Bitcoin Mining Is Set to Turn Greener – Global X ETFs

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The Bit­coin network’s secu­ri­ty is derived from a process called Proof-of-Work (PoW) which is pow­ered by advanced hard­ware and large amounts of elec­tric­i­ty. In PoW min­ing, min­ers aggre­gate trans­ac­tion­al data over a spe­cif­ic peri­od and attempt to sum­ma­rize this data into an encrypt­ed out­put that is accept­ed by the rest of the net­work. This process is com­pu­ta­tion­al­ly-inten­sive and requires a sig­nif­i­cant amount of ener­gy. Suc­cess­ful min­ers are com­pen­sat­ed by the net­work with new­ly-cre­at­ed bit­coin. PoW mining’s ener­gy require­ment is not arbi­trary, how­ev­er. By requir­ing min­ers to expend resources to update the state of the shared ledger, tam­per­ing with his­tor­i­cal data becomes extreme­ly cost-prohibitive.

Today, the glob­al bit­coin min­ing indus­try con­sumes the same amount of elec­tric­i­ty as a small coun­try such as The Nether­lands.1 While the total elec­tric­i­ty con­sump­tion is high, it does not tell the whole sto­ry. It is also essen­tial to con­sid­er the sig­nif­i­cant advance­ments the min­ing indus­try has made in improv­ing the ener­gy effi­cien­cy of their oper­a­tions, as well as the forces cat­alyz­ing the min­ing indus­try to adopt greater amounts of sus­tain­ably-sourced elec­tric­i­ty into the min­ing process.

Key Takeaways

  • Bit­coin min­ers com­pete to max­i­mize their share of a fixed amount of mine­able Bit­coin. Min­ers are incen­tivized to uti­lize effi­cient hard­ware and con­sume inex­pen­sive ener­gy to opti­mize prof­it margins.
  • Advances in the effi­cien­cy of min­ing hard­ware have been impres­sive, but the pace of improve­ments is slow­ing. Uti­liz­ing the cheap­est ener­gy sources is becom­ing increas­ing­ly impor­tant to reduce oper­a­tional costs.
  • Renew­able ener­gy sources such as solar and wind are becom­ing increas­ing­ly cost-com­pet­i­tive. Adopt­ing these ener­gy sources into the min­ing process is a trend that is like­ly to accel­er­ate in the min­ing indus­try, which may sup­port a decrease in the Bit­coin network’s car­bon footprint.

Miners Power ASICs to Earn a Share of Bitcoin Rewards

Appli­ca­tion-spe­cif­ic inte­grat­ed cir­cuits (ASICs) are spe­cial­ized hard­ware units used in the com­pu­ta­tion­al­ly-inten­sive process of bit­coin min­ing. These machines are tasked with “solv­ing” a block of data and adding it to the blockchain. ASICs do this by aggre­gat­ing trans­ac­tion­al data across the net­work and push­ing it through an encryp­tion algo­rithm in search of an arbi­trary out­put. This iter­a­tive process requires ASICs to make bil­lions of guess­es per sec­ond until the cor­rect out­put is found.

Each indi­vid­ual com­pu­ta­tion made by an ASIC is referred to as a hash, and the num­ber of hash­es an ASIC pro­duces per sec­ond is referred to as the hashrate. A sin­gle hash can be thought of as a lot­tery tick­et to solv­ing a block and earn­ing a bit­coin reward. A miner’s share of the network’s aggre­gate hashrate—the amount of com­put­ing pow­er gen­er­at­ed by all ASICs on the network—represents the bit­coin rewards the min­er can expect to earn over a giv­en time period.

High Competition Requires Miners to Seek Operational Efficiencies

Bit­coin min­ing is high­ly com­pet­i­tive. As the network’s aggre­gate hashrate increas­es, min­ing oper­a­tions that do not pro­por­tion­al­ly scale their hashrate become dilut­ed and expe­ri­ence a decrease in expect­ed bit­coin rewards. To remain com­pet­i­tive, min­ers are forced to con­tin­u­al­ly increase their hashrate, result­ing in an arms race for the most pow­er­ful and effi­cient ASICs. The first chart below shows how the hashrate secur­ing the net­work has increased over time, while the sec­ond chart demon­strates how increas­ing com­pe­ti­tion has led to a decrease in the aver­age income per hash.

To main­tain prof­it mar­gins in the face of these com­pet­i­tive forces, min­ers can either uti­lize more effi­cient min­ing hard­ware that max­i­mizes hashrate per unit of ener­gy con­sumed, or they can pow­er their min­ing devices with the cheap­est ener­gy available.

The Importance of Energy Efficiency Grows as Hardware Advances Slow

The ear­ly days of indus­tri­al-scale bit­coin min­ing were defined by min­ers com­pet­ing to max­i­mize ener­gy effi­cient hashrate by using the lat­est-gen­er­a­tion ASICs. Rapid advance­ments in semi­con­duc­tor tech­nol­o­gy fueled this com­pe­ti­tion as ASICs saw expo­nen­tial improve­ments in hashrate effi­cien­cy in a mat­ter of years. Com­pared to their 2014 coun­ter­parts, today’s ASICs are rough­ly 36x more ener­gy effi­cient as mea­sured by Joules of ener­gy con­sumed to pro­duce 1 giga­hash (1 bil­lion hash­es) of com­put­ing pow­er.2 How­ev­er, the effi­cien­cy gains in ASIC tech­nol­o­gy are becom­ing increas­ing­ly mar­gin­al, as illus­trat­ed in the chart below.

In the face of slow­ing ASIC advance­ments, the dom­i­nance of hard­ware as the main deter­mi­nant of a miner’s prof­itabil­i­ty will like­ly dimin­ish. In its place, cost-com­pet­i­tive ener­gy will like­ly become an increas­ing­ly impor­tant input.

Economic Alignments Incentivize Miners to Adopt Renewable Energy

Min­ers are incen­tivized to oper­ate in loca­tions with the cheap­est and most acces­si­ble ener­gy avail­able. Expand­ing oper­a­tions in places suit­able for solar and wind farms is a com­pelling option. While these ener­gy sources cur­rent­ly have reli­a­bil­i­ty lim­i­ta­tions, solar and wind ener­gy have become more afford­able than fos­sil fuel sources, as illus­trat­ed in the chart below.

The bit­coin min­ing indus­try is tak­ing note of the cost ben­e­fits of renew­able ener­gy. Recent­ly, a num­ber of indus­try-lead­ing min­ers began a tran­si­tion of their oper­a­tions away from fos­sil fuel sources of ener­gy. Among these, Marathon Dig­i­tal relo­cat­ed oper­a­tions from a coal-pow­ered min­ing facil­i­ty in Mon­tana to more sus­tain­able facil­i­ties includ­ing a wind-pow­ered facil­i­ty in King Moun­tain, Texas in Q3 2022.3 The Bit­coin Min­ing Coun­cil (BMC), a glob­al forum of min­ing com­pa­nies that rep­re­sents 48.4% of the world­wide bit­coin min­ing net­work, esti­mat­ed that in Q4 2022, renew­able ener­gy sources account­ed for 58.9% of the elec­tric­i­ty used to mine bit­coin, a sig­nif­i­cant improve­ment com­pared to 36.8% esti­mat­ed in Q1 2021.4

Halvings Could be Another Catalyst for Renewable Energy Adoption

In addi­tion to com­pe­ti­tion, bit­coin halv­ings could also accel­er­ate green ener­gy adop­tion among min­ers. Halv­ings hap­pen every 210,000 blocks, approx­i­mate­ly every four years.5 As the name sug­gests, halv­ings reduce bit­coin block rewards by 50%, which low­ers rev­enues earned by bit­coin min­ers by almost the same amount if there is no change in the price of bit­coin. Expect­ed in 2024, the next halv­ing will reduce block rewards from 6.25 BTC to 3.125 BTC issued per block.6 With com­pe­ti­tion and halv­ings pres­sur­ing min­ers to seek out effi­cien­cy gains wher­ev­er pos­si­ble, bit­coin min­ers are dis­cov­er­ing that envi­ron­men­tal­ly sus­tain­able prac­tices may be the next fron­tier to explore.

Relat­ed ETFs

BKCH – Glob­al X Blockchain ETF

Click the fund name above to view cur­rent hold­ings. Hold­ings are sub­ject to change. Cur­rent and future hold­ings are sub­ject to risk.

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