Bitcoin is a revolutionary payment instrument, but it is doubtful whether the Proof-of-Work (PoW) nature of the system is financially sustainable in the long term. Using public and on-chain data to assess its sustainability and longevity, we analyze the Bitcoin mining sector as it plays an important role in the network. We define what Bitcoin is and how mining works while studying the geographical distribution of users and mining power, efficiency, electricity consumption and source. We also analyze the hash rate, hardware costs, hardware efficiency and marginal creation cost. Miners offer their services against a reward while incurring large fixed costs within a highly competitive market with relatively thin margins. This is what economic theory predicts for a competitive market that has a single homogeneous good.
2 The Bitcoin System
The financial crisis of 2007–2008 was a severe worldwide recession. The excessive risk-taking by banks, combined with the bursting of the United States’ housing bubble, caused the values of securities tied to U.S. real estate to plummet and damaged financial institutions globally.
It is believed that, Satoshi Nakamoto, the pseudonymous person/group behind blockchain and Bitcoin, created this new digital cash system in order to remove the third party intermediaries that are traditionally required to conduct digital monetary transfers and unscrupulously profit from it. By removing intermediaries, transactions can flow without censorship and cheaply across boarders making it a fair and transparent system.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, (…). We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.” 
2.2 What is Blockchain?
A blockchain is a decentralized, distributed, and public, digital ledger consisting of records called blocks that are used to record transactions across many computers, in which any involved block cannot be altered retroactively without the alteration of all subsequent blocks. This feature allows the participants to verify and audit transactions independently. It is managed autonomously using a peer-to-peer network collectively adhering to a protocol for inter-node communication.
This list of records called blocks, are linked using cryptography. Each block includes the cryptographic hash, i.e, an output of the SHA-256 (Secure Hash Algorithm) cryptographic function, of the prior block in the blockchain, linking the two. The hash of the previous block, the timestamp, and all transaction data are contained inside the new block. Computers connected to the network validate the digital ledger by solving complicated mathematical equations in order to receive the correct hash that contains all the previous block’s information.
2.3 What is Bitcoin and how does it work?
Bitcoin (BTC) is the cryptocurrency that lives in the blockchain. It is the first digital currency to use peer-to-peer technology to facilitate instant payments. There are no physical bitcoin, only balances kept on a public and transparent ledger that everyone has access to, where all bitcoin transactions are verified by a massive amount of computing power. The Bitcoin network offers an efficient mean of transferring money over the internet and is maintained by a decentralized network with a transparent set of rules, thus presenting an alternative to central bank-controlled fiat money.
Mining is a record-keeping service done through the use of computer processing power called Proof of Work (PoW), where miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes. When a block is mined, miners are rewarded with not only the release of new bitcoin but also with the transaction fee that each user paid to broadcast their transaction onto the network.
Bitcoin emission rates decrease every 210,000 blocks, making it a disinflationary asset. In order to maintain the steady flow of newly mined blocks of approximately one every 10 minutes, the network difficulty, i.e, the measure of how difficult it is to mine a bitcoin, varies proportionally to the computational power dedicated to the network. This feature makes computations harder to do as more miners join the network whilst keeping the network secure and stable.
3 Network Analysis
3.1 Network Adoption
Despite the transparency blockchain offers, it is hard to estimate the number of unique bitcoin owners due to the pseudo-anonymity. Some people prefer to store their bitcoin in brokerages/regulated exchanges while others store it inside bitcoin wallets, i.e, a digital wallet that contains pairs of public and private cryptographic keys that can be used to track ownership, receive or spend bitcoin, all without personal information, where each user can have multiple wallets. In a report from Crypto.com, the number of global bitcoin users reached ∼71 million in January 2021. Since 2017, the number of new users have been increasing at a steady and impressive rate of more than 40% per year. 
Coinbase, the most prominent exchange in this space, has over 41 million users registered to its platform, reporting last year an average of 2.8 million monthly users. The exchange offers a wide variety of cryptocurrencies but most investors start their crypto-journey with the oldest most valuable cryptocurrency, bitcoin. This new and emerging space is growing at an incredibly fast pace, capturing people’s interest from all around the globe, with one study suggesting that 18% of users are located in Europe, 27% in North America and 48% in Asia, while Africa and Latin America compose the remaining market share. 
These statistics mask the discrepancies that can be found in developing countries, mostly located in Africa and Latin America. The political and economic uncertainties combined with poor financial and internet infrastructures make up the biggest obstacle for adopting bitcoin and cryptocurrencies as an acceptable store of value or currency.
3.1.2 Hash Rate
New bitcoin are created out of thin air from the computing process called mining, a term inspired by how precious metals are extracted from the Earth’s crust. This computing process validates around 4 transactions per second, which equates to 300,000 transactions per day or ∼110M transactions per year while consuming ∼87 TWh annually, the equivalent to the energy consumption in Finland during 2019. 
Despite being dwarfed by payment systems like Visa or Mastercard that handle up to thousands of transactions per second, people still use bitcoin as a mean of wealth transfer and wealth accumulation since the transaction value on the network is estimated to be around $6.4B per day. All this daily volume is secured by more than 160EH/s (1 ExaHash equates to 106 TeraHashes or 1018 hashes).
This high level of network security is increasing at an average growth rate of 255% per year with a 73.35% increase in the homologous period alone. A high hash rate is a general indication of a healthy Bitcoin mining environment since it means that more miners are using the most efficient mining hardware they can afford, while competing with each other to process and validate transactions for the block reward.
3.1.3 Price Correlation
Mining cost will always tend towards the price of bitcoin minus a narrow competitive margin. However, these dynamics are not instant, and there is an asymmetrical delay in the trailing effects. There is in fact a lag between price increases and increasing hash rates as miners need to order and install new, more efficient mining equipment as the block rewards become more lucrative as the bitcoin price rises. Analyzing the correlation between the daily price of bitcoin and the network’s hash rate, from Q1 2015 to Q1 2021, returns a Pearson Correlation Coefficient of ρ = 0.73, which means that these metrics are highly correlated.
Miners are paid in bitcoin while incurring local currency costs, hence increasing the hash rate during a non-profitable mining environment would not make economic sense for a miner. A higher bitcoin price means more profit is earned for every coin mined. Miners may be expanding their operations in order to make the most of the ongoing higher prices. As long as the price maintains momentum, the hash rate will likely stay high. With similar logic, it is important to understand that there is also negative price pressure being created as part of this feedback loop. Miners operate marginal businesses, they have to sell a significant portion of their mined bitcoin to pay for expenses, therefore creating constant downward pressure on price. A higher hash rate may indicate more miners are looking to sell BTC, because their operations become more expensive.
3.2 Network Power Distribution
3.2.1 Nodes and Mining Pools
In order to analyze how the Bitcoin network is distributed, it is important to understand what are nodes and mining pools and how they work.
A node is a piece of computer equipment attached to a network that validates the blockchain by following a number of rules. When the entire network follows these rules, all nodes should help to produce the same blockchain. When a transaction is broadcast, nodes use the ”gossip protocol” to relay it to all the network; each node sends it to all nodes it is connected to as soon as it receives it, unless it received it already, in which case the transaction is ignored. Seconds after it is broadcast, the transaction reaches all the mining nodes and waits in the mempool, where all the valid transactions wait to be confirmed by the Bitcoin network, until a miner includes it in a block. The transaction is then considered confirmed (set in stone) when enough new blocks are created on top of it.
A mining pool is a joint group of miners who combine their computational resources over a network to strengthen the probability of finding a block or otherwise successfully mining for bitcoin. If the mining pool is successful and receives the block reward and the subsequent fees, that reward is divided among participants in the pool. By taking part in a mining pool, individuals give up some of their autonomy in the mining process. They are typically bound by terms set by the pool itself, which may dictate how the mining process is approached which in some cases, might lead to malicious activity.
A small number of mining pools, such as F2Pool, Poolin, BTC.com and AntPool, dominate more than 50% of the bitcoin mining process. Although many pools do make an effort to be decentralized, these groups consolidate much of the authority to govern the bitcoin protocol.
3.2.2 Geographic Distribution
A collusion between miners could potentially tamper the Bitcoin network if they could control 51% of the hash rate and the idea of geographical centralization is a concern. If any entity obtained majority of the hash rate, the attackers could alter and reorganize previous transactions registered on the network, effectively erasing all evidence that they happened and funnel funds to themselves. It is factually correct to say that Chinese bitcoin mining pools control a large amount of the hash rate that powers Bitcoin. A study by the University of Cambridge in 2020 estimated that there was about 65% of the hash rate within China itself. This is largely due to cheap hydroelectricity and close connections between hardware manufacturers that build machines specifically to solve hashes that are based in China. 
China’s hash power dwarfs that of the US nine-fold, with America accounting for just 7.24% of the global hash power total, a distant second place. At 6.9%, Russia comes in third followed by Kazakhstan with 6.17%, Malaysia with 4.33%, and Iran with 3.82%. The rest of the world make up 6% of the hash rate.
The study is based on geo-location data of hashers connecting to the Bitcoin mining pools BTC.com, Poolin, and Via BTC. These three pools represent around 32.9% of the total Bitcoin hash power while the remaining hash power’s location remains unknown.
3.3 Network Rewards
The reward for mining a block began at 50 BTC and it has been successfully halved every 210,000 blocks ever since, with the last BTC to be attributed on the 6,929,999th block. The total amount of bitcoin to be issued is 21 million BTC, making it a finite resource. In addition to the block reward, miners also enjoy the fees that users spent to get their transactions validated on the blockchain. When miners pick transactions from the mempool, they usually include the ones with the highest fee first. It can be seen as a tip for the computational work.
On May 11th 2020, the block rewards was successfully halved for the third time, from 12.5 BTC to 6.25 BTC. Nevertheless, despite the slashing, the price appreciation that bitcoin has seen over the past year, made transaction fees account for an average of ∼8% of total rewards that miners receive.
4 Bitcoin Mining
4.1 ASIC Miners
When Bitcoin was at its early stages, with only a few users, you could use your CPU (Central Processing Unit) to mine BTC. As more users joined the network, the hash rate skyrocketed and as a consequence, so did the difficulty of the network. Computations would become harder to solve and no CPU nor GPU (Graphics Processing Unit), was able to mine a block under 10 minutes.
In response to Bitcoin’s increase in popularity, hardware producers started manufacturing ASICs, Application-Specific Integrated Circuits, which were specifically designed to be fast and efficient at mining, with far greater computing capacity and reduced energy expenditure. With GPUs and CPUs now obsolete, ASIC miners became the industry’s standard for mining operations. Bitmain, a Chinese company that specializes in ASIC development, dominated 66% of ASIC market, as of December 2019. That share has since diminished. 
The Antminer S19 Pro, manufactured by Bitmain, currently costs $7,500 and has a hash rate of 110 TH/s while consuming 29.5 J/TH (Joules per TeraHash), the equivalent to an average central air conditioner. At the current price of ∼$58,000 per BTC, this machine makes around 39$ per day not accounting for the price of electricity.
The break-even point depends on the machine’s price and efficiency, the network’s hash rate and difficulty, the average price of BTC, fixed costs, taxes, etc. all of which are not easy to estimate in a volatile market. If we consider the average price people in the U.S. pay for electricity, about 12 cents per kilowatt-hour, it would take 223 days to cover the purchase cost if all other variables remain constant.
4.2 Energy Mix
Coinshares, a Cryptocurrency Asset Management and Analysis Firm, states that 73.1% of the electricity used by Bitcoin is generated from renewables, such as hydropower, making it ”more renewable driven than almost every other large-scale industry in the world”. Their main assumption is that miners, wherever they are located, utilize the same mix of power generation (fossil/nuclear or renewable) as the average reported in their region.
Despite the efforts Coinshares made to accurately pinpoint the location of global mining centres, the Bitcoin mining industry remains a highly private and secretive industry. As a result, the estimates may be subject to significant potential uncertainty. Miners are still majorly confined to regions dominated by cheap hydro-power, such as Scandinavia, The Caucasus, The Pacific North West, Eastern Canada and Southwestern China. 
4.3 Cost of Production
Energy is the quantitative property that must be transferred to an object in order to perform work on. By the first law of thermodynamics energy can be transformed from one form to another but can neither be created nor destroyed. The world’s economy runs on energy, either electric, fossil or human. In order to create or produce anything, energy must be transformed and bitcoin mining is no different. When Satoshi designed PoW, he was fundamentally changing how consensus between humans is formed from political votes to apolitical votes (hashes) via the conversion of energy. Bitcoin is a commodity, minted from energy, the fundamental commodity of the universe.
If we consider a total network hash rate of ∼170EH/s, an Antminer S19 Pro consuming 29.5 J/TH and producing 110TH/s, at 12 cents per kWh, the cost of production for 1 BTC would be $15,094. This cost is derived purely from the electric consumption, which attributes an inherent value to bitcoin. 
5 Final Thesis
The Bitcoin network has been growing for the past 10 years at an impressive rate, attracting retail investors from all over the world, while miners secure a multibillion dollar decentralized network incurring fixed costs in exchange for the block reward.
Nowadays, with the high algorithmic difficulty to mine a block, mining hardware needs to be specialized. Bitcoin users are no longer able to mine with their personal computers, they are not effective in hashing. These ASIC machines that are now the industry’s standard, cost thousands of dollars, pricing out day-to-day bitcoin enthusiasts, leaving the mining sector to big enterprises.
The machines used to mine operate non-stop so a colder climate is advised to keep temperatures down and prevent overheating. Countries such as Iceland, China and Georgia, that have a combination between cold weather and cheap electricity, are the most suitable to be the home for an industrial mining operation. The acquisition of ASICs usually takes upwards of 6 months, posing a big opportunity cost. In addition, the machinery needs to be up-to-date in order to maximize profits hence continuous maintenance is required.
Bitcoin mining profitability is highly dependent on the underlying asset’s value since miners incur fiat currency costs. If BTC price is under a certain threshold, these operations run at a loss. The cryptocurrency market is a highly speculative market and small players are usually priced out during bear markets leaving big corporations controlling the hash rate. Regulatory risk is also something to keep in mind since this new space is not properly regulated and could result in hefty fines.
Despite the high upfront costs and regulatory uncertainty, mining BTC is still a profitable business with a considerably high ROI. Bitcoin has been the best performing asset of the past 10 years and miners also speculate on that, hoarding newly mined coins when its market price is low. As this space matures, the smarter and well connected companies will have the upper edge at improving their facilities.
References Satoshi Nakamoto; Bitcoin open source implementation of P2P currency
https://satoshi.nakamotoinstitute.org/posts/p2pfoundation/1/  Crypto.com; Data Report : On-Chain Market Sizing
https://crypto.com/images/Crypto.com Data Report – On-chain Market Sizing.pdf  CH&Co; How many active crypto traders are there across the globe?
https://www.chappuishalder.com/wp-content/uploads/2019/06/Publication Crypto-traders-06-2019.pdf  CH&Co; List of countries by electricity consumption
https://en.wikipedia.org/wiki/List of countries by electricity consumption  Cambridge Center for Alternative Finance; The Bitcoin Mining Map
https://cbeci.org/mining map  CoinShares Research; The Bitcoin Mining Network
https://coinshares.com/assets/resources/Research/bitcoin-mining-network-december-2019.pdf  Braiins Mining Insights; Cost to mine 1 Bitcoin