By: Joseph M. Pastore III, Will Bleveans

As cryptocurrencies continue to grow more sophisticated and widespread, the economic possibilities offered by cryptocurrency mining have drawn greater attention from prospective investors. Cryptocurrency mining, which helps to ensure that “transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger,”1 is a potentially profitable activity because a small amount of cryptocurrency is awarded to the “miner” able to verify the transaction fastest. On a large scale, cryptocurrency mining could potentially provide a solid revenue stream to a company able to overcome hurdles related to capital and operating costs. In the first place, the capital costs (in terms of computers, software, and other tools) that deter many would-be cryptocurrency miners would not constitute major impediments to any well-funded company intent on entering the field. But operating costs, rather than capital costs, constitute a larger problem for large-scale cryptocurrency mining companies. Because a certain amount of power is consumed whenever cryptocurrency is successfully mined, ensuring that the cost of electricity does not exceed the value of the cryptocurrency awarded is necessary before any such mining can be profitable. The power required to validate one cryptocurrency transaction, while not large on its own, adds up quickly in the context of large-scale mining operations. According to a report compiled by Coinshares, which provides cryptocurrency-related research and investment tools, companies and individuals mining Bitcoin (a popular cryptocurrency) consume roughly 41 terawatts a year in power.2 And according to that same report, investing in higher-quality equipment will not reduce the power requirement because “only the value of the [cryptocurrency] reward[…]can impact the network’s total electricity draw.”2 The solution, then, is to locate sources of cheap electricity – a solution which many cryptocurrency mining companies have already hit upon. In fact, the report notes that bitcoin miners tend to cluster in “regions dominated by cheap hydro-power,” especially the Pacific Northwest and Northeast regions of the United States.3 Although the influx of cryptocurrency mining operations into these areas has produced a measure of political backlash,4 it is not unreasonable to assume that the economic benefits conferred by such activities will soon outweigh such resistance.

Despite the evident promise of large-scale cryptocurrency mining, some have suggested that the upcoming “halving” of the cryptocurrency awarded for mining Bitcoin might seriously eat into profits and upset the delicate balance of power costs.5 However, this is not likely to constitute a serious headache for the industry for several reasons. First, as a Forbes article on the “halving” notes, Bitcoin operates according to the basic principles of supply and demand. That is to say, as fewer and fewer Bitcoins are disbursed during the mining process, fewer are available to be traded, causing their price to increase. This would conceivably offset the “halving” somewhat. Moreover, the recent increase in miner fees6 (fees paid by blockchain users to miners which supplement the cryptocurrency awarded) could also counterbalance the “halving.” All in all, despite the obstacles posed by power costs, capital investment and the gradual reduction of cryptocurrency awarded, large-scale cryptocurrency mining promises both steady revenue and growth potential in the years to come.

  2. , pg. 6
  3., pg. 10

Tags: Advanced Technology, Joseph Pastore