Bitcoin Q&A: Mining, energy prices, and fee market


“Is it still profitable to mine bitcoin
now that the price has dropped?” This is a common question,
but also a common misconception. Even supposedly serious analysts and financial
organizations get this wrong all the time. Articles in the Financial Times, Wall Street Journal,
and research reports published by JP Morgan Chase, say that it is no longer profitable to mine bitcoin,
or it will not be profitable to mine bitcoin soon. You can translate this into common English
as “I don’t understand how Bitcoin works.” “But I like to write articles about it anyway.” Basically, the difficulty retargeting algorithm
creates a dynamic relationship between… the behavior of the miners in that market
and the issuance of new blocks [in Bitcoin]. Think about it this way: at any moment in time, there
are thousands of different mining farms operating… thousands and thousands of pieces of mining
equipment, hardware ASIC miners as they are known. Imagine you are operating one of these
farms within your factory or warehouse. You would probably have a variety of equipment;
80% of it is the very latest, most efficient equipment… at a certain cost and number of hashes
[generated] per kilowatt of energy consumed. That is how you estimate the efficiency of your
mining equipment. It will not be at the same level. Some of it will be less efficient; it requires more
kilowatts per hash to power [security] for the network. At the same time, you will be thinking about the
electricity costs, as well as various other expenses: maintenance and staff expenses to rack,
mount, dismount, and recycle equipment. All of these things. The electricity costs may be
on a three-month, six-month, or even daily contract. That gives you a certain price per kilowatt. Then you can estimate whether, at the current level of
difficulty and bitcoin price, your equipment is profitable. The answer you get will [vary] for
different classes of equipment. Less efficient equipment will become
unprofitable earlier than more efficient equipment. When you [assess] your warehouse, you may
find that a batch of miners is no longer profitable. This means the overall costs, specifically
the cost of the electricity they consume, does not produce enough bitcoin at
the current price to pay for the electricity. Therefore, the longer they are turned on, the more loss
you will have. You have passed the break-even point. That group of miners is no longer profitable.
You may have other miners that generate enough… bitcoin to pay for electricity and maintenance
costs while still making a profit on average. Those are profitable; some of your equipment isn’t.
What should you do? Turn [unprofitable equipment] off. It is very simple. You turn that equipment off as long
as it is consuming electricity without paying for it. Just the equipment that is not profitable,
leaving the equipment that is profitable on. Imagine this as a ripple effect across the entire industry.
This is something that happens on a day-to-day basis. Thousands of miners around the world
decide to turn new equipment on or off. They are constantly replacing equipment. They have
truckloads of ASIC miners in their loading docks to… mount and install; at the same time, they unmount old
miners that are no longer profitable, a constant churn. Now imagine an industry where the mining farms
with the lowest operating costs and the best location, they remain profitable while others are no longer
profitable, even perhaps at the same electricity costs. [There may be] higher maintenance, staffing, and
location costs. They may turn off their warehouses. When they do that, it reduces the hash power across the
entire network. You will see that happening all the time. It changes up and down a few
percentage points every hour as… new machines are turned on,
old machines are turned off, warehouses suffer power cuts,
new warehouses are turned on, etc. If a large number of miners are unprofitable
and turn off their least profitable equipment, that drop in hash power [contributes to]
the difficulty retargeting after two weeks. When the difficulty retargeting happens, miners
who are still operating will be more profitable. As the difficulty lowers, their hash power will generate
more bitcoin for the same amount of electricity. As the difficulty lowers, their mining
equipment becomes more profitable, perhaps so profitable that the equipment they
turned off is profitable again, so they turn it back on. This will cause the hash rate to increase, so by the
next difficulty retargeting it will be less profitable again. Effectively, people will turn machines
on and off as the profitability changes. The same thing happens if the price goes down;
that [also renders some] equipment unprofitable. As a result, the older equipment will be turned off,
until [the difficulty] finds equilibrium [again]. Supply and demand are constantly finding equilibrium
at the right level, where the average miner is profitable. How do we know that the average miner
is profitable? Because they are still running. If they weren’t profitable, they would
have turned off [their mining machines]. The average miner is always profitable,
[though] the average miner is a statistical fiction. They leave their machines on. Some miners
are not profitable, so they turn [machines] off. Some miners [with the newest equipment]
are more profitable, so they turn machines on. Anytime the bitcoin price moves,
that entire equation recalculates; the least profitable will turn off [machines],
the most profitable to will keep operating. The difficulty will retarget [every two
weeks] to keep everything in equilibrium. On average, the profit margin of a miner is
near zero, and the reason for that is economics. A perfect market is where supply and demand reach
equilibrium, so the price approaches the point of cost… as closely as possible and profit margin goes to zero. If the profit margin is above zero, then more people
will join the market, which increases the hash power, which increases the difficulty, which will [cause some
miners to turn off machines], and it drops back to zero. On average, it will hover around zero and most
miners will be operating just about break-even. The average is at the center of a bell curve: some
miners are very profitable, others are very unprofitable. That is how the industry works. The price can
never make mining unprofitable [on average]. The unprofitable miners turning off [their inefficient
machines] will make the rest profitable again. ‘Hard Fork Cafe’ made a very important comment. I discussed this purely from an
operating cash flow perspective. When the price goes up or down, you calculate [the cost
per] kilowatt based on the current practice of bitcoin. Of course, some miners take risks and [still] mine [while]
anticipating that the price will increase in the future. They will make their profits by having
access to bitcoin and investing now. This is a very risky proposition. You can’t do it at scale,
because you need to sell bitcoin to pay for electricity, unless you have another source of income. On a small scale, that still applies. “Will the ongoing reduction in energy prices
effect the bitcoin price and Bitcoin mining?” No, it is not. These are dynamic markets.
Energy prices don’t change everywhere simultaneously. They don’t change uniformly. All miners do
not operate at the same level of efficiency. The miners who gain an advantage due to
lower energy prices will make more profit… than miners who don’t [have
access to lower energy prices]. This will change the market gradually,
in different places at different times. This doesn’t happen all at the same time. A reduction
in energy prices will probably shift the mining industry… to other forms of energy [generation], [such as] where
there are opportunities to use cheaper [methods]. [However], the cheapest energy on the
planet is not a particular production method, but rather [particular] supply and demand [conditions]:
energy which is not being consumed, excess energy. Energy that is being produced, but cannot
be [easily] distributed for consumption. The cheapest energy is surplus energy produced
in locations where it can not easily be distributed. Miners gravitate towards these sources of energy
because that is where [economic incentives] drive them. In many cases, Bitcoin mining acts as a mechanism
for monetizing energy that would otherwise [be wasted], but is being produced anyway due to imbalances. For example, renewable energy [such as wind, hydro,
and solar], is being produced whether you need it or not. If it can’t be distributed, that energy
is wasted. But you still produce it. You can’t profitably turn off a solar panel.
It will produce whether you need it or not. That energy is the cheapest because there is no
demand, but there is supply. Its price drops to zero. If you don’t have bitcoin mining in the
local area, the price will remain at zero. Mining creates a buyer where a buyer didn’t exist
[before], increasing the price of that energy… from zero to a fraction [of what it would be elsewhere],
thereby investing in that energy company. This appreciates the [value] of capital and
infrastructure of that electricity company. If you think about it, that is an investment in renewables.
So a reduction in energy prices doesn’t damage Bitcoin. In fact, it increases profitability for miners and electricity
companies with an oversupply of renewable energy. Therefore, they [are incentivised to]
invest in renewable energy, which is great. “After 2140, when the Bitcoin block reward
is zero and all coins have been issued, should we expect transaction fees to rise, [in order to]
maintain an incentive to secure the Bitcoin network?” Transaction fees will rise long before this [event]. It is a gradual change with each halving [of the block
subsidy], which changes the profitability of miners. The difficulty, price, and profitability determines
whether a miner will disconnect their equipment, thereby reducing the difficulty and making
more efficient miners more profitable, etc. This is a calculation that happens every
two weeks, for every miner in the world. It puts pressure on them and creates the fee market, the
mining market, [and contributes to the futures market]. All of these markets operate with some
overlap and price signaling between them. Fees are and will be considered
as part of this profitability equation. We don’t need a zero block subsidy for miners to
consider how much fees contribute to their profitability. That is part of the equation today and it
constantly changes, at least every two weeks. It is affected by other things, like the price of electricity,
the efficiency of operations, and staffing costs. [The recycling of] new equipment
and removing old equipment, etc. We will see transaction fees
respond to market pressures. Many things will change between now and 2140: block
subsidy, network capacity, [off-chain technology, etc.] Of course, the price of bitcoin [will change too]. By the time we get to 2140, the number
of transactions supported by the network… [with] layer one and layer two, all of these are unknowns. The market will have a long time
to adapt [to these conditions]. We will not go blindly up to 2140
and then something dramatic happens. [The change] is happening every single day, [among]
every miner, in a free market with price discovery. Profitability calculations happen every day.
Nothing sudden will happen. It is a bit like your eighteenth birthday. [Mentally],
you don’t suddenly become an adult overnight. You don’t wake up the next morning and [feel like] an
adult. Your maturity has been building up to that point. It is a gradual process with milestones and checkpoints.
[The date] itself is relatively meaningless.

39 thoughts on “Bitcoin Q&A: Mining, energy prices, and fee market”

  1. well with the energy consumption we gotta be honest. miners demand power just like any other costumer on the market, and as it looks like it is worth it to consume this amout of power in order to creater sound money.

  2. Andreas, you are my favourite crypto personality. Please enlighten us, even by sharing some links of existing content, on who you think satoshi is / was, or was not? And your opinion of btc sv?

    Also, do you think gold backed crypto coins would be a good thing, and are they too centralised to be a crypto? Thank you!

    And do you think Dr Wright is correct saying btc is not a true crypto?

  3. So as the block rewards reduce over time— We can expect only the most efficient miners to survive (constant downward pressure on the number of miners) and we can expect transaction fees to increase indefinitely with less and less miners able to profitably support the network? Sounds bad for the future of bitcoin. When transactions become too expensive again, users will almost certainly move their business to other currencies?? And at some point the mining pool will reduce to point where a few clever billionaires decide to short bitcoin and invest in a 51% attack and then they will clean up. Is that how bitcoin dies?

  4. Andreas is just awesome at explaining stuff… Already knew that stuff, but it's fascinating to watch and learn how to well explaining things 😀

    Thx for your great and quality continuous contribution to the community!

  5. Please get better audio! Your setuop has too much distortion/compression… I imagine you can afford it 🙂

  6. Andreas, just a tip: spend some money on a good microphone, maybe also a bit of light. A channel with information of such quality should have better looks/sound quality and it is relatively easy to achieve that.

  7. Andreas,thank for awesome content as always. Question: What will happen to security of bitcoin network in case of major solar flare? For example this:"At 4:51 p.m. EDT, on Monday, April 2, 2001, the sun unleashed the biggest solar flare ever recorded, as observed by the Solar and Heliospheric Observatory (SOHO) satellite. The flare was definitely more powerful than the famous solar flare on March 6, 1989, which was related to the disruption of power grids in Canada. This recent explosion from the active region near the sun's northwest limb hurled a coronal mass ejection into space at a whopping speed of roughly 7.2 million kilometers per hour. Luckily, the flare was not aimed directly towards Earth."

  8. Question for you: What happens to BTC price if the US Gov goes after Tether and shuts it down….will it be a huge setback for BTC

  9. Andreas; Great respect to you brother. I’ve seen most of your video contents and I’ve learned so much from you. You are so fond of decentralization (thus, equal to all); but I’ve been recently wondering; since electric power cost varies significantly globally; how is it possible to be fair for everyone worldwide?
    Thank you brother if you could explain this issue.

  10. now i understand why bitcoin DOESN"T waste energy, but banks DO! bitcoin always evolves to use less electricity to produce more bitcoins. but banks don't care about their computers' energy consumption, and i bet they even run BUILDINGS of TPUs for better AI to defeat retail traders in order to monopolize trading markets and suck up money.

  11. Whether the market is going through a Bullish or a Bearish market scenario is not in the hands of an individual or a single factor but large scale factors and other macroeconomic situations. Every investor has to go through such phases at some point since these situations are inseparable. Hence the risk in hodling the market is speculative and any factor can affect the market at any time. Investors should direct their investments basis through various factors which define the outlook through which the market is going through. The entry and exit of an investor get impacted and hence investor sentiment plays an important role in defining how long bullish or bearish outlook exists. Never get emotional with your coin and always remember it's strictly business. One cannot escape withering of the scenarios and thus a judgmental call has to be taken before making investment and patience and knowledge should also be held to go through choppy market conditions as well. As an investor that wants to earn consistent profit and do well with cryptos, you must be patient and knowledgeable, always seeking new information, researching news and analysis properly because most content providers on YT are mediocre and don't know anything about trading properly and then create a working system to use in expanding that portfolio over and over again. Or you can find a working system like me with the help of an expert. Am currently using and implementing the strategy and signals of a world class trader Eric Caruso. I got 5 BTC last month and now with his guidance and patterns I have grown that 18 BTC already. I will keep increasing and expanding my portfolio waiting for the next resistance which many believe to be in the range of $6000 instead of just hodling and waiting. When bitcoin eventually starts skyrocketing, I would have had a very good stock in my portfolio. It is no secret Eric Caruso's signals and trade strategy are some of the best and speaking with him for the first time sometime back gave me a clearer understanding of how to make money and propelled me into this system of his that has really helped me in growing my portfolio. You can reach him on [email protected] if you need advice or any assistance to help you trade better

  12. Andreas, I'd argue that the ability to turn electricity (a tax-deductible expense) into real time anonymous liquidity is enough incentive for many entities to mine at a loss. I think this phenomenon will only increase in future, making it unprofitable for the average miner

  13. Financial analysts don't understand mining because the way it works is based on the concept of supply and demand markets.

  14. Why can't this concept of continual hash power adjustment (basically reducing supply to meet demand) be implemented differently within other things, like price stabilization? Couldn't the liquidity of supply be adjusted (via timelocks) to meet demand, therefore stabilizing the price of all remaining liquidity? Then you could have a price-flexible "stablecoin" without any collateral or 3rd parties. Something like what BitBay has built into their dynamic peg system. Do you think this is possible Andreas?

  15. Am I the only one who has a hard time watching Aantonop's videos with subtitles on? God, if they were the same, I could follow on…

  16. Andreas this video is great.. I can hear you fine and I can see you perfectly. Your Giving FREE KNOWLEDGE and People crying literally In the comments.. ungrateful entitled folks.

  17. HEy Andreas, I have a question.. If a person owns some BTC and there is a fork, he gets equal value of new fork for example 0.0019 btc is also 0.0019 BTC SV now ? could you explain how this works

  18. @aantonop Do you think that other coins like Nano will have more adoption because it bypases the whole mining energy consumption problem?

  19. I am a miner… Its simple- If the value of BTC is growing faster than Hash-Rate its good and vice versa… It's ONLY when Hash-Rate is going UP and the value of BTC is going down- THAT'S WHEN IT's BAD!

  20. Hey andreas,

    could you discuss the relationship between the Price of Bitcoin, the hashrate and the total energy consumption due to mining at high prices?

    When I read the "Predictions" of 300,000 to 1,000,000 $/BTC I wonder how would the total energy demand will look like in this cases. Today the estimations on total consumpion are between 40 and 120 TWh in 2018 or 0.2 to 0,6 % of total global electricity consumption.

    Thanks in advance

    HKF

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