Grayscale: Deconstructing the Bitcoin Mining Business Model and Sustainability

Original Title: "The Power of Bitcoin Mining"

Author: Zach Pandl

Compiled by: Luffy, Foresight News

• Bitcoin's emergence as a global cryptocurrency system is attributed to the competitive process of mining. The mining mechanism ensures the proper updating of the blockchain and coordinates the economic incentives across the network. Today, the Bitcoin mining network is vast, generating over 700 quintillion (note: 1 quintillion = 1 trillion, 10^18) hashes per second.

• Bitcoin miners earn income from newly issued bitcoins and network transaction fees. Their expenses cover equipment, electricity, and other operational costs. Many miners also hold bitcoins on their balance sheets, and an increasing number are expanding their businesses into artificial intelligence (AI) and high-performance computing (HPC) services.

• Grayscale Research estimates that Bitcoin mining accounts for 0.2% of global electricity consumption; compared to other industries, the proportion of clean energy used in Bitcoin mining is higher. Bitcoin mining may help accelerate the achievement of environmental goals, especially in areas like methane emissions.

Bitcoin is a decentralized computer network that stores $2 trillion in value. The realization of this modern marvel relies entirely on mining: network participants compete for the right to add the next block to the blockchain and receive rewards. Today, the scale of Bitcoin mining operations is astonishing, converting actual energy into digital security. The computational power used to secure the Bitcoin blockchain acts like a digital "vault door," enabling an autonomous computer network to become a global digital currency system. The specialized skills, capital expenditures, and ongoing operational costs required to run Bitcoin mining facilities, along with the industry's high competitiveness, help maintain the decentralization of the Bitcoin network while making the cost of attacks prohibitively high.

Investing in publicly listed Bitcoin mining companies allows one to gain returns from block production and, over time, also benefit from the growing network transaction fees. In fact, most publicly listed Bitcoin mining companies adopt diversified business models, with many holding mined bitcoins on their balance sheets or even purchasing bitcoins on the open market. Currently, Bitcoin mining companies have also begun to venture into data center operations for artificial intelligence and high-performance computing, diversifying their business.

Modern Marvel

Although Bitcoin mining is technically complex, its concept is straightforward. Dedicated computers compete to guess a random number, and the first computer to guess the correct number wins the right to update the blockchain (i.e., "mine a block"). The winning miner receives the newly issued bitcoins and transaction fees for that block (i.e., "block rewards").

There are no shortcuts in this competition; for instance, there is no algorithm that can find the correct number faster, and Bitcoin miners can only compete through brute force. This process can be viewed as a probability game. Miners continuously guess until they find the correct answer, much like rolling a multi-sided die until the desired number appears. Thus, the probability of winning depends on how many guesses (or "rolls") a miner can make per second. Operators with the most machines and the most efficient machines make the most guesses, thereby maximizing their chances of winning block rewards.

From a technical perspective, the winning result is not merely a random number but a "hash" that combines this number with other data. In computer science, a hash function is a mathematical operation that converts arbitrary data into a string of characters, known as a hash. For example, using the hash function in the Bitcoin network, the hash of the word "Bitcoin" is: b4056df6691f8dc72e56302ddad345d65fead3ead9299609a826e2344eb63aa4.

Therefore, the task of Bitcoin miners is to generate hashes quickly: guess a random number, compute its hash (combining the random number with other data), and then check if it is correct.

It is estimated that today there are about 5 to 6 million Bitcoin mining machines generating hashes at an astonishing scale (see Figure 1). Over the past 90 days, Bitcoin miners have collectively generated hashes at an average rate of 765 EH/s (765 quintillion hashes per second). This means that Bitcoin miners are guessing random numbers and computing their hashes more than 700 quintillion times per second on average. To put this number into perspective, it is estimated that there are about 7.5 quintillion grains of sand and 10 quintillion insects on Earth.

Figure 1: Bitcoin miners generating hashes at a massive scale

Generating such a large number of hashes is costly, but that is precisely the point. To compete for rewards, mining operators need to purchase specialized machines and other hardware and pay ongoing electricity and maintenance costs. Thus, by generating the correct hash, miners provide a "proof of work," indicating that they have invested economic resources and can be trusted to update the blockchain.

Attacking Bitcoin means defeating the existing Bitcoin mining industry. Theoretically, if a malicious actor controls 51% of the network's hash rate, they could mine the majority of blocks and disrupt the network (for example, double-spending bitcoins or censoring certain transactions). In a paper, researchers estimated that as of February 2024, the cost of launching a sustained one-hour 51% attack on the Bitcoin network would be between $5 billion and $20 billion. In reality, no actor has the economic incentive to invest these resources, and the Bitcoin network has other defense mechanisms beyond mining.

Business Models of Bitcoin Mining

The income of Bitcoin miners equals the newly obtained block rewards from mining, while their operational expenses come from the electricity consumed by running machines and generating hashes (which may also include maintenance, pool fees, and other operational costs). Therefore, the goal of Bitcoin miners is to generate the maximum number of hashes per second at the lowest possible cost.

In 2024, miners collectively earned about 230,000 bitcoins, valued at nearly $15 billion at that time. This represents an increase of about 19 times compared to 2014, with a compound annual growth rate of 34% (see Figure 2). Every four years, the rate of newly issued bitcoins decreases in an event known as "Bitcoin halving." Although the issuance in terms of the number of bitcoins has declined, mining revenue has still increased over time due to the rising price of bitcoin in dollars. In the future, growth in mining revenue may come from increases in bitcoin prices and network transaction fees.

Figure 2: Growth of Bitcoin mining revenue over time

The operational expenses borne by miners primarily consist of the electricity consumed by running machines. Each operator negotiates their own electricity purchase agreements, which can vary widely around the world. For simplicity, we can construct a simplified overall economic picture of Bitcoin miners by assuming a certain electricity cost and ignoring other costs. For example, Figure 3 compares the income of Bitcoin miners with estimated total electricity costs assuming an electricity price of $0.05 per kilowatt-hour. The difference between income and electricity costs can be viewed as a simplified measure of miners' operating profit margins. When the dollar value of block rewards increases, miners benefit; conversely, when the dollar cost of generating hashes rises, miners are harmed.

Figure 3: Miners' operating profit margins reflect the gap between block rewards and electricity costs

Given the varying electricity costs faced by global miners, a more intuitive measure might be the dollar value obtained per unit of electricity consumed, such as miner income per megawatt-hour (MWh). Participants in the mining industry often refer to the closely related concept of "hash price," which is calculated by the ratio of daily miner income to network hash rate. Although the concept is very similar, hash prices tend to decline as miner efficiency improves. Therefore, miner income relative to electricity consumption may more accurately reflect changes in miners' economic conditions over time. Figure 4 shows the daily income of Bitcoin miners per megawatt-hour. Over the past two years, this estimate has remained relatively stable, despite significant fluctuations around the 2024 halving.

Figure 4: Bitcoin miners' income per megawatt-hour has remained relatively stable over the past two years

Investing in Bitcoin Mining Companies

Investing in publicly listed mining companies allows one to engage in the Bitcoin economy through the securities market. While the business models of Bitcoin mining companies may become increasingly diversified, they all involve the core business of generating hashes, mining blocks, and obtaining block rewards. Due to differences in electricity costs, non-electric operational expenses, and other factors, the actual costs of obtaining block rewards vary among mining companies. In the third quarter of 2024, the largest publicly listed mining companies had an average production cost of Bitcoin ranging from $34,000 to $59,000 (see Figure 5). The average price of Bitcoin during that quarter was $61,000.

Figure 5: Varying production costs among different mining companies

The ways in which Bitcoin mining companies hold bitcoins on their balance sheets also differ. Some companies immediately liquidate block rewards, some retain block rewards, and others even purchase more bitcoins on the open market. Naturally, when the price of Bitcoin changes, the differences in balance sheet policies can have significant impacts on the financial performance of publicly listed mining companies (see Figure 6). That said, many factors can influence the risk profile of individual mining companies; those with relatively high holdings of bitcoins on their balance sheets are not necessarily riskier than those that liquidate block rewards.

Figure 6: Some mining companies hold bitcoins on their balance sheets

Recently, Bitcoin mining companies have begun to venture into areas such as artificial intelligence and high-performance computing (HPC) services, which are experiencing rapid growth in demand for data center infrastructure. For example, Goldman Sachs' research estimates that from 2023 to 2030, the electricity demand for data centers (excluding cryptocurrency-related portions) could grow by 160%. Bitcoin mining companies may have a competitive advantage in supplying the AI/HPC market because they can access low-cost electricity and related infrastructure. In early 2024, Core Scientific, the third-largest publicly listed mining company by market capitalization, announced a long-term contract with specialized AI infrastructure service provider CoreWeave. Since the announcement of the deal between Core Scientific and CoreWeave in June 2024, several other publicly listed mining companies have also taken steps to expand their businesses into the AI/HPC sector.

Bitcoin Mining and Sustainability

Bitcoin mining consumes actual economic resources—electricity—to create decentralized digital security. The success of Bitcoin as a digital currency system means that mining now consumes a significant amount of electricity. Bitcoin is a unique energy consumer, having utilized a considerable proportion of clean energy resources. Grayscale Research believes that over time, mining may positively contribute to the green energy transition.

According to data from Coin Metrics, we estimate that over the past 12 months, the electricity consumption rate of the Bitcoin network has been approximately 175 terawatt-hours (TWh, note: 1 TWh = 1 million kWh). This is roughly consistent with estimates from the Cambridge Centre for Alternative Finance (see Figure 7). According to data from 2023 (the latest available year), Bitcoin's energy consumption accounts for 0.2% of global electricity consumption (considering power losses during transmission). The Cambridge Centre for Alternative Finance states that data centers consume about 200 TWh of electricity annually and that energy consumption in data centers is expected to rise due to the use of AI models.

Figure 7: Bitcoin mining consumes electricity to create digital security

Compared to typical residential or commercial users, Bitcoin is a unique energy consumer. Bitcoin mining is modular, mobile, location-agnostic, interruptible, and highly sensitive to changes in electricity prices. Therefore, miners can often operate in areas with low-cost clean energy resources. It is estimated that about 50% to 60% of the electricity used in the Bitcoin mining industry comes from sustainable energy (including nuclear power). In the U.S. and globally, sustainable energy accounts for about 40% of electricity generation. Using 2023 data and assuming that sustainable energy accounts for 50% to 60% of Bitcoin's electricity consumption, we estimate that Bitcoin mining accounts for 0.2% to 0.3% of global CO2 emissions related to electricity generation.

Grayscale Research believes that in the coming years, Bitcoin mining will help accelerate the application of renewable energy production. Due to its unique attributes, Bitcoin mining incentivizes investment in the development of renewable energy infrastructure, especially in areas without transmission lines connecting to major population centers. Bitcoin mining can also help stabilize grid demand, which would otherwise fluctuate due to consumption patterns and weather, as it does in the Electric Reliability Council of Texas system. Additionally, startups like the Sustainable Bitcoin Protocol have created market mechanisms to incentivize the use of clean energy and reward reductions in methane emissions. Addressing methane emissions may become a particularly important avenue for Bitcoin miners to contribute to environmental goals. Furthermore, companies like Crusoe Energy have developed methods to utilize excess natural gas instead of flaring it, converting natural gas into electricity for Bitcoin miners.

In the coming years, the growth of technological applications will create significant demand for electricity, driven by digital assets, artificial intelligence, and other industries. Grayscale believes that Bitcoin contributes to the healthy operation of global electricity infrastructure and has a unique advantage in accelerating the transition to renewable energy compared to many other industries.