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A quick and very rough estimation: If the USD/BTC exchange rate grows to $1000/BTC (not that far-fetched if Bitcoin is actually widely adopted) bitcoins for a value of $300000 would be produced every hour, given the current rate of 50BTC each 10 minutes. This should mean that the amount of money spent on mining is roughly the same, $300000/hour.

Given an electricy price of $0.01/kWh that means that 3GW, i.e. a rather large power plant, would be used solely for mining.

Is there anything fundamentally wrong about the above calculation? Is it a problem?

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up vote 9 down vote accepted

This is a very difficult prediction to make, but there is one factor often left out of mining cost estimations: cost of hardware. When amortized over their expected lifespans, the costs of various pieces of equipment can become a meaningfully large factor in Bitcoin mining costs. In the days to come, it seems likely that FPGA or ASIC miners will become more common since they offer tremendous power efficiency gains over GPUs. The "downside" to FPGA and ASIC mining is that it is also extremely expensive to obtain the initial equipment, which means that the cost of equipment amortized over its expected lifespan is higher than with GPU mining.

We're now seeing the first commercially available FPGA mining rigs become available, costing about $440 for a 100 MH/s rig consuming 6.8 watts of electricity. Here at my home in Las Vegas, NV it would cost about 55 cents per month to run one of these FPGA boards, and even if the device survived 10 years of operation before its death, amortized hardware cost would be $3.67 per month, absolutely dwarfing energy costs. The ATI Radeon HD 5830 based rigs I currently run cost about $6.58 per 100 MH/s in electricity alone, but a 10-year amortization only adds $0.96 per month per 100 MH/s to that cost. This means the buy-in for GPU mining is low but so is the profit and sustainability.

This puts my cost per coin for FPGAs at $2.45 and for GPUs at $7.54, though there is certainly room for improvement in those numbers and your mileage WILL vary. The important bit, however, is that FPGA mining is far more profitable regardless of hardware cost and is likely to be the next big thing, which does a lot for Bitcoin's overall energy footprint since FPGA mining consumes about 8% of the electricity GPU mining currently consumes. If FPGA mining took over right now, the Bitcoin network could grow to 12 times its current hash rate without seeing a net increase in energy consumption.

In short, Bitcoin is in its infancy still and so is mining. Just as most technologies begin at low efficiency and high cost and grow towards high efficiency and low costs, so too is Bitcoin mining. You are correct in your assumption that electricity use will likely grow with Bitcoin adoption, but the missing factor in that equation is the increasing energy efficiency of mining hardware.

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+1. Very good answer. I would like to know more though. As mining gets more energy efficient less money will be spent on electricity and more on buying hardware. So it's still $300000/hour but most of it will be amortized hardware costs. With that amount of money spent on hardware it becomes interesting to know more about the costs involved in producing the hardware. How much energy is used for this instead, how much labour etc. I know that there are no definite answers here but if there is anything else you wanna add about this, feel free to do it. –  D.H. Sep 6 '11 at 18:27
    
While I feel my answer is fairly complete from a cost-in-dollars perspective, I do see where it could be found lacking from a cost-in-resources perspective. Unfortunately I have absolutely no data on the combined resource costs of such devices and the resource cost of electricity depends largely on how "green" your region of the planet happens to be (hydroelectric < coal for example). If anyone has data, I'd absolutely love to include it above. –  David Perry Sep 6 '11 at 18:40
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Electricity is not the only cost associated with mining. But basically, that's about what we expect. Likely mining will always be just barely profitable with the most cost-effective hardware and the lowest prices for electricity. If it's much more profitable than that, more people will mine, raising the difficulty, and thus reducing the profitability.

On the bright side, the block payout will start dropping in 2013 or so. Every time the block payout drops, we would expect to see a decrease in mining.

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A drop for a while, at least until the tx fee's start surpassing the payout. –  Evil Spork Sep 5 '11 at 19:08
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It gets interesting when transaction fees start becoming significant. You may see huge drops in mining power right after a block is found, since all the 'juicy' transactions will be taken. Then a few minutes later, when a few transactions with high fees build up, you may see a surge of mining. That should be fun. You may have to include a transaction fee not just to get your transaction included in a block but to get a block mined at all. –  David Schwartz Sep 5 '11 at 19:47
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