Digital Mining is the process of creating new cryptocurrencies, such as Bitcoin or Ethereum, by verifying transactions and adding blocks to the Blockchain. Since the mining process requires powerful computers and mining devices to run for extensive periods of time, it is a natural conclusion that electricity prices affect profitability . But to what extent exactly do Electricity prices influence Digital Mining?
Digital Mining Costs
There are factors that can define the mining costs of cryptocurrencies and they are summarized as follows:
Geographic location: Different regions have different electricity prices. Miners tend to operate in areas with lower electricity costs to maximize profitability. Some regions may have access to cheap renewable energy sources, such as hydroelectric or geothermal power, which can reduce electricity expenses. Policies and tax bills also vary between countries and may effect profitability greatly.
Mining efficiency: The efficiency of mining hardware plays a crucial role. More efficient hardware consumes less electricity while providing higher computational power. Efficient mining equipment can help offset the impact of higher electricity prices to some extent.
Cryptocurrency value: The value of the cryptocurrency being mined is another important factor. If the price of the mined cryptocurrency is high, it can compensate for higher electricity costs and still result in profitable mining operations. However, if the cryptocurrency's value decreases significantly, high electricity costs can make mining unprofitable. For example, a successful verification on the Blockchain currently rewards 6.25 Bitcoins or around $165,362.5 today which needs to exceed the overall cost of mining in order to remain profitable.
Mining Power Consumption Estimates
To understand the effect of energy prices in isolation of other cost factors, we must first observe the energy consumption of the Digital Mining process itself.
The Bitcoin Consumption Index states that the yearly energy consumption estimate for Bitcoin in June of 2022 was around 131 TWh, a significant decline after reaching a maximum of around 200 TWh for the first half of the same year. The current estimation equates the electrical energy expended in the transaction of one Bitcoin (521.43 kWh) to power consumption of an average U.S. household over 17.87 days.
In other words, Digital Mining requires extensive amounts of energy that could be comparable to some countries' energy requirements. However, the energy costs may vary greatly as stated earlier.
It is difficult to estimate the percentage energy costs take from the overall costs for Digital Mining, but theories suggest it may be anywhere from 40% to 80% or more. Either way, the cost of energy remains substantial and can heavily impact the profitability of Digital Mining processes. The Cambridge Bitcoin Mining Map shows the percentage of Bitcoin mining around the world and it may show the relationship between the estimated mining rates in comparison with the respective energy prices.