How to Understand the Cost of Mining Bitcoin; Using 2018 as an Example

The cost of mining a Bitcoin in 2018 is very roughly $6k on average, but the cost varies by region. The main cost of mining a Bitcoin is the cost of energy, and energy prices vary wildly across the world. Meanwhile, rent, taxes, and employee wages also differ by region. Further, hardware costs have to be considered. Further, mining rewards are a matter of probability and the difficultly of mining adjusts over time.[1]

NOTE: Since the difficulty of mining a Bitcoin changes based on the amount of computer power dedicated to mining a Bitcoin, the average cost of mining a Bitcoin can and will change. So we have two things to consider 1. the difference in costs based on energy and overhead (which differs by region), and 2. the fluctuations in costs over time as more or less miners compete. This article is focused on a point and time in 2018, but the logic will apply in any year unless Bitcoin’s Proof-of-Work algorithms fundamentally change.

How to Find the Average Cost of Mining a Bitcoin

All the above factors together make it impossible to offer a single answer as to what the cost of mining a Bitcoin is, but I think I can explain the facts about the cost of mining well enough to give a satisfying answer. For the purposes of this page we will look at the current mining costs (the costs of mining in 2018).

According to a 2018 study by Elite Fixtures (a furniture company who ran a study to get attention, but seems accurate enough based on what I know about energy costs), in terms of energy alone the spread is between $500 (Venezuela; free energy) and $25k (South Korea; very expensive energy).

Now factor in rent, employee wages (if you run a team), taxes, and hardware and you get an even harder to calculate answer due to for example the vast differences between wages, taxes, and rent in a place like say London and rent in Venezuela.

Still, even with it being hard to calculate, I would suggest that $6k is a reasonable rough answer for the average cost of mining, while $4k – $8k is a reasonable rough range.

The reality is no one is going to go to South Korea to open a mining operation due to the costs, and meanwhile the places where it is really cheap to mine tend to have their own drawbacks. So most people are going to mine from places where their cost will be about $4k – $8k.

Meanwhile, in a market where the average price of Bitcoin is below $8k (like our current 2018 market as time drags on), mining is going to consolidate to places where the cost is closer to the $4k – $6k range.

If more miners fire up their computers, at a loss or not, the difficulty will go up and the costs will go up. If people are driven out of the market (further correction in 2018 could do this), then mining becomes more centralized, but the cost of mining is likely to go down.

Miners ensure the Bitcoin system by processing transactions, the system will break if the price goes low enough, however it is unlikely to go low enough to break the system. The worst that will happen is that mining will be consolidated into places like Venezuela.

Ideally Bitcoin’s system is healthier when different miners across the world compete, and thus it is important to have a market price that supports this… but we live in a real world, not an ideal one, and thus the future may consist of mining consolidated into the hands of those who can afford to mine for low costs but at higher difficulties.

NOTE: We would all like to think that the price of Bitcoin will stay at a place where it is profitable for miners, but that isn’t necessarily the case. 1. a group of miners in a country with low energy costs can dump the market to push out competition, 2. speculators often drop the price of metals and oil and such much to the displeasure of miners in other markets, and 3. 2014 was pretty rough for miners and yet here we are. It is an important fundamental, but it is only one factor.

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Citations

  1. VENEZUELA IS “THE CHEAPEST COUNTRY” TO MINE BITCOIN, ACCORDING TO ELITE FIXTURES STUDY. Steemit.com.


"What is the Cost of Mining a Bitcoin?" contains information about the following Cryptocurrencies:

Bitcoin (BTC)