Groundbreaking CoinShares Report Disputes Bitcoin Mining Costs & Common Misconceptions

Most of the cryptocurrency community is not directly involved in bitcoin mining. That’s why there are enormous misconceptions about the true cost of bitcoin mining.

CoinShares Head of Research Christopher Bendiksen published a post on Medium last week trying to clarify some misconceptions.

“…lately we’ve heard some rather unsubstantiated claims about the energy consumption / climate impact of the bitcoin network repeated through various media channels,”

explained Bendiksen.

In response to these misconceptions, Bendiksen and CoinShares produced a comprehensive research paper about the current state of mining on the bitcoin network.

Bendiksen also summarized the results neatly in his Medium post.

6 Misconceptions About Bitcoin Mining

The paper provides a comprehensive look at the cost of bitcoin mining, including the electricity consumption of the bitcoin network and the efficiency of the average miner. Overall, there were six key takeaways from the paper, including the six following misconceptions.

Bitcoin’s Energy Usage Is A Major Component Of Its Network Security Model

The paper describes bitcoin’s energy usage as “a major component” of the bitcoin network’s security model.

“Unlike previous centralised network infrastructures where a third party is in total control, in a distributed system, part of the key to keeping the transaction record honest is determining who gets to write to the database.”

In bitcoin, any entity requesting write privileges to the distributed database has to prove an expenditure of energy. This is what the “proof of work” consensus algorithm is based on. With no risk (expenditure) there’s no reward (bitcoin).

“The reward being paid in bitcoin ensures the incentives are aligned between maintaining truthfulness (security) of the network and mining (writing to) the network; because acting in bad faith for the network results in diminishing the value of the bitcoin reward (financial loss for the actor).”

In more basic terms, a malicious individual has no incentive to harm the bitcoin network. That’s because it takes significant energy consumption to do so. The attacker’s attempt – say, a malicious block – would be rejected by the network. The malicious person would have spent all of that energy to achieve nothing. There’s no incentive for this behavior, and that’s why the bitcoin network is secure.

Some people criticize the high energy consumption of the bitcoin network. CoinShares, meanwhile, makes the point that it’s critical to network security.

Previous Reports About Bitcoin’s Energy Footprint Have Been Exaggerated

The CoinShares report illustrates some serious problems with previous calculations about the bitcoin network’s energy consumption.

You’ve probably seen headlines on major media outlines gleefully report that the bitcoin network’s energy consumption has passed the energy consumption of entire countries like Chile, for example.

CoinShares found, however, that many of these reports are “greatly exaggerated”:

“Where our research produced an estimate of 35 TWh in mid-May, prior estimates had that at nearly double — 65 TWh*. We would also like to note that this is simply a criticism of previous methodologies. If the previous estimate had indeed been correct, it would suggest an even higher level of security than what is currently achieved.”

Most Of The Bitcoin Network’s Energy Comes Trom Renewable Hydroelectric Sources

The CoinShares report found that the majority of the bitcoin network’s electricity comes from hydroelectricity – a renewable source of energy.

CoinShares also refuted the idea that the bitcoin network has a carbon footprint of 32 million tonnes. Their research “finds no proof of this claim” and “in fact identified the primary source of power for the mining network to be hydroelectricity.”

The reason is simple: bitcoin mining is extremely competitive. Miners are constantly looking for the cheapest, most efficient sources of electricity. The cheapest electricity comes from hydroelectric sites that overproduce electricity. It’s an affordable and renewable source of energy with a relatively small carbon footprint.

Miners Periodically Change Location To Take Advantage Of Profitable Conditions

We just established that mining is extremely competitive. Price pressures on electricity are so strong, according to the CoinShares report,

“that some miners migrate with the seasons to capture the cheapest renewables, the most advantageous climates, often when seasonally variable production outstrips the steadier demand.”

The high mobility of bitcoin miners makes it relatively easy to pack up a bitcoin mining operation and move it to a more suitable location.

One example of “seasonal shifts” in profitability can be seen with hydroelectric dams. At the end of summer, the water behind a dam might be low. The dam is releasing minimal water through its spillways. There’s no overproduction of electricity and no cheap electricity. During late winter and early spring, however, the opposite is true: the dam has more than enough water to operate at maximum capacity, and they open their spillways to let excess water pour through. Electricity is cheap.

Network Hashrate Is Growing By 300% Annually While Chips Become Cheaper And More Efficient

The hashrate of the bitcoin network has grown by 300% per year over the past 4.5 years, according to the CoinShares report.

Over that same time period, chip efficiency (measured in GH/J) has increased by an average annual rate of approximately 80% while the chip cost per hash ($ / TH / s) has fallen by an annual rate of approximately 50%.

Mining Is Becoming Increasingly Distributed Around The World

We hear a lot about how mining power is concentrated in China, and that 75% of bitcoin mining hashrate is generated by China-based mining pools.

The CoinShares report didn’t dispute that fact. However, the report does claim that the network is seeing increasing geographical distribution.

“In the wake of the unfriendly policies towards Bitcoin miners adopted by the Chinese government we are observing an increase in miners setting up shop in the Nordic countries, Canada and north-western United States.”

Mining locations have something in common: cool climates, the availability of cheap and renewable electricity, access to high speed internet, and business-friendly governments.

You can view the full report at

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