Original author: Zach Pandl
Original translation: Luffy, Foresight News
Bitcoin has become a global cryptocurrency system thanks to the competitive process of mining. The mining mechanism ensures the normal update of the blockchain and coordinates the economic incentives of the entire network. Today, the Bitcoin mining network is huge, generating more than 700 kilobits per second (note: 1 kilobits = 1 quadrillion, 10^18) times.
Bitcoin miners earn income from newly issued bitcoins and network transaction fees. Their expenses cover equipment, electricity and other operating costs. Many miners also hold bitcoin on their balance sheets, and more and more miners are expanding their businesses into artificial intelligence (AI) and high-performance computing (HPC) services.
Grayscale Research estimates that Bitcoin mining accounts for 0.2% of global electricity use, and clean energy accounts for a higher share of the electricity consumed by Bitcoin mining than other industries. Bitcoin mining may help accelerate environmental goals, especially in areas such as methane emissions.
Bitcoin is a decentralized network of computers that stores $2 trillion in value. This modern wonder is made possible by mining: network participants compete for the right to add the next block to the blockchain and earn a reward. Today, Bitcoin mining operations are conducted at an incredible scale, converting real energy into digital security. The computing power used to protect the Bitcoin blockchain acts as a digital “vault door” that enables an autonomous network of computers to become a global digital currency system. The expertise, capital expenditures, and ongoing operating expenses required to operate a Bitcoin mining facility, as well as the highly competitive nature of the industry, help maintain the decentralization of the Bitcoin network while making attacks prohibitively expensive.
Investing in publicly listed Bitcoin mining companies can generate revenue from block output and, over time, may also generate revenue growth from growing network transaction fees. In fact, most publicly listed Bitcoin mining companies have diversified business models, with many companies holding mined Bitcoin on their balance sheets or even buying Bitcoin on the open market. Currently, Bitcoin mining companies have also begun to diversify their businesses by operating data centers for artificial intelligence and high-performance computing.
Modern Miracle
Although Bitcoin mining is technically complex, the concept is simple. Specialized computers compete to guess a random number, and the computer that guesses the correct number first wins the right to update the blockchain (i.e., mine a block). The winning miner will receive the newly issued Bitcoins and transaction fees for that block (i.e., the block reward).
There are no shortcuts in this competition, such as no algorithm that can find the right number faster, and Bitcoin miners can only compete by brute force. This process can be seen as a game of probability. Miners keep guessing until they find the right answer, just like rolling a multi-sided dice until the desired number appears. Therefore, the probability of winning depends on the number of guesses (number of dice rolls) that the miner can make per second. The operator with the most machines and the most efficient machines will have the most guesses and the greatest chance of winning the block reward.
Technically speaking, the winning result is not just a random number, but a hash value of this number combined with other data. In computer science, a hash function is a mathematical operation that converts any data into a string of characters, i.e., a hash value. For example, using the hash function in the Bitcoin network, the hash value of the word Bitcoin is: b4056df6691f8dc72e56302ddad345d65fead3ead9299609a826e2344eb63aa4.
The task of a Bitcoin miner is therefore to generate hashes quickly: guess a random number, calculate its hash (combine the random number with other data), and then check whether it is correct.
It is estimated that there are about 5-6 million Bitcoin mining machines generating hashes today at an astonishing scale (see Figure 1). Over the past 90 days, Bitcoin miners have collectively generated hashes at an average rate of 765 EH/s (765 quintillion hash operations per second). In other words, Bitcoin miners guess random numbers and calculate their hashes more than 700 quintillion times per second on average. To put this number in perspective, it is estimated that there are about 7.5 quintillion grains of sand and 10 quintillion insects on Earth.
Figure 1: Bitcoin miners generate hashrates at a massive scale
Generating such a large number of hashes is expensive, but that’s exactly the point. To compete for rewards, mining operators need to acquire specialized machines and other hardware, and pay ongoing electricity and maintenance costs. Therefore, by generating the correct hashes, miners provide a kind of “proof of work” that they have invested economic resources and can be trusted to update the blockchain.
Attacking Bitcoin means defeating the existing Bitcoin mining industry. In theory, if a malicious actor controls 51% of the networks hash rate and is able to mine a majority of blocks, they can disrupt the network (for example, double-spending Bitcoin or censoring certain transactions). In a paper, researchers estimated that as of February 2024, a 51% attack on the Bitcoin network lasting one hour would cost between $5 billion and $20 billion. In reality, no actor has an economic incentive to invest these resources, and the Bitcoin network has other defense mechanisms besides mining.
The business model of Bitcoin mining
Bitcoin miners earn revenue equal to the newly mined block reward, while their operating expenses come from the electricity consumed to run their machines and generate hashes (and possibly other operating expenses such as maintenance, mining pool fees, etc.). Therefore, the goal of Bitcoin miners is to generate the most hashes per second at the lowest possible cost.
In 2024, miners received a total of about 230,000 bitcoins, worth nearly $15 billion at the time. This is about 19 times more than in 2014, with a compound annual growth rate of 34% (see Figure 2). Every four years, the rate of new bitcoin issuance decreases in an event known as the bitcoin halving. Although issuance has decreased in terms of the number of bitcoins, mining revenue has increased over time due to the increase in the price of bitcoin in US dollars. In the future, the growth in mining revenue may come from rising bitcoin prices and increases in network transaction fees.
Figure 2: Bitcoin mining revenue growth over time
Miners incur operating expenses primarily in the form of electricity consumed to run their machines. Each operator negotiates its own power purchase agreement, and these agreements vary widely around the world. For illustration, we can construct a simplified picture of the overall economics of Bitcoin miners by assuming a single electricity cost and ignoring other costs. For example, Figure 3 compares Bitcoin miners’ revenue to an estimate of their total electricity costs assuming an electricity price of $0.05 per kilowatt-hour. The difference between revenue and electricity costs can be viewed as a simplified measure of the profitability of a miner’s operation. Miners benefit when the dollar value of block rewards increases, and they are hurt when the dollar cost of generating hashes rises.
Figure 3: Miner operating margins reflect the gap between block rewards and electricity costs
Given the varying costs of electricity faced by miners around the world, a more intuitive measure might be the dollar value received for a certain amount of electricity consumed, such as miner revenue per megawatt-hour (MWh). Mining industry participants often refer to the closely related concept of hash price, which is calculated as the ratio of daily miner revenue to the network hash rate. Although the concepts are very similar, hash price tends to trend downward as miners become more efficient. Therefore, miner revenue relative to electricity consumption may more accurately reflect changes in miner economics over time. Figure 4 shows Bitcoin miner revenue per megawatt-hour per day. Over the past two years, this estimate has remained roughly stable, despite larger fluctuations around the 2024 halving.
Figure 4: Miner revenue per MWh has remained roughly stable over the past two years
Investing in Bitcoin Mining Companies
Investing in the shares of publicly traded mining companies can provide exposure to the Bitcoin economy through the securities market. The business models of Bitcoin mining companies may be increasingly diverse, but they all involve the core business of generating hash values, mining blocks, and obtaining block rewards. Due to differences in electricity costs, non-electricity operating expenses and other factors, the actual cost of obtaining block rewards varies for each mining company. In the third quarter of 2024, the average cost of producing Bitcoin for the largest publicly traded mining companies was between $34,000 and $59,000 (see Figure 5). The average price of Bitcoin in that quarter was $61,000.
Figure 5: Production costs vary among mining companies
Bitcoin miners also differ in how they hold Bitcoin on their balance sheets. Some miners liquidate block rewards immediately, some retain them, and some even purchase more Bitcoin on the open market. Naturally, differences in balance sheet policies can have a significant impact on the financial performance of listed miners when the price of Bitcoin changes (see Figure 6). That being said, many factors influence the risk profile of an individual miner, and miners with relatively high Bitcoin holdings on their balance sheets are not necessarily riskier than miners that liquidate block rewards.
Figure 6: Some mining companies hold Bitcoin on their balance sheets
Recently, Bitcoin miners have begun to expand into areas such as artificial intelligence and high-performance computing (HPC) services, which are rapidly growing in demand for data center infrastructure. For example, Goldman Sachs research estimates that data center electricity demand (excluding cryptocurrency-related portions) could grow 160% between 2023 and 2030. Bitcoin miners may have a competitive advantage in supplying the AI/HPC market due to their access to low-cost electricity and related infrastructure. In early 2024, Core Scientific, the third largest listed mining company by market value, announced a long-term contract with CoreWeave, a specialized AI infrastructure service provider. Since the announcement of Core Scientifics deal with CoreWeave in June 2024, several other listed mining companies have also taken steps to expand their businesses into the AI/HPC sector.
Bitcoin Mining and Sustainability
Bitcoin mining consumes actual economic resources - electricity - to create decentralized digital security. Bitcoins success as a digital currency system means that mining now consumes a lot of electricity. Bitcoin is a unique energy consumer that already uses a significant proportion of clean energy resources. Grayscale Research believes that mining may make a positive contribution to the green energy transition over time.
Based on data from Coin Metrics, we estimate that the Bitcoin network has consumed about 175 terawatt hours (TWh) of electricity over the past 12 months. This is comparable to estimates from the Cambridge Center for Alternative Finance (see Figure 7). Based on data from 2023 (the latest available year), Bitcoins energy consumption accounts for 0.2% of total global electricity consumption (taking into account power losses during transmission). According to the Cambridge Center for Alternative Finance, data centers consume about 200 TWh of electricity per year, and it is expected that energy consumption by data centers may rise due to the use of artificial intelligence models.
Figure 7: Bitcoin mining consumes electricity to create digital security
Bitcoin is a unique energy consumer compared to typical residential or commercial users. Bitcoin mining is modular, mobile, geographically agnostic, interruptible, and highly sensitive to changes in electricity prices. As a result, miners can often operate in locations with low-cost clean energy resources. It is estimated that approximately 50% - 60% of the electricity used by the Bitcoin mining industry comes from renewable energy sources (including nuclear). For the United States and globally, renewable energy accounts for approximately 40% of electricity generation. Using 2023 data and assuming a 50% - 60% renewable energy share of Bitcoins electricity consumption, we estimate that Bitcoin mining accounts for 0.2% - 0.3% of global electricity generation-related CO2 emissions.
Grayscale Research believes that Bitcoin mining will help accelerate the application of renewable energy production in the coming years. Due to its unique properties, Bitcoin mining incentivizes investment in renewable energy infrastructure development, especially in areas where there are no transmission lines connected to major population centers. Bitcoin mining can also help stabilize grid demand, which would otherwise fluctuate due to consumption patterns and weather, just as it does in the Texas Electric Reliability Council system. In addition, startups like Sustainable Bitcoin Protocol have created market mechanisms to incentivize the use of clean energy and reward the reduction of methane emissions. Solving the problem of methane emissions may become a particularly important way for Bitcoin miners to contribute to environmental protection goals. In addition, companies like Crusoe Energy have developed ways to use excess natural gas instead of emitting it. They convert natural gas into electricity and provide it to Bitcoin miners.
In the coming years, the growth of technology applications will generate huge demand for electricity, both from digital assets, artificial intelligence and other industries. Grayscale believes that Bitcoin contributes to the healthy operation of the global power infrastructure and has a unique advantage in accelerating the transition to renewable energy compared to many other industries.
