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Bitcoin at a record high: If the price of the cryptocurrency rises to $ 100,000, Bitcoin mining is likely to devour around 2 percent of global electricity consumption
Photo: JIM URQUHART / REUTERS
The price of the world's most famous cryptocurrency is rising and rising.
In the course of 2020, the price of Bitcoin quadrupled to 29,000 US dollars, and it is now more than 34,000 US dollars on the Bitstamp exchange (as of January 6, 2021).
That corresponds to a market capitalization of around 600 billion US dollars.
New, increasingly absurd-sounding price brands of up to one million US dollars are already being mentioned.
But how realistic is that?
In fact, one might think that a virtual value like Bitcoin is predestined for practically infinite price increases - but the opposite is the case.
Because the price of Bitcoin is linked to very real costs.
The crypto currency is not created out of nowhere, but with the help of sophisticated hardware, large amounts of electricity and profit-maximizing companies, the so-called miners.
Bitcoin is actually "promoted" in this way.
This use of real resources is at the expense of other economic sectors.
This means that in the medium term there must be a price range for Bitcoin that the cryptocurrency will not exceed sustainably, i.e. an upper price limit.
The gold prospector principle - whoever solves the puzzle first, receives 6.5 Bitcoin
The calculation of a miner is similar to that of a gold prospector: the higher the price, the more effort is put into mining.
In the case of Bitcoin miners, a profit arises when the income generated by mining is higher than the cost of electricity consumption and the cost of capital for the hardware used.
A miner always generates income when he is the first to solve a certain cryptographic puzzle.
Then he currently receives 6.25 Bitcoin according to the Bitcoin Protocol.
At the current Bitcoin rate, this corresponds to around 200,000 US dollars.
With appropriately upgraded hardware, miners have a good chance of getting a chance on a regular basis, so the equation is: If the price of Bitcoin rises, the prospect of higher profits also increases - and further investments in mining equipment are then worthwhile.
Hashrate keeps increasing
It is now part of the nature of the market economy that rising profits attract additional providers.
Something else also happens in the Bitcoin blockchain: the degree of difficulty in solving the cryptographic puzzle, the so-called hashrate, increases automatically the more miners are involved in the search for the solution to the cryptographic puzzle.
Like the remuneration, this automatism is specified in the Bitcoin protocol from 2008.
This mechanism increases the pressure on miners to use ever more powerful semiconductors.
The equation can therefore be expanded: the higher the Bitcoin price rises, the more miners participate in the prospecting process.
This makes the cryptographic puzzle more difficult, which in turn fuels the demand for particularly powerful semiconductors.
The chain is reversed as soon as the Bitcoin price drops.
There is a price cap
Bitcoin mining requires two main resources: electricity and semiconductors.
Since these are also used in countless other sectors, there must be an upper limit for the Bitcoin price.
The mining of the cryptocurrency is energy-intensive, as the server farms of the miners have a high power requirement.
Currently, Bitcoin mining is likely to consume around 0.4 percent of global electricity production.
This varies greatly from country to country.
In Georgia, for example, Bitcoin production ate around six percent of national energy production according to a calculation by Berlin Economics 2017.
In Germany, on the other hand, it is hardly of any consequence, as there are hardly any miners in this country.
In view of the high electricity prices, it is simply not worth it.
If the price of Bitcoin rises, the energy required to mine it also rises.
This in turn leads to a shortage of energy as a resource and thus to rising electricity prices, because after all, Bitcoin production competes for electricity with other energy-intensive sectors.
The moment these other energy-intensive goods, for example steel or aluminum, are in greater demand than additional units of the cryptocurrency, the relative attractiveness of Bitcoin decreases.
Then the upper price limit is reached.
The consequence will be a decline in the price of Bitcoin, and the energy requirement will decrease accordingly.
Increasing energy demand - regulatory interventions likely
This free-market adjustment mechanism prevents the dystopian scenario cited by many Bitcoin critics, according to which a continuously rising Bitcoin price will eventually lead to Bitcoin miners consuming the energy of the entire world.
This will not happen, because why should people still ask for Bitcoin when food can no longer be produced due to a lack of electricity?
In addition, state intervention is also conceivable that will put an end to such an increase in the Bitcoin rate.
Climate policy considerations could lead to states banning Bitcoin mining or imposing high taxes on miners' profits.
If a significant number of countries decide to take such a step, doubts about the future viability of the Bitcoin blockchain should arise and depress the price of Bitcoin.
If Bitcoin is booming, semiconductor manufacturers are booming
The impact of the prospecting process on the semiconductor industry could also help cap the price of Bitcoin.
Above all, tailor-made ASIC semiconductors are required, and the more attractive Bitcoin production becomes, the greater the demand.
An extreme scenario could also be drawn here: What if the global chip industry would direct all of its resources into the production of ASIC chips designed for Bitcoin mining?
The result would be similar to the demand for electricity: microchips are found in more and more everyday products.
But who would still ask for Bitcoin when cars are no longer running, laptops are dead and harvesting machines can no longer be controlled?
Here, too, the scarcity would result in a market-driven adjustment process that reduces the attractiveness of Bitcoin - and thus its price.
Absurdly high resource consumption by Bitcoin mining
So the million dollar question is, at what bitcoin price could some kind of equilibrium arise and when could it be achieved?
At what price level does the diversion of resources from other sectors into Bitcoin mining become so noticeable that the global economy plunges into a persistent recession due to supply shortages, which ultimately leads to lower demand for Bitcoin and thus to a fall in the price of the cryptocurrency?
Using a standard model from political economy, the so-called Tullock model, it can be deduced that the electricity costs for Bitcoin production always develop parallel to the Bitcoin exchange rate.
On this you can build a (admittedly very rough) rough calculation that at a rate of 100,000 US dollars, mining the cryptocurrency would devour around two percent of global electricity generation.
At a price of one million US dollars, this would amount to 20 percent of global electricity production.
Similar calculations could be made for the consumption of semiconductor resources.
Upper price limit at 2 percent of global electricity consumption?
It is obvious that such a development must lead to the economic adjustment effects described.
When they take effect depends on the one hand on the price level, but the speed at which this price level is reached is also decisive.
For example, it is conceivable that the Bitcoin rate will be at 100,000 US dollars in a few weeks and then the rate will collapse again.
Then there would be no real economic adjustments worth mentioning, the time would be too short for that.
Should the course hold at this level for several months, however, the negative effects on the energy and semiconductor market would be felt.
Then the market mechanisms would ensure a decrease in the demand for Bitcoin.
In addition, the pressure on state actors would increase to try to limit or prevent the promotion and holding of Bitcoin through bans and taxes.
It is reasonable to assume that the above-described relative price shifts and / or political interventions would occur at the latest with electricity consumption of two percent of global generation capacities.
The "natural" upper limit of the Bitcoin exchange rate should therefore be found in the vicinity of the 100,000 US dollar mark.
In the long term, the upper price limit shifts - through "halving"
However, that does not mean that a Bitcoin price of one million US dollars is forever excluded.
Because the upper price limit will move upwards in the long term due to another special feature of the Bitcoin protocol: From 2024 on, miners will no longer receive 6.25 Bitcoin when they have solved the cryptographic puzzle, but only half, i.e. 3, 13 bitcoin.
This is what the Bitcoin protocol defines.
This halving of the "reward" is repeated every four years.
Under the above conditions, the Bitcoin price could then reach the mark of 200,000 US dollars without the electricity consumption being higher than the roughly two percent of global electricity generation that would already be reached at the price of 100,000 US dollars under today's conditions.
That would mean that the one million US dollar mark would actually be achievable for Bitcoin - but at the earliest in the first half of the 2030s.
Cyrus de la Rubia is a guest commentator for manager-magazin.de. Nevertheless, this column does not necessarily reflect the opinion of the editorial team of manager magazin.
