How the Bitcoin mining industry works

Analysts at fintech company BitOoda have carefully studied the mining industry and revealed some previously unknown facts in a study commissioned by the Fidelity Applied Technology Center.

To gain insight into mining geography, technical performance and economics, they conducted over 60 interviews with miners, hardware manufacturers and vendors, and used data from over 45 public sources.

Key:
the bitcoin mining industry has approximately 9.6 GW of power available, currently ~ 67% used.
about 50% of the capacity is in China, 14% in the United States, and 8% is available to miners in Russia.
on average, electricity costs miners $ 0.03 per 1 kWh, and the cost of mining 1 BTC is approximately $ 5000.
after 12 months, the hash rate can reach 260 EH/s.

Bitcoin hashrate and energy consumption analysis

In this section, researchers examined the geographic distribution of mining capacity, the amount of electricity consumed, and the profitability of mining.

According to analysts, the bitcoin mining industry has access to 9.6 GW of electricity. They got the meaning by analyzing the drop in the bitcoin hash rate after the halving that took place on May 11.

BitOoda specialists recorded a maximum hash rate of 136 PH / s (May 10) and a minimum of 81 569 PH / s (May 17). They suggested that within seven days, from May 10 to May 17, all S9 devices were disconnected from the network, which became unprofitable. On May 17, according to their model, the entire hashrate was generated by devices of the S17 class, which in theory would consume 3.9 GW. Taking into account the disconnected S9 class devices, the miners’ capacity would be 9.6 GW.

The terms “S9 class”, “S17 class” and “S19 class” were used by analysts to refer to all competing devices with similar characteristics. They applied the numbering of the Bitmain model series due to the company’s historical dominance in the miner production market, although it has recently decreased.

In their calculations, BitOoda experts used an energy efficiency factor (PUE) of 1.12. It means that for every 1 MW of electricity directed directly to bitcoin mining, another 120 kW is spent on associated costs (lighting, cooling, powering servers, switches, etc.).

The researchers noted that for simplicity, they excluded a number of factors from the calculations:

• in reality, not all S9 devices were disabled after halving;
• the indicated dates coincided with the period of migration of miners in China from north to south, where tariffs are significantly reduced during the rainy season;
• luck factor – the possible coincidence of hashrate peaks with bands of fast or slow blocks, which affect the indicator.

With all the assumptions, experts have determined that the bitcoin mining industry has a power available for consumption of 9.6 GW. They estimate that miners use about 67% of the available power, which powers 2.8 million ASIC devices.

Now most devices represent the S17 class, but hashrate recovery was also provided by:

• some returned S9 class devices in jurisdictions with extremely low tariffs (for example, Chinese
  Sichuan and Yunnan provinces);
• devices of the S19 class, which began to be limited to the market.

From conversations with miners and according to open sources, BitOoda has accurately determined the geography of the location of approximately 4 GW of mining capacities and 153 farms. The miners provided data on tariffs on condition of anonymity.

The experts established the most complete data on capacities in the USA, Canada and Iceland. They received the least amount of accurate information on China.

BitOoda admitted that they received approximate values, but noted that they are enough for a general idea of ​​the geography of the distribution of the power used by miners.

According to them, China accounts for 50% of the indicator, the United States – 14%, Russia and Canada – 8% and 7%, respectively.

Analysts have determined that more than 50% of the electricity consumed costs miners $ 0.03 per kWh or less. The indicator has been steadily declining in recent years. According to unconfirmed reports, in 2018 the price of electricity available to miners was close to $ 0.06 per kWh. With hash rates rising and PH/s profit falling, miners with high electricity costs have either moved to regions with low tariffs or ceased operations.

Based on the cost curve, they calculated that the average cash cost to mine 1 BTC is about $ 5,000. This estimate does not include depreciation and other equipment costs.

The curve also shows that a small proportion of bitcoins are mined at a cost that exceeds the spot price of the cryptocurrency. This may be due to commitments to buy electricity and potential incentive payments for outage during periods of peak demand, analysts say.

Another likely reason is getting crypto in jurisdictions with limited or expensive buying options.

For the break-even operation of S9 class devices, electricity is needed at a price below $ 0.02 kWh, noted in BitOoda.

To generate 1 PH / s with S19 class ASICs, a little more than 9 pieces of equipment and 30 kW are needed. For comparison, to provide a similar indicator with S9 class installations, more than 100 kW, about 70 devices are required and, accordingly, more costs for maintenance, operation and other costs.

What is the relationship between hash rate growth and the rainy season in China

In this section, BitOoda analysts examined the mining industry in China, which accounts for 50% of the total power consumption and hash rate, as well as the impact of the country’s “high water” season on bitcoin price and network computing speed.

In the southwestern provinces of Sichuan and Yunnan, heavy rains fall annually from May to October. This leads to a rise in water in dams and a surge in hydropower production. Supply far outstrips demand and surplus electricity is sold cheaply to miners. Both utilities and miners will benefit, experts say.

Bitcoin mining capacity is migrating from nearby provinces to take advantage of low tariffs. During dry months, miners pay about $ 0.025- $ 0.03 per kWh for electricity in northern China, from May to October in Sichuan and Yunnan, the price drops below $ 0.01 per kWh.

BitOoda experts disagreed with the generally accepted view that low electricity prices during the rainy season stimulate hashrate growth. In their view, the season shifts down the cost curve, which leads to a decrease in bitcoin sales by miners.

According to the experts, there is a significant difference between the average price increase during the rainy season and the dry months, while the hash rate growth is approximately the same during both periods.

The cheap hydropower season allows miners to accumulate capital to expand capacity, BitOoda noted. The dynamics of capital accumulation is reflected in the correlation between the increase in the price of bitcoin and the increase in the hash rate in 4-6 months (the period during which the supply chain is triggered).
Bitcoin hashrate growth forecasts

In this section, BitOoda experts looked at how much Bitcoin’s hash rate can grow, what factors support growth, and capital and funding constraints that could slow it down.

According to analysts, the network hashrate may exceed 260 EH / s over the next 12-14 months. They determined the forecast by the following factors:

increase in available capacity from 9.6 GW to 10.6 GW (traditional ~ 10%);
completion of the upgrade cycle with the complete replacement of S9 class installations by S17 and S19 class miners.

Manufacturers are able to maintain the pace of deliveries of new equipment at over 150 thousand units per week, according to BitOoda. For a projected increase in devices of 2.3 million units by the middle of next summer, they need about 60 thousand miners per week.

By mid-2022, the bitcoin hash rate can reach 360 EH / s with the completion of the next update cycle and the final transition to S19 class installations, BitOoda summed up.

They noted that the next radical upgrade of equipment is possible at the same time, based on the technological capabilities of semiconductor manufacturers. Therefore, the next 24 months, S19 ASIC miners will make up the bulk of the supply.

The critical issue is the decrease in bitcoin flow based on PH / s or MW, analysts said. If the increase in price does not match the increase in hash rate, mining profitability will fall, and the computing power of the network will find an equilibrium point below the predicted values.

The income received by the miner on PH / s depends on the hashrate and price. With the figures for mid-July ~ 125 EH / s and $ 9220 per BTC, the daily revenue of S19 class equipment was about $ 70 per 1PH / s. If in the summer of 2021 the hash rate reaches 260 EH / s, then to maintain the level of profitability of the equipment, bitcoin should cost ~ $ 19,500.

For every 10 EH / s of growth, bitcoin needs to rise in price by $ 1000 to maintain the level of profitability.

Analysts stressed that the limiting factor for the projected hashrate growth is the need for significant capital investments. To reach 260 EH / s in 12 months, the total investment should be $ 4.5 billion; to grow to 360 EH / s by mid-summer 2022, an additional $ 2 billion will be needed.

The projected change in the base of equipment and its quantity for the growth of the hash rate to 260 EH / s by mid-2021. Source: BitOoda.

The lag in the growth of the bitcoin price from the hashrate will at least limit the internal generation of funds in the industry, increasing the dependence on external sources of funding. This could negatively affect the hash rate, as large miners will reduce the demand for funding due to uncertainty and a decrease in the expected return on investment, experts predicted.