Grayscale: Deconstructing Bitcoin mining business model and sustainability

Original title: "The Power of Bitcoin Mining"

Author:Zach Pandl

Compiled by: Luffy, Foresight News

• The reason why Bitcoin can become a global cryptocurrency system is due to the competitive process of mining. The mining mechanism ensures the normal update of the blockchain and coordinates the economic incentives of individual networks. Today, the Bitcoin mining network is huge, and the "hash value" generated per second exceeds 700 Beijings (Note: 1 Beijing = 1 trillion, 10^18).

• Bitcoin miners earn from newly issued bitcoins and online transaction fees. Their expenses cover equipment, electricity and other operating costs. Many miners also hold Bitcoin on their balance sheets, and more miners are expanding their business into artificial intelligence (AI) and high-performance computing (HPC) services.

• Grayscale Research estimates that Bitcoin mining accounts for 0.2% of global electricity consumption; clean energy accounts for a higher proportion of electricity consumed by Bitcoin mining than other industries. Bitcoin mining may help accelerate the achievement of environmental protection goals, especially in areas such as methane emissions.

Bitcoin is a decentralized computer network that stores $2 trillion in value. The realization of this modern miracle relies entirely on mining: network participants compete to add the next block to the blockchain and receive the right to reward. Today, Bitcoin mining operates at an astonishing scale, and they convert real energy into digital security. The computing power used to protect the Bitcoin blockchain is like a digital "vac door". It is precisely through this mechanism that an autonomous computer network can become a global digital currency system. The expertise, capital expenditure and ongoing operating expenses required to operate a Bitcoin mining facility, and the highly competitive industry, help maintain the decentralization of the Bitcoin network while making attack costs prohibitively high.

Investing in publicly listed Bitcoin mining companies can earn profits from block outputs and, over time, expect to gain revenue growth from growing online transaction fees. In fact, most listed Bitcoin mining companies adopt a diversified business model, and many companies will hold mined Bitcoin on their balance sheets and even buy Bitcoin in the open market. At present, Bitcoin mining companies have also begun to engage in data center operations of artificial intelligence and high-performance computing to achieve business diversification.

Modern Miracle

Although Bitcoin mining is very complex at the technical level, its concept is simple. Specialized computers compete with each other to guess a random number and the computer that first guesses the correct number will win the right to update the blockchain (i.e. "Mining out blocks"). The winning miner will receive the newly issued bitcoin and transaction fees for the block (i.e., "block rewards").

There is no shortcut to this competition, such as there is no algorithm that can find the correct number faster, and Bitcoin miners can only compete with brute force. This process can be regarded as a game of probability. The miner keeps guessing until he finds the correct answer, like throwing a faceted dice until the desired number appears. Therefore, the probability of winning depends on the number of guesses the miner can make per second ("number of dice rolls"). The operator with the largest number of machines and the highest efficiency of machines has the most guesses, and the chance of winning block rewards is the greatest.

From a technical point of view, the winning result is not just a random number, but a "hash value" after this number is combined with other data. In computer science, a hash function is a mathematical operation that converts arbitrary data into a string of characters, i.e. hash values. For example, using the hash function in the Bitcoin network, the hash value of the word "Bitcoin" is: b4056df6691f8dc72e56302ddad345d65fead3ead9299609a826e2344eb63aa4.

Therefore, the task of a Bitcoin miner is to quickly generate a hash: guess a random number, calculate its hash (combining the random number with other data), and then check if it is correct.

It is estimated that about 5-6 million Bitcoin mining machines today generate hash values ​​at an astonishing scale (see Figure 1). Over the past 90 days, the average rate of hash generation by Bitcoin miners is 765 EH/s (765 Beijing hash operations per second). That is, Bitcoin miners guess random numbers per second and calculate their hash values ​​more than 700 times. To make this number more intuitive, it is estimated that there are about 7.5 grains of sand and 10 insects on the earth.

Figure 1: Bitcoin miner generates hash values ​​on a huge scale

Generating such a large number of hash values ​​is expensive, but that's the key. To compete for rewards, mining operators need to acquire dedicated machines and other hardware and pay for ongoing power and maintenance costs. So, by generating the correct hash, miners provide a "proof of work" that shows 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 hash rate of the network, thus being able to mine most blocks, it can disrupt the network (e.g., double-spend bitcoin or censor certain transactions). In a paper, researchers estimate that as of February 2024, a 51% attack lasting an hour on the Bitcoin network would cost between $5 billion and $20 billion. In fact, no actor has the economic incentive to invest these resources, and the Bitcoin network has other defense mechanisms besides mining.

Business model of Bitcoin mining

Bitcoin miners earn equals the rewards for mining newly received blocks, while their operating expenses come from the power consumed from running machines and generating hash values ​​(may also include other operating expenses such as maintenance, pool expenses, etc.). Therefore, the goal of Bitcoin miners is to generate the most hash values ​​per second at the lowest possible cost.

In 2024, miners received a total of about 230,000 bitcoins, worth nearly $15 billion at the price at that time. This increased by about 19 times compared with 2014, with a compound annualized growth rate of 34% (see Figure 2). Every four years, the rate of newly issued Bitcoins will drop in an event called "Bitcoin Half". Although the issuance volume has declined in terms of the number of Bitcoins, mining revenue has increased over time due to the rise in Bitcoin’s USD price. In the future, the growth of mining revenue may come from rising Bitcoin prices and the increase in online transaction fees.

Figure 2: Bitcoin mining revenue grows over time

The operating expenses borne by miners are mainly in the form of electricity consumed by running machines. Each operator negotiates their own power purchase agreements, which vary widely around the world. To facilitate illustration, we can construct a simplified overall economic situation chart of Bitcoin miners by assuming one electricity bill cost and ignoring other costs. For example, Figure 3 compares the income of Bitcoin miners with estimates of total electricity costs when the electricity price is assumed to be $0.05 per kWh. The difference between revenue and electricity costs can be considered as a simplified measure of miner operating margins. Miners benefit when the dollar value of the block reward increases; while miners suffer when the dollar cost of generating hash increases.

Figure 3: Miner operating margin reflects 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 earned per a certain amount of electricity consumed, such as miner income per megawatt-hour (MWh). Mining industry participants often mention the concept of "hash price" that is closely related to it, which is calculated from the ratio of daily miner income to network hash rate. Although the concept is very similar, hash prices tend to tend to decline as miners improve efficiency. Therefore, miner income relative to electricity consumption may more accurately reflect the changes in miner economic conditions over time. Figure 4 shows Bitcoin miner income per megawatt-hour per day. This estimate has remained roughly stable over the past two years despite the large volatility around the halving in 2024.

Figure 4: Miner income per megawatt-hour has been roughly stable over the past two years

Invest in Bitcoin mining companies

Investing in stocks of publicly listed mining companies can get involved in the Bitcoin economy through the securities market. The business models of Bitcoin mining companies may become increasingly diversified, but they all involve core businesses that generate hash values, mine blocks, and obtain block rewards. Due to differences in power costs, non-power operating costs and other factors, the actual cost of each mining company to obtain block rewards is different. In the third quarter of 2024, the average cost of producing Bitcoin by the largest listed mining companies was between $34,000 and $59,000 (see Figure 5). And the average price of Bitcoin in the quarter was $61,000.

Figure 5: Different mining companies produce different costs

Bitcoin mining companies also hold Bitcoin on their balance sheets differently. Some mining companies will immediately clear block rewards, some will retain block rewards, and some will even buy more Bitcoins in the open market. Naturally, when Bitcoin prices change, differences in balance sheet policies can have a significant impact on the financial performance of listed mining companies (see Figure 6). Having said that, many factors will affect the risk profile of individual mining companies. Mining companies with relatively high Bitcoin holdings on the balance sheet are not necessarily more risky than mining companies that liquidate block rewards.

Figure 6: Some mining companies hold Bitcoin on balance sheet

Recently, Bitcoin mining companies have begun to engage in areas such as artificial intelligence and high-performance computing (HPC) services, with demand for data center infrastructure growing rapidly. For example, Goldman Sachs research estimates that between 2023 and 2030, electricity demand in data centers (excluding cryptocurrency-related parts) may increase by 160%. Bitcoin mining companies may have a competitive advantage in supplying AI/HP computing markets because they have access to low-cost electricity and related infrastructure. At the beginning of 2024, Core Scientific, a listed mining company with the third largest market value, announced a long-term contract with CoreWeave, a dedicated artificial intelligence infrastructure service provider. Since the announcement of the Core Scientific deal with CoreWeave in June 2024, several other listed mining companies have also taken steps to expand their business into the field of artificial intelligence/high performance computing.

Bitcoin Mining and Sustainability

Bitcoin mining consumes actual economic resources - electricity, to create decentralized digital security. The success of Bitcoin as a digital currency system means that mining now consumes a lot of electricity. Bitcoin is a unique energy consumer that has used a considerable proportion of clean energy resources. Grayscale Research believes that mining may make a positive contribution to the green energy transition over time.

According to Coin Metrics, we estimate that the power consumption rate of the Bitcoin network has been approximately 175 terawatt hours (TWh, note: 1TWh=1 million KWh). This is comparable to the estimate of the Cambridge alternative financial center (see Figure 7). According to data from 2023 (the latest available year), Bitcoin’s energy consumption accounts for 0.2% of the total global electricity consumption (power loss during transmission has been considered). According to the Cambridge Alternative Financial Centre, the data center consumes about 200 terawatt hours of electricity per year and energy consumption in the data center is expected to rise due to the use of artificial intelligence models.

Figure 7: Bitcoin mining consumes power to create digital security

Compared to the typical residential or commercial user, Bitcoin is a unique energy consumer. Bitcoin mining is modular, mobile, unrestricted, interruptible and highly sensitive to electricity price changes. Therefore, miners can often operate in places with low-cost clean energy resources. It is estimated that about 50% - 60% of the electricity used by the Bitcoin mining industry comes from sustainable energy (including nuclear energy). In the U.S. and globally, sustainable energy accounts for about 40% of power generation. Using the 2023 data and assuming that sustainable energy accounts for 50% -60% of Bitcoin’s electricity consumption, we estimate that Bitcoin mining accounts for 0.2% - 0.3% of global power-related carbon dioxide emissions.

Grayscale Research believes that Bitcoin mining will help accelerate the application of renewable energy production in the next few years. Due to its unique attributes, Bitcoin mining incentivizes investment in renewable energy infrastructure development, especially in areas where there is no transmission line connected to major population centers. Bitcoin mining can also help stabilize grid demand, which otherwise fluctuates due to consumption patterns and weather reasons, just as it does in the Texas Power Reliability Commission system. In addition, startups like Sustainable Bitcoin Protocol have created market mechanisms to incentivize the use of clean energy and reward reduced methane emissions. Solving methane emissions may become a particularly important way for Bitcoin miners to contribute to achieving environmental protection goals. Also, companies like Crusoe Energy have developed ways to use excess gas instead of emissions, which convert gas into electricity and provide it to Bitcoin miners.

In the coming years, the growth of technology applications will create a huge demand for electricity, from digital assets, artificial intelligence and other industries. Grayscale believes that Bitcoin helps the healthy operation of global power infrastructure and has unique advantages in accelerating the transition to renewable energy compared to many other industries.