Bitcoin mining is largely eco-friendly says report

This finding contradicts many prior reports and should help to alter the ‘Bitcoin is an environmental disaster’ narrative. The biannual ‘Bitcoin Mining Network’ report was compiled by CoinShares researchers Christopher Bendiksen and Samuel Gibbons. It covers areas such as overall cryptocurrency mining trends, the average costs of operation per area, the types of energy used to power mining rigs as well as the general composition of miners across the world. This is the third iteration of the report.

Global Advisors-owned CoinShares is a London-based digital asset investment and research company that is most known for its offering of exchange-traded crypto asset investment products, such as the Bitcoin Trackers (COINXBT and COINXBE) and Ether Trackers (COINETH and COINETHE). Most recently, in 2018, Global Advisors also entered into a custodial venture for institutional investors.

Renewable energy dominates

The mining sector is dominated by miners located in areas where there is cheap hydroelectric energy. Examples of these areas are Scandinavia, the Caucasus, the Pacific North West, Eastern Canada and Southwestern China.

Utilizing a combination of estimated global mining locations as well as regional renewables penetrations, CoinShares found that the bitcoin mining industry is supported heavily by renewable energy.

Christopher Bendiksen, head of research at CoinShares stated: “Our current approximate percentage of renewable power generation in the Bitcoin mining energy mix stands at 74.1%, more than four times more renewable usage than the global average energy mix.”

This revelation is a win for the bitcoin mining sector which has been heavily criticized in the past for its large energy needs. Additionally, it speaks to a sector that is working to reconcile its ideals with increased global environmental concerns.

Increased transaction fees

The report confirms that bitcoin miners continue to dominate the overall mining sector. Bitcoin proof-of-work miners net greater amounts with regard to both total revenue as well as total security spend.

The report states: “Over the course of 2018, Bitcoin miners received an estimated $5.5bn in total block rewards, $5.2bn (97%) of which was newly minted coins, and $300m (3%) of which were transaction fees. At current (31 May 2019) prices and 30d average fees per block, Bitcoin miners are earning an estimated total annualized return of $6.2bn per year, 94% of which come from new coins and 6% from fees.”

This finding points towards an increase in the fees levied on each transaction within the Bitcoin network. The noted increase in the proportion of returns between block rewards and transaction fees is interesting as well as advantageous for miners because it represents a more mature stream of the transaction market.

The Bitcoin network is designed to cut the number of bitcoins remitted to miners by half at specific intervals. Controlled by the difficulty algorithm, the next block halving is estimated to arrive sometime in the next 12 months. While an expected development in the network, it does represent a significant fall in returns for miners. Thus, the increase in transaction fees is welcome news for the mining community.

Network changes

The CoinShares report also found that there was a pronounced correlation between the hashrate, the bitcoin (BTC) price as well as other macro trends relating to the mining industry related to the two aforementioned factors.

Between November 2018 and June 2019, the hashrate increased around 25% from about 40 EH/s to approximately 50 EH/s. The hashrate experienced a major drop and bottomed out in correlation with the falling bitcoin price. The lowest bitcoin price in recent times was experienced on December 15 2018.

CoinShares notes that “the ~40% drop in hashrate observed at the tail-end of 2018 represents the first time we have ever observed a substantial and prolonged drop in hashrate as a result of sustained large-scale corrections in the bitcoin price.”

As the bitcoin price began to recover and rally in January and beyond, bitcoin miners began returning. Additionally, the rally coincided with the beginning of the rainy season in South-Western China. This is a major factor because the rain is used to create hydroelectric power which is a cheaper source of electricity for Chinese miners. This factor also contributed to the growth of the Bitcoin network’s hashrate.

Moreover, there were two observed macro trends correlated to the shifts in price and hashrate. The first of these is a large number of miners exiting the Bitcoin network due to the fall in price. The reports revealed that a large number of miners experienced bankruptcies and liquidations. In the attempt to recoup some of their funds, some miners resorted to transferring ownership of their mining rigs to other miners. Often the buying miners were those with bigger operations able to withstand the low price pressure.

The second trend is the “first at-scale deployment of the latest generation mining gear.” The report notes that this shift is most visible in the Chinese area of Sichuan. As mentioned earlier this coincides with the rainy season in that area. Despite this, CoinShares found that Chinese dominance as a geographical powerhouse in the mining sector continues to fall, in line with the trend witnessed over recent years.

However, China continues to assert its dominance in the development of mining rigs. The report explains: “Chinese dominance in the hardware manufacturing sector remains as strong as ever and is showing no immediate signs of reduction. Even if the most damning rumors of Bitmain’s struggles were true (we have our doubts), it would have minimal impact on Chinese dominance in the miner manufacturing sector as all other relevant manufacturers are also Chinese.”