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Business improvement analyst mining bitcoins

The higher the hashrate, the costlier it is to attack the network. In the early days of bitcoin, you could mine bitcoin on any computer. Those who mined a block received 50 BTC as a reward. Bitcoin is a proof of work proof of work link1 system; probabilistically, those who put in the most work receive reward. As bitcoin began to gain traction, miners devised more efficient ways of mining bitcoin, meaning that everyone had to work harder to obtain the same number of bitcoins.

As stated in our piece Digital Investor - Bitcoin halving: The battle of hard and soft money Digital Investor - Bitcoin halving: The battle of hard and soft money link1 , bitcoin halvings occur approximately every four years. Mining efficiency needs to double to ensure that profitability remains the same ceteris paribus. Recent ASICs have a chip size of approximately 7 nm 4. As some miners employed specialised machines to mine bitcoin, others had to evolve as well.

Increasing efficiency meant not only improving mining machines but also optimising operations to keep costs in check. Thus, hobbyists lost their share to sophisticated miners. New ways of mining rendered the old ways obsolete, and the entry barrier for solo miners grew. As operational expenditure Opex is in fiat currencies, miners are heavily reliant on BTC price to continue supporting the bitcoin network. Gradually, mining equipment manufacturers and miners have optimised equipment and operations to reduce price sensitivity.

As a result, capital expenditures Capex have increased and operational expenditures have decreased as shown figure 1. As bitcoin price volatility is detrimental to miner revenue, the mining industry has made efforts on all fronts to reduce the sensitivity of BTC price, endeavouring to make the break-even on capital and operational expenditure as early as possible. To understand how mining equipment has evolved over the years, we need to examine how the sensitivity of break-even days to bitcoin price has evolved with new equipment.

Interested readers can see the calculations used for this exercise in the Appendix.. What interests us in this Digital Investor is the relationship between break-even days BED and the price of bitcoin for different generations of equipment. Figure 2 presents this sensitivity with an elasticity of BED to price. This finding is observable for any price. For any given technology, the higher the price is relative to where it is at launch, the more sensitive it becomes meaning the breakeven is achieved quickly.

However, if price declines immediately after launch, it takes more time to achieve break even, but the sensitivity is less. The reason is that the operational break-even price of bitcoin for new-generation machines is lower than that of older-generation machines. In the last column of Figure 3, we see that in the current environment hashrate and price as of August , only the newest generations of equipment survive.

This result reveals both the competition pressure miners feel and why miners are forced to upgrade technology regularly to optimise their operations. The result also indicates that mining is becoming an industry where only well-organised, large players survive. Having sufficiently established how bitcoin mining equipment has changed over the years, we next discuss how investors can gain exposure to bitcoin mining.

Now that we understand the journey, we can explore the viability of the mining business using an example based on the current environment. The first question to answer is why anybody should bother mining bitcoin when you can simply buy bitcoin at market price. For investors who are bullish on bitcoin in the long term, mining does allow them to acquire bitcoin at a price that is cheaper than market price. For example, at the time of writing this, bitcoin price is approximately USD 12, See Part A of the Appendix of this article for details about our assumptions.

Bitcoin mining has three major drivers: electricity cost, capital expenditure purchase of machines and set-up costs , and bitcoin price. For our example, we performed discounted cash flow DCF analysis on a bitcoin mining business for a month time horizon the expected lifetime of a machine with initial capital expenditure of USD 1 million. For the given assumptions again, detailed in the appendix , net present value NPV is highest if the business is terminated at the end of the tenure in this example, 36 months.

This assertion is subject to change if the business environment changes. Figure 4 shows the results of our calculation. Opex can be covered either by selling earned BTC or through existing cash. Both strategies are prevalent among miners. However, if the assumption is that BTC price will have an ascending trajectory, using existing cash to pay for running costs make more sense.

Figures 5 and 6 compare cash flow and terminal value changes resulting from different opex strategies. At the current-day total network hashrate, monthly operating profit is calculated to be approximately USD 33, For the given set of assumptions, the mining business example appears to be viable even if the hashrate grows rapidly and the bitcoin price grows moderately.

As stated earlier, mining simply allows investors to acquire bitcoin at a cost cheaper than the market price. Though the number of break-even days is less sensitive to bitcoin price than earlier, price does have a significant impact on the business. The share in total network hashrate determines the profitability of a mining business.

Thus far in the example, we have assumed that the hashrate of the business remains constant. Two possibilities emerge: the total hashrate increases or the total hashrate decreases. What happens in each case? The total network hashrate tends to increase exponentially in lockstep with the price. Therefore, it is likely that significant increases in price will drive up the total hashrate.

When bitcoin price drops, miners with high operating costs due to higher electricity costs are forced to halt their operations. Bitcoin mining is a full-time business. There are many nuances that investors should be aware of and pay attention to, including selecting a mining pool, negotiating electricity contracts, choosing the geographical location of the facility, and more.

If investors are not prepared to allot full-time attention to a bitcoin-mining business, there are other routes to consider, such as hashrate futures or dollar-cost averaging in bitcoin itself. If bitcoin price does not increase significantly, it can be difficult to recover the capital expenditure. As has happened in the past, disruption in mining-equipment manufacturing can usher in new-generation mining equipment that has the potential to make the current generation of equipment obsolete 5.

Bitcoin mining has become a sophisticated industry over the years. Miners and equipment manufacturers have managed to reduce reliance on price and electricity costs to a certain extent. Given the current environment, our analysis indicates that bitcoin mining could be a lucrative business for the next three years.

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Therefore, a sustainable crypto currency needs higher payments for miners or more energy efficient algorithms to achieve consensus in a network about the truth of the distributed ledger. Since bitcoin emerged in , individuals and companies invested billions of dollars in the digital currency and the underlying blockchain technology. The bitcoin is an unregulated digital peer-to-peer currency with a finite supply of 21 million units that is not backed by debt obligations and governments Grinberg and does not need third parties such as banks Courtois and Bahack The bitcoin currency provides a certain degree of anonymity, has no issuance expenditure and charges none to low transaction fees Nakamoto Current uses for bitcoin are payments to online merchants, sending remittances abroad and speculation Goldman Sachs ; Bouoiyour and Selmi The European Central Bank ECB considers bitcoin to be a digital representation of value, not issued by a central bank.

It can serve as a substitute to banknotes, coins, demand deposits and e-money. Currently, most national banks in the European Monetary Union follow the example of the ECB by issuing a warning about the risks of bitcoin, but there is no framework for regulation European Central Bank On top of this, investment firms made large investments in bitcoin-related companies Edgar Fernandes ; Davies Many parties profited from the increased value of the bitcoin, but some went bankrupt Ember or had to suspend services when its value dropped Ember ; Higgins The bitcoin network exposes a number of issues: amongst others the scalability, speed and consensus system are known problems for bitcoin see Decker and Wattenhofer ; Barber et al.

In this paper however, we address another important problem of the bitcoin work and that is its long term economic sustainability. The promise of the bitcoin network is to provide a transaction processing engine and payment instrument; if this really happens, such an instrument should be economically sustainable in order to replace the traditional payment system of banks. To answer the question of long-term sustainability, we quantify the most important revenue streams in the bitcoin network.

We utilize network theory on networked value constellations, and more specifically the e 3 value methodology Gordijn and Akkermans to understand the ecosystem of enterprises and end-users. The e 3 value method requires that each actor in an ecosystem is capable of generating a net cash flow on the long term. If one or more actors fail to do so, the network collapses and is unsustainable.

The methodology supposes that participants in a system are rationally behaving actors to do a best-effort to generate cash flow. The e 3 value method is backed by theory on networked value constellations e. Tapscott et al. Holbrook , and traditional well-known investment theory such as discounted net present value calculations, break even analysis and payback time. Our analysis of the bitcoin network will reveal a number of actors, for which we assume that most of them are actually capable of generating a net cash flow for example the providers of hardware and electricity supply companies.

As a result of this assumption, the evaluation of the sustainability of the bitcoin network focuses on the financial risks of the miners that keep the bitcoin network secure and trustworthy. To earn these revenues, large investments in specialized hardware were required, as well as operational expenses in electricity power. In short, the value of the mined bitcoins should outweigh the expenses. There is a vast body of public data available about the bitcoin e. Unfortunately, information about the installed base is not available.

Therefore, in this paper we develop an estimate of this installed base assuming that miners do rational decision making. This estimate of the installed base over time, and how to do that estimate is the main contribution of this paper. The rest of the paper proceeds as follows: In Section 2 we review the bitcoin system to capture the ecosystem of the bitcoin.

Section 3 presents the overall research approach. We use a model-based approach e 3 value to understand the bitcoin ecosystem Section 4. In Section 5, we quantify the revenues and expenses of miners for a period of five years. As we will discuss further in Section 6, the marginal revenues of miners approach the marginal expenses mainly related to electricity costs. As a result, bitcoin mining moves from a highly profitable business to an undertaking that is, on average, barely returning the investment in hardware.

Bitcoin is fundamentally different from trust-based electronic payment systems where financial intermediaries e. With these trust-based systems, the intermediary checks if the sender of the payment can afford the payment, preventing them from spending the same amount of money twice also called the double spending problem.

The bitcoin network also offers payment services, but does so in a decentralized way, meaning that trust-based parties, such as banks, are not needed. Opposite to trust-based systems, bitcoin transactions are non-reversible and the network offers no mediation in disputes. Banks have pioneered in the adoption of electronic markets for internal processes, but have been slow to do so in the field of consumer interaction Alt and Puschmann Bitcoin is a disruptive innovation as its goal is to entirely remove the middlemen namely the banks.

Bitcoin does not require intermediaries to provide secure storage of funds. A bitcoin owner can store bitcoins on many kinds of devices by installing a software program called a bitcoin wallet. This has the disadvantage of placing the responsibility for safeguarding bitcoins on the owner, nor is any interest earned on the deposits.

Owners also often store their bitcoins on centralized exchanges in order for the exchange to safeguard the funds or to speculate on value changes. Storing bitcoins at centralized exchanges, poses the funds at considerable risk as a number of exchanges defaulted due to cyber-attacks, insolvency or outright fraud Moore and Christin The bitcoin system has a built-in mechanism that reduces the amount of newly created coins per block, to prevent inflation Courtois and Bahack By the beginning of , about 16 of the total 21 million bitcoins were mined.

Figure 1 shows the projected number of bitcoins that will go in circulation during the first ten years of the bitcoin network. Bitcoins in circulation. At the heart of bitcoin lies the blockchain technology that acts as a distributed, shared transaction ledger that records all transfers of bitcoins. Each block is like a new page of a ledger containing the most recent transactions.

The network consists of nodes where the majority reaches a consensus on the transaction history and on which transactions are valid Kroll et al. With fiat currencies, the double spending problem is solved as a third party like a bank can clear transactions or it can take the shape of physical cash. The bitcoin, however, is a neither a physical token nor a database record of a trusted bank representing the money. Instead, the bitcoin network consists of parties who cannot be trusted upon beforehand.

Therefore, in principle, it would be simple to duplicate coins by some party, e. Without a trusted bank preventing users from spending the same money twice, another solution must be found. Blockchain technology, the basis of bitcoin, employs a consensus mechanism that guarantees a majority of the participants in the network agree on the validity of transactions.

Proof-of-work is a computationally hard problem a cryptographic puzzle solved by a significant amount of distributed computing power directly relating to the signing, and therefore approving, of a transaction block, including all earlier approved blocks hence the name blockchain. Miners are incentivized to do the proof-of-work with their computers with a reward in the form of newly created bitcoins and possibly transaction fees. When a miner solves the cryptographic puzzle, it broadcasts the solution to other miners.

Other miners easily verify this solution as the reverse computation is simple. If honest miners control more computer power than dishonest miners Nakamoto , the bitcoin system as a whole is trustworthy. It is not possible for a minority of miners to manipulate transactions, as the network as a whole will not accept payments that were not issued by the owner of the bitcoins. Next to proof-of-work miners, the bitcoin network is also supported by full nodes that do not receive a reward.

These full nodes offer the user increased privacy and security that lightweight clients do not offer Gervais et al. Many authors have analyzed the possibilities to attack the bitcoin network. Barber et al. Moore and Christin analyze attacks on bitcoin exchanges. As a unit of account, bitcoin is quite unstable. Figure 2 shows that during the first years of trading, the bitcoin was not widely traded putting its value close to zero.

The overall volatility of the bitcoin price makes it an unreliable unit of account. Bitcoin value over time from to in US-Dollars. By , there were four generations of mining hardware in which energy efficiency increased by a factor of almost 10, Courtois et al. The rapid progress in bitcoin mining technology makes bitcoin mining a risky venture. Value is created every time a new block is mined and one of the miners is rewarded with new bitcoins and transaction fees.

The reward is hard-wired into the blockchain software to incentivize miners to continually provide computing power to the network. As the miners keep the blockchain going, the bitcoin owners have the possibility to send transactions across it. For a transaction to be rapidly added into the blockchain, the owners can offer a transaction fee, as miners can choose to ignore transactions that do not offer a fee.

In addition, the miners often use pools, where their mining effort is combined with that of others. In pools, when one miner finds the block, the rewards will be spread among all users of the pool according to their share in hashing power. This way, the miner will get a partial reward more quickly than when the miner would have mined on his own.

In return, the owners of the pools often ask for a fee. The pools do not handle the mining of the block itself, but provide a block reward sharing service, so they are a service that concerns only the miners and not the bitcoin owners. Miners have to invest in hardware and pay for electricity to keep the hardware running. In order to make a profit and pay some of the bills in fiat money, miners can sell a share of their mined bitcoins via centralized online exchange websites.

The miners need a bank account to receive the fiat currencies. Our method of computing bitcoin investments and profits uses computations similar to those of bitcoin profitability calculators. Such calculators compute payback times and profits for given investments in hardware and energy prices. These calculators use a predicted decrease in profit that is of linear or exponential nature.

We use historical hash rates and the available hardware at different points in time to reverse-engineer what has happened in the mining industry. This research is the first to provide an estimation of bitcoin mining net cash flows for the years to This provides insight into the actual profits on a daily basis and the sustainability of bitcoin mining.

The bitcoin is considered to be financially sustainable if the participating actors are able to generate a net positive cash flow on the long term. During the research period there was no publicly available information about the expenses of bitcoin mining operations, and thus, no insight into the net cash flows.

To address the profitability of the participants in the network, we first have to understand the actors involved in the bitcoin ecosystem, as well as the revenue streams between these actors. To do so, we develop a networked business model, using the e 3 value method, Gordijn and Akkermans , which describes the total bitcoin system in an adequate way. The purpose of using the e 3 value method is twofold. First, it results in a map of the actors involved as well as the objects of economic value in the exchange, called value objects.

In many cases, these objects reflect money but they can also be goods or services. Second, it allows for quantification of the value streams specifically the monetary ones and gives a long-term view of cash flows. To construct the e 3 value model of the bitcoin ecosystem, we use a number of sources. Apart from our own knowledge about the bitcoin, we consult the literature, analyze publicly available information of the bitcoin, and finally perform 10 interviews to validate the constructed models.

The literature and public available data led to the creation of the e 3 value model that was validated in 10 interviews. The backgrounds of the interviewees can be divided into three groups: 1. Blockchain experts 1—4 , 2. Furthermore, to understand the bitcoin ecosystem, we develop an e 3 value business model describing the most important value streams in the bitcoin network based on the body of literature about the bitcoin available. The e 3 value model describes the actors enterprises and individuals involved and the things called value objects they exchange with each other Gordijn and Akkermans It is also possible to describe a group of actors who assign economic value in the same way; this construct is called the market segment.

Furthermore, a key notion in e 3 value is the idea of economic reciprocity: actors exchange only something of economic value if they get something in return of higher value. If they do so, this will result in a net positive cash flow and therefore sustainability. The e 3 value business model will be discussed with the interviewees and changed according to their feedback. To understand the bitcoin ecosystem, we develop an e 3 value business model describing the most important value streams in the bitcoin network.

Figure 3 shows the actors and market segments that are relevant for the value creation in the bitcoin network. An interesting feature of the bitcoin is how the bitcoins themselves are generated. In traditional currencies such as the Euro , the central banks play an important role in adding money to the system. In the bitcoin system, money is added to the system by the system itself. If a miner solves the cryptographic puzzle, a bitcoin is created and assigned to the miner.

In the model this is represented by the bitcoin network actor, which reflects the total network of actors. The central market segment is the conglomerate of miners. Miners have the goal to create a profit, either by mining bitcoins flow 1 or by collecting a transaction fee flow 5 , paid by bitcoin owners and users using bitcoins for doing transactions.

They are crucial for the correct functioning of the blockchain system, as they have approve the blocks with transactions. It is known that miners have serious expenses, most notably for hardware investments and energy. Therefore, we focus our analysis on the miners only, leading to the following research question:. Miners are financially sustainable if, on the long term, they can present a positive net cash flows.

Apart from their revenues mined coins and transaction, we need to know their expenses. Footnote 1 First, miners have to invest in computing hardware flow 2. The performance of hardware, which can be used for mining, increases rapidly and becomes more dedicated; Therefore, hardware needs to be replaced in the order of months, rather than years. Second, they have to pay electricity flow 3 for the computer they employ. Third, miners often participate in a pool flow 4. Effectively, participation in a pool increases the chance of revenue in the short term, because once a bitcoin is mined by one of the pool members, the value is divided over the pool participants.

Hence, participation reduces the risk of losses in the long term as a result of outdated hardware and consumed electricity. Four, the bitcoin is a currency that can be kept by the owner, but sometimes participants want to exchange the bitcoin for a regulated currency such as the Euro or the Dollar.

For this purpose, there are exchanges, who offer an exchange service for a fee flow 6. Finally, to interact with a traditional financial system, owners, exchanges, and miners need a bank e. In such a case, a transaction fee has to be paid to the bank flow 7.

Note that the model abstracts from the flow of bitcoins which are needed for end-user transactions e. This follows from our focus on the miners in their value system and not on consumers who use bitcoin for the purchasing of products and services, or speculation.

They are important for the correct functioning of the network, but carry no financial compensation so that monetary flows to those nodes are by definition zero. Moreover, since the number of full nodes is not known at all, it is impossible to include them in the analysis. We assume that the other actors e. Manufacturers of hardware and electricity power companies have also other customers and can easily calculate the price of their products and service such that a net positive flow results.

Pools are a kind of insurance for miners to ensure that, over time, they will have positive revenues. Pools are an effective risk sharing mechanism and base their fees on insurance policies; hence we assume they are capable of generating a positive net cash flow. Similarly, exchanges just trade bitcoins for traditional money. We assume that the losses and profits average over time, and result in a modest net positive cash flow.

Although we assume for most actors that they have a net positive cash flow, we nevertheless have to know their cash flow, since miners either have to pay or receive cash. For example, miners have to pay to the power company a fee for electricity. Below, we briefly introduce how the fees are calculated, which is discussed in more detail in Section 5.

Mined bitcoins: Bitcoins obtained as a result of mining. The aggregate information about mining results is publicly available, which is sufficient for the analysis. Hardware investments: these are unknown. In the next section, we present an approach to estimate the installed base of mining hardware over the period of analysis. Electricity expenses: these directly relate to the installed hardware base.

Footnote 2 Therefore, once we know which hardware is deployed during which period, we can estimate the total electricity power expenses over time, assuming that mining hardware is always on. Since most hardware is dedicated, this is a realistic assumption. Footnote 3 value flow 4 of Fig. Bitcoin transaction fees: from the bitcoin user to the miners whose numbers are publicly available. Exchange fees: we assume an average of 0. This is similar to the range of fees exchanges charge per transaction like 0.

Footnote 4 value flow 6 of Fig. Bank fees: differ per bank and usually contain a fixed and a variable amount. For this research we assume it is similar to the exchange fee with 0. The first version of the e 3 value model was presented to the interviewed parties and discussed.

All of the interviewees agreed on the bridging role of banks and exchanges between bitcoin and fiat money. The co-founder of a bitcoin payment provider concluded that while bitcoins are created by the miners, the actual monetary value is assigned once it is sold via exchanges and turned into fiat money via bank accounts. The business manager at a bank noted the scalability of the amount of transactions the bitcoin network can handle is a weakness. The bitcoin consultant underlined the importance of energy prices to mining and predicted a movement toward regions with lower energy prices like China and lower cooling costs like Iceland.

The retired bitcoin miner mentioned the centralization occurring with bitcoin mining as the initial investment is increasing continually. The interviewees agreed on the proposed bitcoin value model. One interviewee proposed additional actors that were cost factors for the payment providers, but the interviewee agreed it was not a cost factor to the miners, so these were not added to the model.

After drafting the value model the interviewees were contacted again for comments. The four interviewees had nothing to add. Thus, we consider the e3 value model sufficiently supported by the literature and by the option of experts.

To assess the sustainability of the network, the money flows have to be quantified for actors for which we cannot safely assume a positive net cash flow. As Section 5 explains, we focus on the miner, since the miner is the enabler for the bitcoin system, and has significant expenses mainly hardware and energy. For quantification, we rely on publicly available information about bitcoin trade volume, mining revenues, electricity prices, etc. For some data, we have to make estimates. Specifically, the installed mining hardware base is unknown over time but an important cost to actors.

We therefore develop a method to estimate this installed base. The way of estimating is an important contribution of this paper. Finally, we analyze the results for sustainability. Concerning data collection, a significant amount of publicly available data is an advantage of the bitcoin system.

In particular, we use data retrieved from blockchain. For the analysis of sustainability, we first look at the expenses and revenues of miners and the resulting value flows from these. We start by inferring which mining hardware is in use during which specific period. This is necessary as the hardware investment represents a large cash outflow for the miners. Third, the computing performance of specific hardware directly determines the expected number of bitcoins mined by that hardware.

Formally, we solve an equation that models the total bitcoin hash rate on each day as a function of the hardware in operation. From the hardware in operation we can deduce the hardware spending and the electricity costs. Other expenses pool expenses, bank costs and exchange fees follow from the total production of bitcoins. Starting from the observed total bitcoin hash rate, TH t on day t , it must be the case that.

As long as no better type is available, the machines stay in operation to produce the total hash rate that we observe in the data. At a first increase in the hash rate, the number of machines increases to reach the total hash rate. At a decrease in the hash rate, we assume that new machines are throttled back or old machines are turned off. Footnote 5. Once a new machine becomes available, we assume that buyers choose between hardware types by picking the machine with the lowest estimated payback time.

This way of calculating the attractiveness of an investment is common practice Berk and DeMarzo and the simplicity of the technique fits the dynamism and fast-changing nature of the bitcoin miners. For each machine on the market, the payback time is computed using the day moving average of the bitcoin price:.

Existing machines stay in operation as long as the marginal profit is positive, i. If that is not the case, we assume that they are switched off on that day. They can come online again if they become profitable again, for example, when the bitcoin price increases. The combination of machines in operation on any given day is then simply equal to the number in operation on the previous day, minus machines that have become unprofitable, plus new machines of the type that have the lowest payback time.

Then, we have that. Although the hash rate is increasingly almost continuously in our sample period, there are a few instances where the hash rate declines. We allocate those decreases to the most recent machines that we assume are throttled back proportionally. Footnote 6 Since declines in the hash rate are rare and small see Fig. We now turn to the data that is fed into Eqs. Figure 4 shows the hash rate and difficulty of the bitcoin network increasing by a factor of more than , from to There are two reasons why this happens.

First, faster hardware is added to replace slower running hardware for which electricity expenses outnumber mining and transaction revenues. Second, new hardware is added to increase production, as bitcoin mining becomes increasingly popular. In both cases, we attribute the increase in computing power in the bitcoin network to new hardware.

Regarding the purchasing of mining hardware, we assume that miners behave rationally and therefore buy the hardware with the lowest payback time. During the year the payback time of the cost-efficient hardware is shorter than that of energy-efficient hardware. Payback time for most energy-efficient en. During the first 6 months of , the payback time is so high, it would take decennia to earn back the hardware. At the beginning of our analysis period, we assume that the AMD is installed, which was the best available hardware at that time.

Regarding the operation of mining hardware, we assume that mining hardware remains in operation until the daily electricity expenses related to that hardware is equal or higher than the expected revenues for that day, namely the value of the mined bitcoins and the transaction fees.

In other words: after initial investment, the only incentive for miners to turn their hardware off is that the marginal expenses for mining electricity outweigh the marginal revenues. The energy cost for a particular type of hardware is known. Therefore, in order to calculate the payback period, we must know the expected revenue.

This assumes that miners possess no superior timing ability, which seems sensible. Given the assumptions on purchasing and operations we can estimate the hardware in use over time. As the market of mining hardware is not transparent, the archived pages Footnote 8 of a public wiki page Footnote 9 are used to select the most cost-effective hardware over the period to This data was cross-referenced with discussions on the public forum bitcointalk.

The results are in Table 1. Since the performance of the bitcoin network is known, we can calculate the upfront hardware investment, if we assume all hardware was the AMD at that time. Then, for each subsequent day we can infer the hardware purchases using the increase in hash rate and available hardware on that day.

With the assumption of positive marginal revenues, we also can calculate when new hardware is added or retired. Note that, because the hardware is tailored to bitcoin mining, we consider the residual value of hardware zero as it cannot be used economically for other tasks.

Now that we know which specific kind of hardware is into operation during which specific period, we can also calculate the electricity consumption of that hardware, and related to that, the electricity expenses. We assume that mining is always running during the period of operation. Figure 7 shows the rapidly increasing energy usage of the bitcoin network from to This seems sensible, given the hash rate ultimo of 2 bln.

It does question the earlier estimate of O'Dwyer and Malone , who find a number that is close to the electricity use 3GW of Ireland in

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Bitcoin mining is a full-time business. There are many nuances that investors should be aware of and pay attention to, including selecting a mining pool, negotiating electricity contracts, choosing the geographical location of the facility, and more. If investors are not prepared to allot full-time attention to a bitcoin-mining business, there are other routes to consider, such as hashrate futures or dollar-cost averaging in bitcoin itself.

If bitcoin price does not increase significantly, it can be difficult to recover the capital expenditure. As has happened in the past, disruption in mining-equipment manufacturing can usher in new-generation mining equipment that has the potential to make the current generation of equipment obsolete 5. Bitcoin mining has become a sophisticated industry over the years.

Miners and equipment manufacturers have managed to reduce reliance on price and electricity costs to a certain extent. Given the current environment, our analysis indicates that bitcoin mining could be a lucrative business for the next three years. The subscript i denotes time at which new-era mining equipment was launched. This document is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial investment or to participate in any particular investment strategy.

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First name. Last name. Email address. Bitcoin Mining as a Business. Introduction Why should investors care about bitcoin mining or the hashrate of the bitcoin network? How did we get here? Thursday, 13 August, Abstract Our analysis shows that increased bitcoin mining equipment efficiency has reduced the time it takes to breakeven, even at lower bitcoin prices. Why should investors care about bitcoin mining or the hashrate of the bitcoin network?

Figure 1: Decrease in operational expenditure at the cost of increasing capital expenditure. Figure 2: Price elasticity of break-even days. Figure 3: Break-even days for different equipment at launch and today. Ways to gain exposure to bitcoin mining. Equity route The easiest way for traditional investors to gain exposure to bitcoin mining is to go through stocks of companies involved in the mining business.

Hashrate futures A more specific way to gain exposure to hashrate or bitcoin mining activity is to use hashrate futures offered by some of the exchanges. Cloud mining Investors can buy hashrate using cloud mining. In this case, the hosting company provides the infrastructure for investors.

Investors are paid according to their shares in the mining operations. Though it is a convenient way to gain exposure to hashrate, this route has been used by fraudulent companies to swindle investors in the past and, therefore, is not a recommended way to gain exposure to mining.

Mining bitcoin Mining bitcoin allows investors to remain in control and tweak mining conditions as and when required. It remains the cleanest way to gain exposure to bitcoin mining but requires constant oversight. Mining as a business. Performance of the mining business. Figure 5: Cash flow and terminal value difference with different Opex strategies.

Figure 7: Monthly operating profit sensitivity analysis based on bitcoin price and total network hashrate. Business defensibility. The total hashrate increases significantly. The total hashrate decreases significantly. Figure 8: Mining business defensibility. Appendix: Part A - Assumptions. The assumptions used in our example analysis are as follows: No machine upgrades for the duration and no new capital expenditures.

Straight line depreciation for 36 months. Calculation of the discount rate: The beta in this example is the average adjusted beta of Canaan, Hut 8, and Riot. Similarly, risk premium is the average of the equity risk premiums of the United States and China. With these assumptions, we arrive at a discount rate of 8. In our hashrate projection, we assume elevated growth at the beginning of the time period and a slowdown as time passes.

The rationale for this assumption is that new-generation machines were launched recently by various mining equipment manufacturers and chips are already at the nm range. To reduce chip size further will become increasingly difficult. There will need to be a breakthrough for the hashrate growth to sustain the momentum. Bitcoin halving took place recently; miners tend to upgrade equipment after the halving and then wait for significant improvements in machines before upgrading again.

Growth rate is conservative so that the total hashrate beats the hashrate estimated by hashrate futures. A miner with sufficiently large operations can choose not to join a pool. However, for a smaller miner, joining a pool offers steady rewards. Different pools and their pay-out methods are listed in figure 9.

Figure 9 - Mining pools and their payout methods. Electricity cost is assumed to be USD 0. For machines, the set-up cost is USD 46, In general, break-even days BED can be defined as follows:. Economic News. Expand Your Knowledge.

Forex Brokers Filter. Trading tools. Macro Hub. Corona Virus. Stay Safe, Follow Guidance. World ,, Confirmed. Fetching Location Data…. Get Widget. Bitcoin Mining for Dummies: How to Mine Bitcoin Bitcoin mining is the validation of transactions that take place on each Bitcoin block. Bob Mason. What is Bitcoin Mining? What is Bitcoin Mining Difficulty? Miners will then receive transaction fees in the form of newly created Bitcoins. From Start to Finish: Bundle Transactions, Validation, Proof of Work, Blockchains and the Network The end to end process can perhaps be best described by the following chart that incorporates the various steps involved from mining to ultimately receiving well-earned Bitcoins and transaction fees: Bitcoin Mining Step-by-Step Verify if transactions are valid.

Transactions are bundled into a block The header of the most recent block is selected and entered into the new block as a hash. Proof of work is completed. A new block is added to the blockchain and added to the peer-to-peer network. Proof of Work Step-by-Step A new block is proposed. A header of the most recent block and nonce are combined and a hash is created.

A Hash number is generated. The miner receives the reward in Bitcoins and transaction fees. If the Hash is not less than the Target Value, the calculation is repeated and that takes the process of mining difficulty. Mining Difficulty Step-by-Step More miners join the peer-to-peer network. The rate of block creation increases.

Average mining times reduce. Mining difficulty increases. The rate of block creation declines. Average mining time returns to the ideal average mining time of 10 minutes. The cycle continues to repeat at an average 2-week cycle. What is Bitcoin Cloud Mining? No ASIC vendor endorsement. If there are no advertisements from the ASIC vendor, the mining company may not even own the hardware.

No photos of the hardware or data center of the mining company. No limit imposed on sales or does not display how much hash rate sold against used in mining. Referral programs and social networking. A mining company willing to pay high referral fees should be avoided as these may well be Ponzi schemes. Anonymous operators should certainly be avoided… No ability to sell your position or get the money out upon sale. What is Proof-of-Work? Don't miss a thing! Discover what's moving the markets.

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Bitcoin does not require intermediaries to provide secure storage of funds. A bitcoin owner can store bitcoins on many kinds of devices by installing a software program called a bitcoin wallet. This has the disadvantage of placing the responsibility for safeguarding bitcoins on the owner, nor is any interest earned on the deposits.

Owners also often store their bitcoins on centralized exchanges in order for the exchange to safeguard the funds or to speculate on value changes. Storing bitcoins at centralized exchanges, poses the funds at considerable risk as a number of exchanges defaulted due to cyber-attacks, insolvency or outright fraud Moore and Christin The bitcoin system has a built-in mechanism that reduces the amount of newly created coins per block, to prevent inflation Courtois and Bahack By the beginning of , about 16 of the total 21 million bitcoins were mined.

Figure 1 shows the projected number of bitcoins that will go in circulation during the first ten years of the bitcoin network. Bitcoins in circulation. At the heart of bitcoin lies the blockchain technology that acts as a distributed, shared transaction ledger that records all transfers of bitcoins. Each block is like a new page of a ledger containing the most recent transactions. The network consists of nodes where the majority reaches a consensus on the transaction history and on which transactions are valid Kroll et al.

With fiat currencies, the double spending problem is solved as a third party like a bank can clear transactions or it can take the shape of physical cash. The bitcoin, however, is a neither a physical token nor a database record of a trusted bank representing the money. Instead, the bitcoin network consists of parties who cannot be trusted upon beforehand.

Therefore, in principle, it would be simple to duplicate coins by some party, e. Without a trusted bank preventing users from spending the same money twice, another solution must be found. Blockchain technology, the basis of bitcoin, employs a consensus mechanism that guarantees a majority of the participants in the network agree on the validity of transactions.

Proof-of-work is a computationally hard problem a cryptographic puzzle solved by a significant amount of distributed computing power directly relating to the signing, and therefore approving, of a transaction block, including all earlier approved blocks hence the name blockchain. Miners are incentivized to do the proof-of-work with their computers with a reward in the form of newly created bitcoins and possibly transaction fees.

When a miner solves the cryptographic puzzle, it broadcasts the solution to other miners. Other miners easily verify this solution as the reverse computation is simple. If honest miners control more computer power than dishonest miners Nakamoto , the bitcoin system as a whole is trustworthy.

It is not possible for a minority of miners to manipulate transactions, as the network as a whole will not accept payments that were not issued by the owner of the bitcoins. Next to proof-of-work miners, the bitcoin network is also supported by full nodes that do not receive a reward. These full nodes offer the user increased privacy and security that lightweight clients do not offer Gervais et al.

Many authors have analyzed the possibilities to attack the bitcoin network. Barber et al. Moore and Christin analyze attacks on bitcoin exchanges. As a unit of account, bitcoin is quite unstable. Figure 2 shows that during the first years of trading, the bitcoin was not widely traded putting its value close to zero. The overall volatility of the bitcoin price makes it an unreliable unit of account.

Bitcoin value over time from to in US-Dollars. By , there were four generations of mining hardware in which energy efficiency increased by a factor of almost 10, Courtois et al. The rapid progress in bitcoin mining technology makes bitcoin mining a risky venture.

Value is created every time a new block is mined and one of the miners is rewarded with new bitcoins and transaction fees. The reward is hard-wired into the blockchain software to incentivize miners to continually provide computing power to the network. As the miners keep the blockchain going, the bitcoin owners have the possibility to send transactions across it.

For a transaction to be rapidly added into the blockchain, the owners can offer a transaction fee, as miners can choose to ignore transactions that do not offer a fee. In addition, the miners often use pools, where their mining effort is combined with that of others. In pools, when one miner finds the block, the rewards will be spread among all users of the pool according to their share in hashing power.

This way, the miner will get a partial reward more quickly than when the miner would have mined on his own. In return, the owners of the pools often ask for a fee. The pools do not handle the mining of the block itself, but provide a block reward sharing service, so they are a service that concerns only the miners and not the bitcoin owners. Miners have to invest in hardware and pay for electricity to keep the hardware running.

In order to make a profit and pay some of the bills in fiat money, miners can sell a share of their mined bitcoins via centralized online exchange websites. The miners need a bank account to receive the fiat currencies. Our method of computing bitcoin investments and profits uses computations similar to those of bitcoin profitability calculators. Such calculators compute payback times and profits for given investments in hardware and energy prices.

These calculators use a predicted decrease in profit that is of linear or exponential nature. We use historical hash rates and the available hardware at different points in time to reverse-engineer what has happened in the mining industry. This research is the first to provide an estimation of bitcoin mining net cash flows for the years to This provides insight into the actual profits on a daily basis and the sustainability of bitcoin mining.

The bitcoin is considered to be financially sustainable if the participating actors are able to generate a net positive cash flow on the long term. During the research period there was no publicly available information about the expenses of bitcoin mining operations, and thus, no insight into the net cash flows.

To address the profitability of the participants in the network, we first have to understand the actors involved in the bitcoin ecosystem, as well as the revenue streams between these actors. To do so, we develop a networked business model, using the e 3 value method, Gordijn and Akkermans , which describes the total bitcoin system in an adequate way.

The purpose of using the e 3 value method is twofold. First, it results in a map of the actors involved as well as the objects of economic value in the exchange, called value objects. In many cases, these objects reflect money but they can also be goods or services.

Second, it allows for quantification of the value streams specifically the monetary ones and gives a long-term view of cash flows. To construct the e 3 value model of the bitcoin ecosystem, we use a number of sources. Apart from our own knowledge about the bitcoin, we consult the literature, analyze publicly available information of the bitcoin, and finally perform 10 interviews to validate the constructed models.

The literature and public available data led to the creation of the e 3 value model that was validated in 10 interviews. The backgrounds of the interviewees can be divided into three groups: 1. Blockchain experts 1—4 , 2. Furthermore, to understand the bitcoin ecosystem, we develop an e 3 value business model describing the most important value streams in the bitcoin network based on the body of literature about the bitcoin available.

The e 3 value model describes the actors enterprises and individuals involved and the things called value objects they exchange with each other Gordijn and Akkermans It is also possible to describe a group of actors who assign economic value in the same way; this construct is called the market segment.

Furthermore, a key notion in e 3 value is the idea of economic reciprocity: actors exchange only something of economic value if they get something in return of higher value. If they do so, this will result in a net positive cash flow and therefore sustainability. The e 3 value business model will be discussed with the interviewees and changed according to their feedback. To understand the bitcoin ecosystem, we develop an e 3 value business model describing the most important value streams in the bitcoin network.

Figure 3 shows the actors and market segments that are relevant for the value creation in the bitcoin network. An interesting feature of the bitcoin is how the bitcoins themselves are generated. In traditional currencies such as the Euro , the central banks play an important role in adding money to the system.

In the bitcoin system, money is added to the system by the system itself. If a miner solves the cryptographic puzzle, a bitcoin is created and assigned to the miner. In the model this is represented by the bitcoin network actor, which reflects the total network of actors. The central market segment is the conglomerate of miners. Miners have the goal to create a profit, either by mining bitcoins flow 1 or by collecting a transaction fee flow 5 , paid by bitcoin owners and users using bitcoins for doing transactions.

They are crucial for the correct functioning of the blockchain system, as they have approve the blocks with transactions. It is known that miners have serious expenses, most notably for hardware investments and energy. Therefore, we focus our analysis on the miners only, leading to the following research question:. Miners are financially sustainable if, on the long term, they can present a positive net cash flows. Apart from their revenues mined coins and transaction, we need to know their expenses.

Footnote 1 First, miners have to invest in computing hardware flow 2. The performance of hardware, which can be used for mining, increases rapidly and becomes more dedicated; Therefore, hardware needs to be replaced in the order of months, rather than years. Second, they have to pay electricity flow 3 for the computer they employ. Third, miners often participate in a pool flow 4. Effectively, participation in a pool increases the chance of revenue in the short term, because once a bitcoin is mined by one of the pool members, the value is divided over the pool participants.

Hence, participation reduces the risk of losses in the long term as a result of outdated hardware and consumed electricity. Four, the bitcoin is a currency that can be kept by the owner, but sometimes participants want to exchange the bitcoin for a regulated currency such as the Euro or the Dollar.

For this purpose, there are exchanges, who offer an exchange service for a fee flow 6. Finally, to interact with a traditional financial system, owners, exchanges, and miners need a bank e. In such a case, a transaction fee has to be paid to the bank flow 7. Note that the model abstracts from the flow of bitcoins which are needed for end-user transactions e. This follows from our focus on the miners in their value system and not on consumers who use bitcoin for the purchasing of products and services, or speculation.

They are important for the correct functioning of the network, but carry no financial compensation so that monetary flows to those nodes are by definition zero. Moreover, since the number of full nodes is not known at all, it is impossible to include them in the analysis.

We assume that the other actors e. Manufacturers of hardware and electricity power companies have also other customers and can easily calculate the price of their products and service such that a net positive flow results. Pools are a kind of insurance for miners to ensure that, over time, they will have positive revenues. Pools are an effective risk sharing mechanism and base their fees on insurance policies; hence we assume they are capable of generating a positive net cash flow.

Similarly, exchanges just trade bitcoins for traditional money. We assume that the losses and profits average over time, and result in a modest net positive cash flow. Although we assume for most actors that they have a net positive cash flow, we nevertheless have to know their cash flow, since miners either have to pay or receive cash. For example, miners have to pay to the power company a fee for electricity. Below, we briefly introduce how the fees are calculated, which is discussed in more detail in Section 5.

Mined bitcoins: Bitcoins obtained as a result of mining. The aggregate information about mining results is publicly available, which is sufficient for the analysis. Hardware investments: these are unknown. In the next section, we present an approach to estimate the installed base of mining hardware over the period of analysis. Electricity expenses: these directly relate to the installed hardware base.

Footnote 2 Therefore, once we know which hardware is deployed during which period, we can estimate the total electricity power expenses over time, assuming that mining hardware is always on. Since most hardware is dedicated, this is a realistic assumption.

Footnote 3 value flow 4 of Fig. Bitcoin transaction fees: from the bitcoin user to the miners whose numbers are publicly available. Exchange fees: we assume an average of 0. This is similar to the range of fees exchanges charge per transaction like 0.

Footnote 4 value flow 6 of Fig. Bank fees: differ per bank and usually contain a fixed and a variable amount. For this research we assume it is similar to the exchange fee with 0. The first version of the e 3 value model was presented to the interviewed parties and discussed. All of the interviewees agreed on the bridging role of banks and exchanges between bitcoin and fiat money. The co-founder of a bitcoin payment provider concluded that while bitcoins are created by the miners, the actual monetary value is assigned once it is sold via exchanges and turned into fiat money via bank accounts.

The business manager at a bank noted the scalability of the amount of transactions the bitcoin network can handle is a weakness. The bitcoin consultant underlined the importance of energy prices to mining and predicted a movement toward regions with lower energy prices like China and lower cooling costs like Iceland.

The retired bitcoin miner mentioned the centralization occurring with bitcoin mining as the initial investment is increasing continually. The interviewees agreed on the proposed bitcoin value model. One interviewee proposed additional actors that were cost factors for the payment providers, but the interviewee agreed it was not a cost factor to the miners, so these were not added to the model.

After drafting the value model the interviewees were contacted again for comments. The four interviewees had nothing to add. Thus, we consider the e3 value model sufficiently supported by the literature and by the option of experts. To assess the sustainability of the network, the money flows have to be quantified for actors for which we cannot safely assume a positive net cash flow. As Section 5 explains, we focus on the miner, since the miner is the enabler for the bitcoin system, and has significant expenses mainly hardware and energy.

For quantification, we rely on publicly available information about bitcoin trade volume, mining revenues, electricity prices, etc. For some data, we have to make estimates. Specifically, the installed mining hardware base is unknown over time but an important cost to actors. We therefore develop a method to estimate this installed base. The way of estimating is an important contribution of this paper. Finally, we analyze the results for sustainability.

Concerning data collection, a significant amount of publicly available data is an advantage of the bitcoin system. In particular, we use data retrieved from blockchain. For the analysis of sustainability, we first look at the expenses and revenues of miners and the resulting value flows from these.

We start by inferring which mining hardware is in use during which specific period. This is necessary as the hardware investment represents a large cash outflow for the miners. Third, the computing performance of specific hardware directly determines the expected number of bitcoins mined by that hardware. Formally, we solve an equation that models the total bitcoin hash rate on each day as a function of the hardware in operation.

From the hardware in operation we can deduce the hardware spending and the electricity costs. Other expenses pool expenses, bank costs and exchange fees follow from the total production of bitcoins. Starting from the observed total bitcoin hash rate, TH t on day t , it must be the case that. As long as no better type is available, the machines stay in operation to produce the total hash rate that we observe in the data. At a first increase in the hash rate, the number of machines increases to reach the total hash rate.

At a decrease in the hash rate, we assume that new machines are throttled back or old machines are turned off. Footnote 5. Once a new machine becomes available, we assume that buyers choose between hardware types by picking the machine with the lowest estimated payback time. This way of calculating the attractiveness of an investment is common practice Berk and DeMarzo and the simplicity of the technique fits the dynamism and fast-changing nature of the bitcoin miners.

For each machine on the market, the payback time is computed using the day moving average of the bitcoin price:. Existing machines stay in operation as long as the marginal profit is positive, i. If that is not the case, we assume that they are switched off on that day. They can come online again if they become profitable again, for example, when the bitcoin price increases.

The combination of machines in operation on any given day is then simply equal to the number in operation on the previous day, minus machines that have become unprofitable, plus new machines of the type that have the lowest payback time. Then, we have that.

Although the hash rate is increasingly almost continuously in our sample period, there are a few instances where the hash rate declines. We allocate those decreases to the most recent machines that we assume are throttled back proportionally.

Footnote 6 Since declines in the hash rate are rare and small see Fig. We now turn to the data that is fed into Eqs. Figure 4 shows the hash rate and difficulty of the bitcoin network increasing by a factor of more than , from to There are two reasons why this happens.

First, faster hardware is added to replace slower running hardware for which electricity expenses outnumber mining and transaction revenues. Second, new hardware is added to increase production, as bitcoin mining becomes increasingly popular. In both cases, we attribute the increase in computing power in the bitcoin network to new hardware. Regarding the purchasing of mining hardware, we assume that miners behave rationally and therefore buy the hardware with the lowest payback time.

During the year the payback time of the cost-efficient hardware is shorter than that of energy-efficient hardware. Payback time for most energy-efficient en. During the first 6 months of , the payback time is so high, it would take decennia to earn back the hardware. At the beginning of our analysis period, we assume that the AMD is installed, which was the best available hardware at that time. Regarding the operation of mining hardware, we assume that mining hardware remains in operation until the daily electricity expenses related to that hardware is equal or higher than the expected revenues for that day, namely the value of the mined bitcoins and the transaction fees.

In other words: after initial investment, the only incentive for miners to turn their hardware off is that the marginal expenses for mining electricity outweigh the marginal revenues. The energy cost for a particular type of hardware is known. Therefore, in order to calculate the payback period, we must know the expected revenue. This assumes that miners possess no superior timing ability, which seems sensible. Given the assumptions on purchasing and operations we can estimate the hardware in use over time.

As the market of mining hardware is not transparent, the archived pages Footnote 8 of a public wiki page Footnote 9 are used to select the most cost-effective hardware over the period to This data was cross-referenced with discussions on the public forum bitcointalk.

The results are in Table 1. Since the performance of the bitcoin network is known, we can calculate the upfront hardware investment, if we assume all hardware was the AMD at that time. Then, for each subsequent day we can infer the hardware purchases using the increase in hash rate and available hardware on that day.

With the assumption of positive marginal revenues, we also can calculate when new hardware is added or retired. Note that, because the hardware is tailored to bitcoin mining, we consider the residual value of hardware zero as it cannot be used economically for other tasks. Now that we know which specific kind of hardware is into operation during which specific period, we can also calculate the electricity consumption of that hardware, and related to that, the electricity expenses.

We assume that mining is always running during the period of operation. Figure 7 shows the rapidly increasing energy usage of the bitcoin network from to This seems sensible, given the hash rate ultimo of 2 bln. It does question the earlier estimate of O'Dwyer and Malone , who find a number that is close to the electricity use 3GW of Ireland in Their estimates, however, are based on a theoretical estimate of the hash rate instead of the real rate, and is a mid-point estimate of a wide range of possibilities.

Figure 8 gives a graphical representation of our estimates of when certain hardware was in use. The sudden drops of profitability during periods like the fourth quarter of and the second quarter of , suggest the predicted gradual linear and exponential profit declines of online mining calculators are an unreliable tool for net cash flow prediction.

Assuming that all mined bitcoins and earned transaction fees are immediately exchanged for dollars, exchange and bank expenses directly relate to the amount of bitcoins transferred and mined each day. The expenses are summarized in Table 3 , by hardware type. Table 4 summarizes the expenses and revenues, and calculates per hardware the estimated generated net cash flow. As can be seen from the table, the first part of our analysis period shows a positive net cash flow for miners.

The numbers of the flows in Table 4 correspond to the numbered value transfers in Fig. However, the last two periods have a loss. At the end of the measurement period, only the Antminer S9 was still running on a profitable basis, so the losses might be compensated in the later periods. Table 4 also shows that in some time periods the investments in hardware have been very profitable, such as with the Avalon 1 in Most of the income stems from the generated bitcoins, while most of the costs are due to the hardware investments.

The hardware expenses are by far the biggest expense to bitcoin miners. This upfront investment in hardware, combined with a high daily energy cost leads to considerable losses in the later years. Figure 9 shows the day moving average of total revenues and expenses. As can be seen, the expenses related to bitcoin mining approach the revenues, which is also predicted by economic theory: under full competition, marginal revenue approaches marginal costs.

This holds for normal goods as well as for virtual goods and currencies as bitcoin. Figure 10 shows the marginal expenses not counting the upfront hardware purchases compared to marginal revenues. During and these lines approach each other, leading to very little profits. This makes it very difficult to have a return on investment on the acquired hardware. The sudden drop in revenue and expenses in mid is likely a result of the blockchain halving, where the bitcoin reward was halved from 25 to Marginal daily expenses and revenues on a logarithmic scale of Figure 11 shows the cumulative net cash flow that resulted from Fig.

Positive flows are followed by periods where money is invested in new hardware, leading to temporarily negative net cash flows. By mid, the high revenues of and are countered by high expenses, leading to a negative net cash flow from that moment on. It can be seen that this results in a positive net cash flow, but due to necessary new investments, the total net cash flow drops with each innovation. Energy prices determine the profitability of mining hardware, so it could be argued that these prices heavily influence the resulting profits.

It is therefore meaningful to do a sensitivity analysis with respect the energy prices. A question we can ask is what the exchange rate of the bitcoin should have been in order to reach the break-even point for the modes. The estimates in Table 6 should be interpreted with care. It is likely to expect that a change in the exchange rate would influence other parameters too, e. Since our analysis is based on factual data of the bitcoin network, we cannot compensate for these effects.

To do so, a proper simulation model of the bitcoin network should be developed to include the market dynamics. An important question is how reliable our estimates are. Our calculation relies on the one hand on publicly available data which are factual e. Understanding of the installed base is important, because the kind of hardware installed determines the expenses by miners, namely the initial hardware investment and the expenses for energy.

A recent other study by De Vries also aims to estimate the total energy consumption for the bitcoin, although a different analysis period is used Feb 10th — present, see the Bitcoin Energy Consumption Index BECI Footnote 13 , which displays the results of their installed base estimate model. In our calculation, at June 20 , the electricity power consumption was The BECI estimates for February 10th the first date of analysis the yearly energy consumption as 9.

The difference of The BECI uses a fairly straightforward model: it assumes that hardware remains in production by miners until it reaches its minimum sales price. Others though have decided to break away from this process and instead have implemented a proof-of-stake system. This method only requires miners to have a certain amount of coins in their wallet. Users with more money, or users with money that has been kept in a wallet for longer, have a better chance of solving the block without any work required whatsoever.

Bitcoin is not controlled by any central organization, bank or government. Instead all users have a stake in the system, and all users have a say in the direction the cryptocurrency will take. All users keep a copy of the blockchain and everyone can verify and view this public ledger.

An online viewer can be found here. Payments can also be made by scanning a QR code on a paper wallet. Supply and demand: As demand increases, so does the value of bitcoin. There is a finite amount of bitcoin in distribution, so the value fluctuates sometimes wildly based on demand or lack of demand. He's passionate about helping you get your finances in order by expertly navigating cutting-edge financial tools — including credit cards, apps and budgeting software. How do EOS and bitcoin compare to one another?

Find out in this guide to the similarities and differences of these two popular cryptos. If you want to mine bitcoin for profit, find out all about the mining process and how to get started in this handy guide. Your guide to peer-to-peer asset transfer network Ravencoin and how you can buy and mine this new cryptocurrency. The study analyzed the cost to mine one bitcoin in different countries based on average electricity rates.

Click here to cancel reply. How to proceed further? What else hardware needed and other things? After buying the necessary processor, you would need a computer. However, as what our guide mentioned, it is not worth it anymore to mine bitcoin by yourself. The cost outweighs the gain. However, you are still interested in going it alone, you would need to seek bitcoin mining hardware manufacturers.

You can easily find them by doing a quick search on the Internet. Alternatively, you may consider buying Bitcoin cloud mining contracts. This can simplify the process, but of course, it comes with some levels of risk since you do not control the actual physical hardware. Please make sure you weigh the pros and cons of your decision before making an investment to ensure that you understand the risk involved. I hope this helps.

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Please appreciate that there may be other options available to you than the products, providers or services covered by our service. Kevin Joey Chen. Learn more about how we fact check. What is the blockchain? Bitcoin mining. Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering.

It is not a recommendation to trade. Must read: Cloud mining warning Cloud mining will almost never be profitable. What's in this guide? Compare bitcoin cloud mining providers What is mining? Proof of work Evolution of the mining computer Where do I store my mined bitcoin? Are people still making money mining bitcoin? Compare bitcoin marketplaces Bottom line FAQs.

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The analyst views the company as a leader in “the next wave of hash rate Bitcoin mining is a notoriously energy consuming endeavor. the company expands, and margin improvement from new offerings and geographies. The Bitcoin developer has previous experience working with Bitcoin's mining industry via a collaboration with Italian mining company Bitminer. Our analysis shows that increased bitcoin mining equipment Our discounted cash flow analysis shows that starting a bitcoin mining business may be a Increasing efficiency meant not only improving mining machines but.