The fact that one of the largest bitcoin miners has just filed for bankruptcy underscores the significance of the fact that the BTC price has hovered around the average mining cost of approximately $17,000 since November 9. When added to the fact that both the trade volumes and the price of the supposedly 'trustless' cryptocurrency have been flattened by the implosion of numerous cryptoverse intermediaries in the past few months, it seems there are a number of very important 'externalities' that the bitcoin protocol and blockchain are unable to address and the market has failed to appreciate.
Of course, Core Scientific's filing follows several warnings, and the bankruptcy of another miner in September, as explained by Coindesk in the latest coverage. But the fact that this filing comes amidst the market doldrums related to the FTX collapse and speculation on Binance makes it particularly significant.
How do you calculate the cost of mining a bitcoin?
One industry 'Bitcoin Mining Profitability Calculator' assumes the following (presumably not necessarily for the major miners):
Mining metrics are calculated based on a network hash rate of 6,363,326,225 GH/s and using a BTC - USD exchange rate of 1 BTC = $ 16,810.56. These figures vary based on the total network hash rate and on the BTC to USD conversion rate. Block reward is fixed at 6.25 BTC. Future block reward and hash rate changes are not taken into account. The average block time used in the calculation is 617 seconds. The electricity price used in generating these metrics is $ 0.12 per kWh. Network hash rate varies over time, this is just an estimation based on current values.
Of course, the mere quantity of energy consumed in mining bitcoin is itself a significant problem to be solved.
When considering the drivers of the base mining cost (or the Production Cost Floor or Bitcoin Electrical Cost, as calculated by the analyst Charles Edwards), it's worth noting that the bankruptcy filings for NASDAQ listed Core Scientific (CORZ) explain that 45% of a proposed $72m rescue package hangs on a #BTC price of $18,500. This suggests that Core's actual mining cost per bitcoin is higher, presumably because of higher energy costs relative to other miners, but also the cost of its financing arrangements.
Core Scientific seems to have effectively borrowed over $600m in convertible notes, bank facilities and DeFi loans, and in the context of a bankruptcy this must affect Core's own base mining cost. But this should extend to other miners, given the Core's 10% market share; the fact that another miner, Compute North, filed for bankruptcy in September owing about $500m; and the sector as a whole has $2.5bn in fiat currency borrowings. Borrowing must also be directly related to the miner's own view on how much it needs to weather market troughs and possibly to protect a desired base price (not to mention that fact that the Bitcoin protocol halves mining rewards periodically with the next halving due in 2024, on current forecasts).
What's harder to factor in is the wider risk of contagion due to lenders' overall credit risk exposure and potentially increasing finance costs or even withdrawal from the sector in certain circumstances...
In other words, a more sophisticated base mining cost calculation is fraught with uncertainty.
At best, therefore, the base mining cost is merely one factor to consider as a guide to the future of miners and bitcoin.
Can the mining sector (and bitcoin) recover?
Core Scientific says it hopes to win the support of key creditors and continue mining.
Continuing market hype also suggests that Bitcoiners are still ploughing in time and advertising spend to stoke demand, which may increase trading volumes and prices.
Energy/electricity costs should fall, if and when Putin finally accepts defeat in Ukraine... but when will that be?
Will lender appetite persist amid the ongoing contagion from the FTX (and Binance?) fallout?
Time is indeed money when it comes to the $2.5bn in real world commercial debt outstanding among miners.
Stick all that in your protocol!
When all is said and done, it seems to me that the claimed ideological 'purity' of bitcoin as a 'permissionless', 'trustless', 'fully decentralised' 'currency' is actually vulnerable to the following 'externalities' (either in the sense of affecting outsiders but not being reflected in the market price and/or being apparently outside the perception of bitcoin proponents/fans):
- the centralising effect of intermediaries, such as crypto exchanges, custodians and decentralised finance (DeFi) providers;
- wilful misconduct by intermediaries (resulting potentially in active distrust of bitcoin itself);
- the sheer scale and quantity of energy required to mine each bitcoin;
- rising energy costs;
- limits on computing efficiency;
- existing and proposed regulation;
- competition from other cryptocurrencies or types of token (e.g. stablecoins);
- (over) borrowing/investment by miners; and
- 'news' or commentary concerning each of the other externalities listed above.
That's not to say bitcoin is necessarily 'worthless', but it is not the idyllic ecosystem that fans claim it to be; and can't really be dubbed 'successful' until it's value is not subject to the wild swings we've seen to date nor at risk of being significantly undermined by any of the above externalities.
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