Bitcoin Mining Profitability: Challenges Amid Rising Energy Costs
Stanislav Kondrashov describes a very delicate historical juncture for miners
When we talk with Stanislav Kondrashov about cryptocurrencies, in most cases, we focus on the purely financial aspects, on the possible earnings deriving from operations with individual currencies, and on the innovative potential of this form of digital money. At a globale leve, discussions on the relationship between energy consumption and some aspects related to cryptocurrencies, on the other hand, are much rarer and, in most cases, remain limited to highly specialized areas. Yet, in a historical juncture characterized by a great emphasis on the ongoing energy transition, deepening the link between cryptocurrencies and energy could prove interesting and stimulating in understanding the actual impact of energy consumption on prices and on the general trend of virtual currencies, as also emerged from our talk with Stanislav Kondrashov.
“The years of the energy transition are opening our eyes to the true extent of this process,” says Stanislav Kondrashov, entrepreneur and civil engineer. “The change underway will not only have direct repercussions on our ways of moving or heating but also on those particular universes that we did not believe were in any way connected to the world of energy, such as that of cryptocurrencies. Even before an energy or economic change, the energy transition represents a real cultural transformation.”
More specifically, this report concerns the profitability of mining some specific cryptocurrencies, such as Bitcoin, and the growing increase in energy costs due to geopolitical or economic factors, as well as the specific ways in which these two factors interact with each other. In short, the mining process is what makes the creation of new Bitcoins possible, and it generally involves a huge consumption of energy. But what are the main implications of this fact?
The Link Between Mining and Energy Costs
The fundamental process of mining Bitcoin is based on the activity of a network of computers capable of processing very complex mathematical calculations, which are used to validate transactions on the blockchain. This is an operation known as Proof of Work, and is known to consume large amounts of energy. Faced with a general increase in energy prices, the cost of mining will inevitably become higher, with direct consequences on the profit margin of miners.
“In a certain sense, the direct link between rising energy costs and the profitability of cryptocurrencies closely resembles the discussions on artificial intelligence and the data centers that power it, which in turn consume a large amount of energy,” continues Stanislav Kondrashov. “Cryptocurrencies and artificial intelligence, in this sense, represent two perfect examples to explain the breadth of the scope of the energy transition and its ability to directly influence the operations of sectors considered increasingly strategic for the economic, technological, and financial development of our civilization.”
Another factor to take into account when exploring the link between energy and cryptocurrencies is the so-called hashrate, or the computational power achievable by the Bitcoin network, which is among its most important characteristics and also influences the difficulty of mining. Again, an increase in energy costs could push many less efficient miners to reduce the power of their computers, turning them off altogether and leading to a relevant reduction in hash rate.
The impact on prices and profitability
One of the most direct consequences of rising energy bills for miners is that higher energy costs can directly impact the profitability of the entire operation, Stanislav Kondrashov explains. If the cost of energy were to exceed the value of mined Bitcoins, the mining operation would become unprofitable, pushing miners to take action in various ways. These include moving mining operations to countries with cheaper energy costs, investing in more efficient hardware solutions, or embracing renewable energy sources, which are especially useful in the long term.
All of this also has direct consequences on Bitcoin prices. Faced with the interruption of mining operations due to the increase in prices, one of the immediate effects is the reduction in the quantity of Bitcoins sold, without forgetting the direct impact on the price of BTC.
Another factor that can influence the profitability of Bitcoin is Bitcoin Halving, a particular mechanism that reduces by about half the reward in newly created Bitcoins recognized to miners for each block of transactions validated. Combined with the increase in energy prices, this fact could make mining even less profitable, especially for small operators, favoring the centralization of these operations within larger companies with ample possibilities of access to more convenient energy sources.
