Will Bitcoin only go up?

Bitcoin is loved and demonized. Some swear by it as a revolution and the democratization of payment transactions, others see it as an absurdity that has no value and destroys the environment. Its use of (a lot of) electricity has caused massive criticism in many places (1) but is actually a distinctive feature of the Bitcoin model as we will show below.

According to Cambridge University, which publishes The Cambridge Bitcoin Electricity Consumption Index (CBECI), so-called Bitcoin mining consumes more energy than countries like Finland and Belgium. At the same time, the current annual electricity consumption of 84 TWh per year for Bitcoin mining is still well below the consumption for gold mining with 131 TWh per year (2).

What is Bitcoin mining?

Bitcoin mining involves checking new transactions against the Bitcoin network, resulting in the production of new Bitcoins. It does this by solving complex cryptographic hash puzzles to verify blocks of transactions that are updated on the decentralized blockchain ledger. Solving these puzzles requires substantial computing power and sophisticated equipment. In return, miners are rewarded with Bitcoin, which is circulated, hence the name Bitcoin mining (3).

Bitcoins mining rewards compete with the costs of this mining. Running costs arise from a reliable energy supply, an internet connection, and some staff. The cost of electricity is dominant for the profitability of mining (3).

The Bitcoin price compared to the cost of mining a Bitcoin

A fascinating consideration is thus the comparison of the Bitcoin price with the direct variable costs of mining a Bitcoin. Why is that? The higher the Bitcoin price is above the cost, the greater the motivation to deliver this service. We present this analysis for the last few years in the figure below (the price of Bitcoin in red, the variable cost of mining a Bitcoin in black).

Bitcoin price and cost of mining a Bitcoin; Source: Cambridge University, blockchain.com, Partners for Sports analysis

Generally, we see the Bitcoin price way above the variable cost of mining a Bitcoin. The marked areas where the Bitcoin price falls and approaches the variable costs, as was the case in the last crypto winters of 2018 and then again in 2020, are of particular interest. The Bitcoin price has never fallen below the variable cost of mining a Bitcoin, which also applies to the entire existence of Bitcoin before 2018. 

Cause and effect

What could be the reason for this behavior? And do the variable costs of Bitcoin mining even protect against further price decays? The reason could be that numerous Bitcoin transactions are made even during a crypto winter. To complete transactions, mining must take place – somewhat irrespective of its costs. We note a phenomenological connection: The variable cost of mining a Bitcoin support the role of Bitcoin as a store of value. As those increase due to rising energy prices and the network design, the price of a Bitcoin seems to experience strong supportive resistance as soon as prices get too close to direct mining costs.

Upside and worst-case scenario

Should the Bitcoin price again bounce off the variable costs of mining it, Bitcoin advocates might get another confirmation that it is a true store of value and a financial revolution. Should the price though drop well below the variable costs of mining, this could lead to a catastrophic collapse of the network. 

We will certainly follow developments closely. What are your thoughts, given the crypto winter and the recent events in the market? Please post your comments below.

  1. Carter N. How Much Energy Does Bitcoin Actually Consume? Harvard Business Review. 2021; Available from: https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume
  2. University C. The Cambridge Bitcoin Electricity Consumption Index (CBECI) 2022; Available from: https://ccaf.io/cbeci/index.
  3. Tandan D. What Is Bitcoin Mining? How It Works and What It Takes to Make It Pay 2022; Available from: https://www.toptal.com/finance/blockchain/what-is-bitcoin-mining.


The data for the total consumption of electricity to mine Bitcoin was retrieved from the Cambridge Bitcoin Electricity Consumption Index. The annualized consumption guess (in TWh) was matched with the newly issued Bitcoin, retrieved from blockchain.com, on a daily basis. The average electricity price was assumed to be USD 0.05, in line with assumptions by other authors. On top of the electricity price, we assumed 20% of other direct costs (such as rent, wages, etc.). The data file is available on request. 

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