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Bitcoin Mining The Evolution of A Multibillion Dollar Industry Yassine Elmandjra, and Derek Hsue, To illustrate the cost to mine bitcoin, assume a miner has purchased hardware with a hashing rate of 16 TH/s for $750. When in service, the hardware consumes 1 kilowatt of electricity costing 5 cents per kilowatt hour and incurs maintenance, leasing, and cooling costs of 3 cents per kilowatt hour. In total, running the hardware for a year would cost $700. At current Bitcoin difficulty, the miner is expected to generate approximately .1 bitcoin annually. Extrapolating the costs to mine a full bitcoin (assuming a 12.5 bitcoin block reward) comes out to ~$7000 per bitcoin plus the cost of hardware. At 3 cents per kilowatt hour of electricity cost, the cost to mine a bitcoin is roughly $5000. The Geography of Mining A number of factors can influence hardware and electricity costs. Historically, most large mining farms have set up their operations in China for a number of reasons, some of which have diminished in importance. Among them are the following: To leverage local infrastructure and scale rapidly • Given one- to six-month hardware replacement cycles in the early days of mining, farms had to hit the ground running to generate positive returns on investment in a business that might be profitable for just a few weeks to months. Based on shorter deployment times, shipping, and overhead costs, China was a logical location because Asian foundries supply most of the chips for mining hardware. Now that design cycles are lengthening, however, we believe the competitive dynamics are shifting from geographical proximity and rapid deployment to product reliability and energy costs. To take advantage of cheap electricity in sweetheart deals with municipalities • Historically, Chinese miners cut deals with power-plant owners and local municipalities to access cheap electricity. Mining farms proliferated in Sichuan, for example, attracted by the access to cheap electricity from its hydroelectric power stations.34 With a surplus in hydro-power capacity, Sichuan wanted to capitalize on what otherwise would have been stranded assets. Now that the Chinese government has turned hostile toward cryptoassets and ramped up pressure on miners,35 the political risk is rendering mining untenable. Local governments also are hurting the economics with new taxes as well as regulations on the price of electricity and the use of land. As China forces them out, mining operations are diversifying geographically with the cost of electricity a primary consideration. Many countries offer competitive electricity rates, including Iceland, Canada, and the US.36 34 Hileman, Dr. Garrick, and Michael Rauchs. Global Cryptocurrency Benchmark Study. Cambridge Centre for Alternative Finance, 2017, www.jbs. cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-global-cryptocurrency-benchmarking-study.pdf. 35 Deng, Chao. “China Quietly Orders Closing of Bitcoin Mining Operations.” The Wall Street Journal, Dow Jones & Company, 11 Jan. 2018, www.wsj.com/articles/china-quietly-orders-closing-of-bitcoin-mining-operations-1515594021. 36 Alderman, Liz. “Despite Bitcoin’s Dive, a Former Soviet Republic Is Still Betting Big on It.” The New York Times, The New York Times, 22 Jan. 2019, www.nytimes.com/2019/01/22/business/georgia-bitcoin-blockchain-bitfury.html. 14PDF Image | Bitcoin Mining
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