There is a relationship between the price of Bitcoin (BTC) and the amount of energy being used to mine it. But it’s a lot like the chicken and egg problem. Does a higher Bitcoin price prompt more miners to join the network? Or do more miners joining the network result in higher prices for Bitcoin? It’s hard to tell, but I’m inclined to say that the answer is both. This positive feedback loop could take Bitcoin to higher and higher price levels. In order to understand how this positive feedback loop really works, we need to first understand a couple of key components of how Bitcoin mining works.
Bitcoin, price and energy
Bitcoin miners will continue to mine Bitcoin as long as they can do so profitably. Aside from startup costs such as acquiring equipment, the entire Bitcoin-mining profitability equation depends on how much miners spend on energy. The lower the cost of energy, the more profitable a mining operation is.
Embedded within the inner workings of Bitcoin is the fact that as more miners join the network, Bitcoin becomes harder to mine. The harder Bitcoin is to mine, the more energy is used to mine the same amount of Bitcoin. Additionally, every 4 years or so, the number of Bitcoin eligible to be mined in any single block decreases by half. As of 2022, the “block reward” is 6.25, down from 12.5 in 2020. In 2024, the block reward will become 3.125.
In other words, the more miners there are, and the more time that elapses, the fewer Bitcoin an operation will mine with the same equipment. This necessarily means one of two things must be true in order for an operation to continue to mine. Either the price of Bitcoin must rise to sustain the profitability (despite obtaining less Bitcoin) or the operation must increase the number of miners they have (and thus the amount of energy they’re using) in order to increase their yield.
The feedback loop
If the price of Bitcoin rises, then people who have never mined Bitcoin are incentivized to start and existing miners are incentivized to grow. The implication is that the entire network uses more energy. If any individual mining operation is not growing faster than the rate of growth of the entire network, then their relative share of the block reward is going down. Then, of course, every 4 years, every miner’s share of the block reward goes down as the network goes through a “halving event.” This is an event where the amount of Bitcoin coming into circulation each block is half as much as it was before. This number started at 50, became 25 in 2012, 12.5 in 2016, and is now 6.25 as of 2020. Sometime in 2024, the amount of Bitcoin coming into circulation in each block will be reduced to 3.125. These halving events increase investors’ and miners’ incentive to HODL their coins as the inflation rate is being reduced every 4 years.
Incentive to HODL
As mining profitability increases and decreases, individual miners are faced with a decision.
- Do I sell the Bitcoin I’ve mined to cover my costs?
- Or do I HODL the Bitcoin in hopes of higher prices (and thus higher profitability) in the future?
Miners choosing the former option will add downward (sell) price pressure to the market. Miners choosing the latter will decrease the tradable supply and ultimately add to the scarcity of Bitcoin, typically aiding in price increases.
This is yet another component of Bitcoin mining that needs to be factored into predicting the price of Bitcoin. Whether miners are selling their mined Bitcoin matters a lot, but less so over time, as miners are mining less and less Bitcoin. The 19 millionth Bitcoin was mined in April 2022, leaving only 2 million left to be mined over the course of the next 120 years. The market is currently in the middle of a shift from having the price be dominated by miners to the marketplace being dominated by HODLers and traders.
Bitcoin price predictions
While I’m hesitant to say that Bitcoin price and energy use are causally related, it’s clear that there is a correlation. Observe the two below graphs and recognize that, in general, as more energy is used, the price goes up and vice versa. If anything, price rises first, and energy use rises to meet it. Looking at the charts now (April 2022), either the energy needs to decrease to meet current price levels or the price needs to increase to meet energy levels.
[ source: Blockchain.com/en/charts ]
So can we use any of this information to predict the price of Bitcoin? Furthermore, can we observe and add validity to price predictions made by market experts? Finder.com surveyed a panel of 33 experts on what they think the price of Bitcoin will be in the future. They were asked to predict the price at the end of 2022, 2025 and 2030. If prices continue on their current trajectory, we can expect Bitcoin to break $100k per Bitcoin in 2022 and be somewhere around $650k per Bitcoin by 2025.
There are of course limitations to how much energy can be harnessed to mine Bitcoin or at least how quickly we can add new computers to the network. As it stands right now, the Bitcoin network consumes about 0.6% of the world’s electricity. What is the upper limit (if any) on the amount of energy Bitcoin will use, and will this limit enforce a price ceiling? Unfortunately, the uncertainty leaves us with more questions than answers.
Closing remarks
Several details of Bitcoin mining and its relation to energy use were discussed within the article. No mention was made of what kind of energy (wind/solar/fossil fuels) Bitcoin was using nor was whether the energy used to mine Bitcoin was being put to good use. In order to partially address these concerns, I encourage the reader to think of Bitcoin miners as opportunistic energy consumers. Meaning Bitcoin miners always seek the cheapest energy they can buy. They buy energy when it’s overproduced and has no consumer demand and also when it’s underproduced because it has no demand. In this sense, the Bitcoin network acts as a sort of buffer for power production facilities, regardless of whether the type of power comes from wind, solar, hydro, nuclear or fossil fuel.
In each situation, Bitcoin makes productive use of power that would have otherwise not been generated or not been used by consumers. So as long as humans are generating power, Bitcoin has a use case for monetizing unutilized energy. To me, this signals that regardless of the price of Bitcoin in the future, we can plan on it being around.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.