large pools have to scale up or upgrade their equipment. There are now dozens of data centers worldwide with thousands of hardware running 24/7. One byproduct of these industrial-scale operations is heat. Mining equipment powered by application-specific integrated circuits (ASICs) gets too hot when performing hashing functions, so you have to constantly cool the air in the rooms to prevent them from burning out. This further increases the amount of energy consumed. 

It's a classic Catch-22 situation, where an increase in hashing capacity forces an increase in associated energy costs and investment in equipment upgrades. These costs are not always taken into account in superficial calculations of mining break-even.

Mining cost estimation models

Economists offer two working models based on the calculation of energy and mining costs, as well as on the direct dependence of capitalization on hash rates.

One of them was developed by Charles Edwards, a leading global economist and founder of the Capriole Investments platform.

Edwards' estimates show that the bitcoin mining cost floor is currently at $17,254. If the price falls below that level, the owners of the most powerful (and energy-consuming) rigs will have to stop mining. 

Calculating BTC mining electricity costs. Source: Capriole Investments

According to the Edwards algorithm, Bitcoin has fallen below the global electricity cost four times in its history. 

• In 2014: by 50%, from $605 to $308 (Mt.Gox crash)
• In 2018: by 85%, from $18,000 to $3,300 (beginning of strict crypto regulation)
• In 2019: by 38%, from $12,700 to $7240 (Covid)
• In 2022: FTX collapse and subsequent bankruptcies of crypto companies.

The second model was offered by Hans Hague, an analyst at Glassnode. He suggests using a difficulty regression algorithm to calculate the mining cost of 1 BTC. In his model, Hague uses data on hashing rate and total market cap.

His result is slightly different, though it doesn't differ fundamentally from Edwards' values.

Difficulty Regression Model. Source: Glassnode

This analyst's estimates show that as of December 13, 2022, the cost of producing 1 BTC is $18,872.

What conclusion can be drawn from these calculations?

The cost of mining can't be defined as a fixed dollar amount: it's subject to a feedback mechanism. As the BTC price goes up, new pools enter the market. This increases the effort required to mine bitcoin, as its rewards will be distributed among a larger group of participants. When the Bitcoin price goes down, miners exit the fray, and the mining costs drop, too.

If the calculations are correct, BTC must slightly increase in value to hit its profitability plateau. Otherwise, miners will shut down their rigs, the hashrate will fall, and the BTC price will drop to near zero. 

Yes, you can mine bitcoin even with a laptop. But this will affect the BTC blockchain's viability and may result in its complete shutdown. No one will benefit from this situation, including regulators. They are still assessing the scale of losses that the FTX bankruptcy caused to the financial market.