The power requirement of the Bitcoin network

In the normal financial system, a third party (banks, state, broker) is always required to verify the transaction or provide the currency value. The Blockchain technology, or more specifically cryptocurrency, completely eliminates this aspect of the current financial system. There is no value report that gives an estimate of the value of the currency and there is no technical analysis in the world that can predict the price. Bitcoin mining, which guarantees network security and is rewarded with newly issued bitcoins, has grown into a huge industry in recent years. This involves enormous hardware and energy requirements, which many consider unnecessary and excessive social costs to maintain a payment system. Until we do not have accurate data on the energy requirements of conventional financial service providers (banks, POS devices, ATMs), we can’t say that the system of cryptocurrencies is more expensive. Despite this the cryptocurrency system is in constant operation, and due to its centralization, there is no break in service. What happened is that we do not control our own money, but the bank and then the payment service provider does it. The Bitcoin network works for nine and half years without any downtime or hacking. In 2017, the total energy consumption of the network was around 30 TWH, which would have covered the whole consumption of Ireland. Consumption of the entire banking system is estimated to be 100 TWH. Many people are thinking about the cryptocurrency mining. Worth it? Not worth it? Still, how much does it cost? Well, it mostly depends on where or how we want to get into mining. Or is there mining possibility for somebody without enough assets or fund?

JEL: G000

Keywords: Bitcoin, Cryptocurrencies, Blockchain, Power requirement, Digitalization, FinTech

1. Introduction

The main purpose of the blockchain is to deliver value securely without the need of third party. In the normal financial system, a third party (banks, state, broker) is always required to verify the transaction or provide the currency value. Blockchain technology, or more specifically cryptocurrency, completely eliminates this aspect of the current financial system. There is no value report that gives an estimate of the value of a currency, no technical analysis in the world that can predict the price. Since the launch of Bitcoin in 2009, the cryptocurrency market has grown significantly, thereby gaining recognition and acceptance. Today, cryptocurrencies are playing the role of a universal, decentralized, internationally accepted currency. Their exchange rates are volatile due to high volatility and high demand dependency, while their exchange function is low due to low acceptability. Anonymity is a great place for criminals for money laundering, blackmail and illegal hacking. The lack of central price regulation makes the exchange rate very volatile and prices moving at low volumes relative to the total monetary base often cause extreme increases and decreases. Because of these price changes and of the large amount of bitcoin held by early users, the bitcoin system often tends to look like a pyramid scheme. In some cases, the irreversibility of transactions makes it difficult to protect customers against scams, and in contrast with traditional bank systems, it is impossible to recover bitcoins.

2. Theoretical background

Bitcoin mining, which guarantees network security and is rewarded with newly issued bitcoins, has grown into a huge industry in the recent years. This entails huge hardware and energy requirements, which many consider unnecessary and excessive social costs to maintain a payment system. Until there is no any accurate data on the energy requirements of conventional financial service providers are available, taking into account the entire system (banks, POS devices, ATMs), it cannot be proven that the system of cryptocurrencies is more expensive than the banking system. In contrast, the cryptocurrency system is in constant operation, and due to its non-centralization, there is no break in service. From time to time, people are concerned about the produced cost of bitcoin. Extremely different dollar values are due to different energy prices in different countries. The main criticism of bitcoin and PoW (Proof of Work) cryptocurrencies is usually the brutal energy using of the miners, while they are working to stabilize the network and making profit from it. However, almost every time we consider this power consumption as a bad thing, because wasting energy is a major crime in enlightened society of the 21st century. First, let’s clarify what does the proof of work means. The term “proof of work” refers to the process whereby the players of the bitcoin payment network, the so-called mining computers, have to perform a mathematical calculation which requires considerable computing capacity. So, there is a cost to do the calculation so not everyone can produce the data. However, once the result of the math operation has been calculated, the rest of the network can quickly and easily verify that the result is real. In case of bitcoin, mathematical calculations were configured to have result in average every 10 minutes, so a block can be created in every 10 minutes, which is connected to the last block of a blockchain network. So, the blockchain is the complete ledger, which contains all the transactions so far, with all the bitcoin payments.

3. The power requirement of the Bitcoin network

We can see that the essence of the proof of work algorithm is precisely that only that person can create a block, who has enough computer capacity (more miners, more competition and greater difficulty level in calculation). Meanwhile, the competition is increasing, more computer capacity will be needed, so the power consumption of the bitcoin payment network is increasing. The fact, PoW is expensive and consumes a lot is both true and relative. How much electricity and money do you need to run a single bank branch every year and what about employee’s salary, office buildings and operating banking systems? Paper money is also produced, need to cut trees, need to print it and need to transport is. How much money, time, and energy do these things cost all over the world? In addition, a bank branch is open only mainly on weekdays and only until 5 pm. In 2017, the total energy consumption of the bitcoin system was around 30 terawatt hours, which would have covered the whole consumption of Ireland. Consumption of the entire banking system is estimated to be 100 terawatt hours per year.

Many times, it is not possible to pay with VISA or Mastercard bank card. Imagine that situation, when we are in the queue at a shop, then we try to pay with our bank card and face the error, obviously we don’t have cash, because we are in an era of financial innovation (Paywave, Paypass, QR Code). We could withdraw money from the ATM, but it has run out, because most of the people did it as well. That happened we do not own our money, but the bank and the payment service provider own it. Bitcoin system works for nine and a half years without downtime or hacking. You own your money, you can pay with bitcoin anytime, just not anywhere. The acceptable of the bitcoin unfortunately is very low yet. Here is an example, Venezuela. There are many political and economic problem in this country. The inflation of the bolivar was incredible in the last few years, even higher than the volatile of the bitcoin. Maybe in Venezuela for families it would be worth to buy bitcoin and use that system instead of the present one.

4. FinTech Mining – Cloud Mining

However, when it is about Bitcoin mining, we cannot forget the fact that, mining is not simple and entering has its barriers, such as technical knowledge, minimum investment, and location (e.g. warm geographic environment can cause less competitive cost). Of course, FinTech companies invented the solution. Cloud mining is a unique service that allows anyone to earn bitcoins through the mining process without having to purchase specialized hardware or use complicated software. In essence, users purchase the mining power from a data center enabling them to obtain bitcoins. Simply said, you buy yourself some shares of mining power and profit. This means that you only need a contract with someone who offers cloud mining services and a bitcoin wallet. This will let you earn bitcoins without facing any offline issues like bitcoin mining hardware, bitcoin mining software, electricity and more. Bitcoin cloud mining, sometimes called cloud hashing, enables users to buy the output of bitcoin mining power from bitcoin mining hardware placed in remote data centers. Then all Bitcoin mining is done remotely in the cloud. This enables the owners to not deal with any of the hassles usually encountered when mining bitcoins such as electricity, hosting issues, heat, installation or upkeep trouble. There are many benefits of FinTech Mining, like higher profits, tranquil and cooler home, less electricity, equipment problems and less risky. To do this, first you have to look for a cloud mining service provider. With them, you can mine more efficiently because, for example, they use cheap energy sources due to their location. Examples are geothermal energy or water. This reduces the cost of their operation and is also more environmentally friendly. Once you have the right service provider, you need to choose the optimal solution from the packages they offer. These packages differ in terms of contract duration, hashing power, and prices. The price depends on the current market value of bitcoin, the cost, the level of difficulty of the mining, and the chosen hashing rate. It may be seen that the higher the hash rate a miner has managed to bring together, the greater the chance of mining Bitcoin. If a group of miners pool their resources, they achieve a much higher hash rate than if they tried their hardware alone.
A group of miners is called a mining pool. The mining pool therefore has a much better chance of mining bitcoin, but of course the cryptoponey mined by the group must also be distributed among the members.

5. The cost to mine one Bitcoin

Many people are thinking about cryptocurrency mining. Worth it? Not worth it? Still, how much does it cost? Well, it mostly depends on where we want to get into mining. The prices shown below are based on average electricity prices in each country for 2018.

I will analyze the mining cost for four continents. Let’s start with America. I categorized 19 countries in this group. The cheapest countries are from South America, like Venezuela 531 USD, Trinidad and Tobago 1190 USD and Surinam 2956 USD. The most expensive countries are Turks and Caicos Islands 14033 USD, Curacao 11,896 and America Samoa 10,706 USD. The average bitcoin mining cost is 6756 USD.

Secondly, I continued my analysis with Europe and categorized 40 countries in this group. The cheapest mining cost in Europe is in Ukraine with 1852 USD, followed by Belarus 2177 USD, Kosovo 3133 USD and Serbia 3133 USD. The most expensive countries are Germany with 14275 USD, Denmark 14275 USD and Belgium 13482 USD. The average cost is 7025 USD, which is a higher than in America and Asia.

Thirdly, I checked Asia, which includes 34 countries. The cheapest mining cost is in Uzbekistan 1788 USD, Kuwait 1983 USD and Myanmar 1983 USD. The most expensive countries in Asia are South Korea 26170 USD, Bahrain 16773 USD and Sri Lanka 11630 USD. The average cost is 5938 USD.

Then, I checked the Australia and Oceania region, which includes 15 countries. The cheapest cost is in Fiji 5155 USD, New Zealand 7593 USD and Palau 9053 USD. The most expensive countries in this region are Niue 17566 USD, Solomon Islands 16209 USD and Cook Islands 15861 USD. The average cost is 12335 USD, which is much higher than in any other region.

Finally, I analyzed Africa, which includes only 6 countries. The cheapest country are Ethiopia 2855 USD, Zambia 3569 USD and Nigeria 5321 USD. The most expensive are Rwanda 8922 USD, Uganda 7637 USD and South Africa 5948 USD. The average cost is 5709 USD.

Summarizing the analysis, the cheapest mining cost is in Venezuela. Here, extraction of 1 bitcoin costs about 531 USD. Venezuela followed by Trinidad and Tobago with 1190 USD and Uzbekistan with 1788 USD. A bitcoin in June 2018 was worth 7120 USD.

6. Conclusion

Many people are thinking about starting the cryptocurrency mining. So, we decided to check and analyze the mining prices for a lot of country all over the world, calculated with the average electricity prices in each country for 2018. We can claim that, to be profitable in bitcoin mining, mostly depends on where we want to start it. If the most important is the price, then it is worth to start bitcoin mining in Venezuela, Trinidad and Tobago, Uzbekistan, Ukraine, Kuwait or Myanmar, Ethiopia, Zambia which countries mainly belong to the third world. There is another aspect also, the safety, the infrastructure, the existence of the technical requirements. For example, there is an economic crisis and a situation close to civil war in Venezuela and in Ukraine or the technical requirements and the infrastructure are not provided in Ethiopia or Zambia. There are few other countries, like Belarus, Kosovo, Serbia, Kazakhstan, Paraguay, China. Although it is more expensive to mine one bitcoin in these countries, we would say it is more worth it. The conditions for mining are much better than in the first mentioned countries. If we want to start the mining in a well-developed, safe country without any economy or civil crisis, then we should choose Canada, Iceland, Sweden, United States. The mining cost will be much higher than in other countries, but our mining business will be safer and less risk. Finally, thanks to the continuous inventions of the quickly developing FinTech companies, we have also the opportunity to purchase only the shares of a Cloud Mining company and enjoy the Bitcoins form a professionally installed and economically placed Bitcoin mine.

References

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Kenneth B. Haesly II (2016): How to Sole a Problem Like Venezuela: An Argument for Virtual Currency. Online: https://scholar.smu.edu/cgi/viewcontent.cgi?article=1043&context=lbra Date of downloading: 6th February 2020

Kroll, J.A., Davey, I.C., Felten, E.W. (2013): The economics of Bitcoin mining or, Bitcoin in the presence of adversaries.  Online: https://www.econinfosec.org/archive/weis2013/papers/KrollDaveyFeltenWEIS2013.pdf Date of downloading: 6th February 2020

Lee, T.B. (2013): Four reasons Bitcoin is worth studying.  Online: https://www.forbes.com/sites/timothylee/2013/04/07/four-reasons-bitcoin-is-worth-studying/#731ba460cb89 Data of downloading 7th February 2020

Leonardo Vera (2017): In search of stabilization and recovery: macro policy and reforms in Venezuela. Online: https://www.researchgate.net/publication/317595427_In_search_of_stabilization_and_recovery_macro_policy_and_reforms_in_Venezuela 4th February 2020

Pacia, C. (2013): Bitcoin mining explained like you’re five: Part 1 – incentives. Online: https://chrispacia.wordpress.com/2013/09/02/bitcoin-mining-explained-like-youre-five-part-1-incentives/ Data of downloading: 6th February 2020

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László Mátyás Czirkus  PhD student

Szent István University, Doctoral School of Management and Business Administration, Gödöllô

Máté Neményi  PhD student

Szent István University, Doctoral School of Management and Business Administration, Gödöllô