Hypothesis - bitcoin price is directly related to electricity consumption

[tertius993]

Inspired by this topic I developed the following hypothesis for discussion: the bitcoin price is directly related to the amount of electricity that the bitcoin network consumes and using that we can estimate the sustained maximum price.

Reasoning:

When considered as a whole, bitcoin miners expend a fixed percentage of their income on electricity.

If their income increases (in a sustained way) they will spend more money on electricity, but in a fixed ratio. The remainder of their income covers all other items, including profit.

The electricity consumption of the bitcoin network is bound by two factors:
1.   Mining income (derived by price x subsidy+fees) - (i.e. how much money do they receive)
2.   The proportion of worldwide electricity generating capacity that is available to the network - (i.e. how much electricity can they get)

At the time of writing the bitcoin network is estimated to use 130.39 TWh of electricity annually.¹

This is approximately 0.47% of worldwide generation (27,586 TWh)²

In the current era the Bitcoin block subsidy is currently 6.25 BTC/block = 27,375 BTC/month

Bitcoin transaction fees are currently averaging 3,294 BTC/month³

Thus total mining income (BTC) is currently approx. 30,669 BTC/month

At the 2021 “average” price of approximately $44,234/BTC⁴ that means an average worldwide total mining income of $1.357 billion per month

Therefore, $1.357 Bn provides sufficient income to purchase 0.47% of the worldwide electricity supply.

Assertion – the proportion of worldwide electricity generation that may be consumed by the Bitcoin network cannot exceed 1%.

Key assumptions for forward projections:
Assumption 1: worldwide electricity generation capacity continues to increase at c. 2% per annum
Assumption 2: transaction fees increase at 10% per annum
Assumption 3: there will be no step change in the cost or capacity of the worldwide electricity generating network (such as making cold fusion wirk)

Forecast maximum sustained BTC value, era 3:	2022	2023	2024
Using 0.5% of worldwide electricity	$47,000	$48,000	$48,000
Using 1.0% of worldwide electricity	$94,000	$95,000	$96,000

For era 4 there is a significant increase driven by the halving of the block reward:

Forecast maximum sustained BTC value, era 4:	2025	2026	2027	2028
Using 0.5% of worldwide electricity	$84,000	$84,000	$83,000	$82,000
Using 1.0% of worldwide electricity	$168,000	$168,000	$166,000	$164,000

Summary
Between now and the next halving (mid 2024) the maximum sustained high we should expect the bitcoin price to reach will be no more than about $95,000.
In the next era (post 2024 halving) the sustained peak will be no higher than about $168,000

Note: I do not think these are hard numbers, just indications - there are a lot of estimates and assumptions that underpin the forecasts.

Clearly the key question is my assertion that the Bitcoin network cannot, for an extended period, consume more than 1% of the total worldwide generating capacity.  If that is wrong then the projections will be wrong, but the hypothesis may still be valid, but at a different level.  My estimate of 1% is purely a guess, but I believe that societal, economic and structural constraints will mean that it is more or less right.

Notes:
These are estimates for sustained prices – this does not mean that the price cannot go above those values, merely that it cannot maintain those higher values for an extended period.
Miners expenditure on other items (capital, maintenance, labour, etc.) is irrelevant to this hypothesis as it assumes the spend on electricity is a fixed maximum proportion of income and those costs are covered in the remainder. 
The forecast price per bitcoin in era 4 reduces over time, because the projected increase in transaction fees and thus income outweighs the increase in the worldwide electricity network.
For simplicity I have assumed that era 3 continues until the end of 2024, and era 4 starts in 2025.  This also reflects the fact that there is likely to be a time lag as miners adapt to the new era.



¹Cambridge Bitcoin Electricity Consumption Index (www.cbeci.org)
²Extrapolated from data on Our World in Data (https://ourworldindata.org/energy-production-consumption#electricity-generation)
³taken from here: https://www.blockchain.com/charts/transaction-fees
⁴Calculated by taking the average of the of the last 12 weekly closing prices, from Bitstamp BTC:USD market

[1714857080]

1714857080

[1714857080]

1714857080

[1714857080]

1714857080

[1714857080]

1714857080

[thecodebear]

In general electricity consumption goes up when bitcoin price goes up because it becomes more profitable to mine bitcoin. But it's not like there is some super elastic direct relationship. Mining continued to go up for most of 2018 as the price crashed.

The relationship is more like: when price allows mining rewards to vastly outstrips mining costs, mining goes up perpetually. And occasionally in the bottom of bear markets when mining rewards barely or don't cover the mining costs then mining falls. Mining will continue to go up where there is the will and capital to venture into mining, as long as cheap electricity is available.

I think your very low price predictions for the coming years speaks for itself in showing your model isn't accurate.

[tertius993]

In general electricity consumption goes up when bitcoin price goes up because it becomes more profitable to mine bitcoin. But it's not like there is some super elastic direct relationship. Mining continued to go up for most of 2018 as the price crashed.

The relationship is more like: when price allows mining rewards to vastly outstrips mining costs, mining goes up perpetually. And occasionally in the bottom of bear markets when mining rewards barely or don't cover the mining costs then mining falls. Mining will continue to go up where there is the will and capital to venture into mining, as long as cheap electricity is available.

Well, that is the point isn't it - I am positing that it won't be available (or rather that there will be a practical cap) and therefore (un)availability of electricity will act as a brake.

I think your very low price predictions for the coming years speaks for itself in showing your model isn't accurate.

We will see won't we ... I certainly won't mind if that's the case ...

[Poker Player]

Rather than a simple relationship, I understand you to mean that there is a causal relationship. That two events are apparently related does not mean that there is a causal relationship between them, and, in fact, most of the time there is not:

The more films Nicolas Cage makes, the more people drown.

[Febo]

Hypothesis - bitcoin price is directly related to electricity consumption

It is the opposite. The electricity consumption is directly related to the bitcoin price. If it would not be then Bitcoin network would be insufficient secured. You need much higher network security when Bitcoin is worth $100k then when Bitcoin is worth $1.

It is similar as with Gold. When price of gold goes up then investment in mining Gold increases. They start mining Gold from deeper gold mines where at gold price $1000 would not be profitable to mine it. At $2000 it is profitable.

[stompix]

Your assumption has one major flaw

If you look at the price and hashrate evolution you will see that hashrate has not managed to keep up with the rise in price, and thus energy consumption, why? Simple because there is no gear to burn that electricity and mine available.
As of right now, those two indicators are so far away it makes no sense trying to find any relation between them.

The second problem is that electricity consumption follows price, miners don't buy gear, plug it in and then think wait, we need to raise the price to x level to make mining profitable, it's completely the opposite if the price goes up, profits increase buying gear becomes a good investment, electric consumption goes up.

Now to your assumption:

Assertion – the proportion of worldwide electricity generation that may be consumed by the Bitcoin network cannot exceed 1%.

Why? Who is stopping it to go to 1.0007%?

Between now and the next halving (mid 2024) the maximum sustained high we should expect the bitcoin price to reach will be no more than about $95,000.

Who is sustaining this price? One thing I can tell you for sure, it's not miners.
Now, to understand simply why your projected growth is not realistic you should look at your own numbers:

You're capping the price at double the current one based on the assumption that bitcoin staying at a certain level requires 0.47% of the world production which is false.

The problem arises with the fact that even if the price doesn't move, with current profitability if enough gear will be released on the market the power consumption could still double even if the price retracts.
Remember that we were doing around 130EH/s when the price was 10k, and now we're barely at 160EX.
So if the electric consumption was already at 0.3-0.4% when the price was at 10k it means that we're already far beyond the above levels imposed by your 1% limit, but somehow still under 

[tertius993]

Rather than a simple relationship, I understand you to mean that there is a causal relationship. That two events are apparently related does not mean that there is a causal relationship between them, and, in fact, most of the time there is not:

The more films Nicolas Cage makes, the more people drown.

Yes and I absolutely understand your position - correlation is not causation - as per the famous pirates vs global warming chart.

See my later post that hopefully further clarifies what I am saying.

[tertius993]

Your assumption has one major flaw

If you look at the price and hashrate evolution you will see that hashrate has not managed to keep up with the rise in price, and thus energy consumption, why? Simple because there is no gear to burn that electricity and mine available.
As of right now, those two indicators are so far away it makes no sense trying to find any relation between them.

The second problem is that electricity consumption follows price, miners don't buy gear, plug it in and then think wait, we need to raise the price to x level to make mining profitable, it's completely the opposite if the price goes up, profits increase buying gear becomes a good investment, electric consumption goes up.

But this is my argument exactly, perhaps I did not explain it clearly, I am saying that the price drives electricity consumption - as miners make more money (due to a rising price) then they will spend more money on electricity, thus electricity consumption follows the price.  However, I am also saying that there will be a cap on the amount of electricity that the network can use and when we are at or about that cap it will signal the approximate maximum sustained price, as if miners cannot acquire more electricity their costs will not increase and there will be no reason for them not to sell at a lower price.

Now to your assumption:

Assertion – the proportion of worldwide electricity generation that may be consumed by the Bitcoin network cannot exceed 1%.

Why? Who is stopping it to go to 1.0007%?

That is not an assumption it is an assertion - it is the crux of my argument - I am saying that the network will not exceed 1% because socially and economically there is no justification for it to do so.  There is insufficient benefit to the world as a whole for more than 1% of worldwide electricity generation to be consumed by Bitcoin. Accordingly people (individuals, corporates, governments, etc.) will not make the investment decisions and compromises required for more than 1% to go to Bitcoin.

Note I fully accept that 1% is just a guess - it may well be 1.0007% or even 2% - the key point is that I am arguing that there is a practical cap.  It may be better to re-word the assertion to something like:

Assertion – the proportion of worldwide electricity generation that may be consumed by the Bitcoin network cannot exceed [N%] unless there is a step change in the general perceived value delivered by Bitcoin.

Between now and the next halving (mid 2024) the maximum sustained high we should expect the bitcoin price to reach will be no more than about $95,000.

Who is sustaining this price? One thing I can tell you for sure, it's not miners.

I am using the word sustained in its meaning for an extended period not to mean held up by something.  Since there is a significant lag between price changes and additional gear coming online price changes need to persist for some time for them to have a meaningful effect.

Now, to understand simply why your projected growth is not realistic you should look at your own numbers:

You're capping the price at double the current one based on the assumption that bitcoin staying at a certain level requires 0.47% of the world production which is false.

The problem arises with the fact that even if the price doesn't move, with current profitability if enough gear will be released on the market the power consumption could still double even if the price retracts.
Remember that we were doing around 130EH/s when the price was 10k, and now we're barely at 160EX.
So if the electric consumption was already at 0.3-0.4% when the price was at 10k it means that we're already far beyond the above levels imposed by your 1% limit, but somehow still under  

Firstly that is why I have set my "limit" at more than double the current consumption - as I say above I don't know what the limit is, but I am arguing there is one and for the sake of the argument I picked a value to hang my hat on!

Secondly my prediction only sets an upper limit it does not set a lower limit at all.  As you rightly say there is nothing to prevent the price being far far below the maximum implied by the power consumption cap.  However, I would expect total consumption of the network to fall if the price fell and remained significantly lower for an extended period.  

We'd need to have good historic power consumption data to model the past accurately, and to be fair we don't even have good current data let alone historic!) but as I say the values can clearly diverge significantly for a period, the question is can they stay apart or will they tend to converge?  I think the latter.

Also let me add this is mainly a thought exercise - so thanks for your replies which are helping to refine my thoughts.

[KTChampions]

The amount of electricity consumed by the bitcoin network is a secondary or even tertiary parameter in its economy. If the demand for it grows, then there will be an increase in consumed electricity, if it falls, then vice versa.
I had my own topic where I considered the interaction of miners, the price of bitcoin and consumed electricity - but unfortunately it is in Russian.

[buwaytress]

Actually, I don't think it really is a new hypothesis. Certainly, the first value ever attributed to Bitcoin was based on the cost of mining a block (can't recall right now the source but will add it here later).

And like it or not, miners have to sell at a profit. I do believe many hold for bigger gains especially in huge dips but the majority will sell for as long as it's profitable and as long as there is significant new coin issued by miners, they have a say in price I think.

[dkbit98]

This is certainly interesting topic for discussion but I said this before and I have to repeat that Cambridge Bitcoin Electricity Consumption Index (CBECI) data is totally wrong and should not be taken as correct source of information.
Even CBECI themselves admitted that data is inaccurate and you need to find better source for your hypothesis.

It is also interesting to know that 60 to 67% of all energy produced goes to waste worldwide, so then why not use that wasted energy for mining Bitcoins.
I don't know how to calculate this but it should be taken into consideration.

[tertius993]

This is certainly interesting topic for discussion but I said this before and I have to repeat that Cambridge Bitcoin Electricity Consumption Index (CBECI) data is totally wrong and should not be taken as correct source of information.
Even CBECI themselves admitted that data is inaccurate and you need to find better source for your hypothesis.

It is also interesting to know that 60 to 67% of all energy produced goes to waste worldwide, so then why not use that wasted energy for mining Bitcoins.
I don't know how to calculate this but it should be taken into consideration.

If there is a better source for the energy consumption of the network I should be delighted to use it and re-work my hypothesis, however, I haven't found that better source yet.

Regarding the waste energy point, I saw that commented on in the WO thread and haven't had time to look into the detail as to how it is calculated, though my immediate question is how can we say that bitcoin is using some of the "waste" energy rather than being counted in the 30-40% that isn't "wasted"?

[dkbit98]

If there is a better source for the energy consumption of the network I should be delighted to use it and re-work my hypothesis, however, I haven't found that better source yet.

There is Digiconomist research that is showing very different and much lower values compared to CBECI but their information is also not correct.
Maybe you can take a look at this Coincenter report from 2019 for more information and clarification.

Regarding the waste energy point, I saw that commented on in the WO thread and haven't had time to look into the detail as to how it is calculated, though my immediate question is how can we say that bitcoin is using some of the "waste" energy rather than being counted in the 30-40% that isn't "wasted"?

We can't say that but in theory we could use ALL of that wasted energy for mining Bitcoin, and my point is that a lot more energy is wasted in the world all the time even if we don't count Bitcon.
Do you see any headlines about that in newspapers?
No.

[slaman29]

Rather than a simple relationship, I understand you to mean that there is a causal relationship. That two events are apparently related does not mean that there is a causal relationship between them, and, in fact, most of the time there is not:

The more films Nicolas Cage makes, the more people drown.

The famous saying everywhere I hear in trading even before crypto is that, just because the two events happened one after another, does not mean they caused each other (it's translated from what I know in local language).

Causal relationships are difficult to determine but especially in crypto I would never put 2 and 2 together:)

[hatshepsut93]

Well, it's reasonable to think that Bitcoin's electricity consumption can't go up too much, because if it would start negatively affecting other industries, the government will step in and ban mining and Bitcoin, which already happened in some smaller countries. If this happened in China or the US, the price would suffer majorly.

But if there's a way to get more electricity without annoying anyone, then there's no reasons to think that some arbitrary value, like 1% of world's power, is a hard limit to Bitcoin's power consumption and by link a price.

[BrewMaster]

i wouldn't say "directly" related but electricity cost is definitely one of many factors that are affecting bitcoin price.

you are also making certain wrong assumption here such as the total capacity of the electric network. the capacity is what it is because the demand needs this much and not any more. if the demand went up the capacity will also increase. not to mention that thee efficiency of everything (mining equipment, electricity production line,...) is also improving.

how much electricity bitcoin is going to consume in the future depends on how much demand there is for bitcoin. when bitcoin becomes a lot more adopted than this and more than 1% of the world is using it, the electricity consumption will also go up and reach 0.5% of the total electricity consumption in 2024 for example.

[KTChampions]

Well, it's reasonable to think that Bitcoin's electricity consumption can't go up too much, because if it would start negatively affecting other industries, the government will step in and ban mining and Bitcoin, which already happened in some smaller countries. If this happened in China or the US, the price would suffer majorly.

But if there's a way to get more electricity without annoying anyone, then there's no reasons to think that some arbitrary value, like 1% of world's power, is a hard limit to Bitcoin's power consumption and by link a price.

It seems to me that no government will worry about too much electricity consumption by the bitcoin network. Miners do not receive any subsidies from the state - they buy electricity at market prices. This price includes all compensation for electricity production, taking into account environmental problems, etc.

[stompix]

But this is my argument exactly, perhaps I did not explain it clearly, I am saying that the price drives electricity consumption - as miners make more money (due to a rising price) then they will spend more money on electricity, thus electricity consumption follows the price.

Yeah,  you didn't. 

However, I am also saying that there will be a cap on the amount of electricity that the network can use and when we are at or about that cap it will signal the approximate maximum sustained price, as if miners cannot acquire more electricity their costs will not increase and there will be no reason for them not to sell at a lower price.

And you're back at it one phrase later.
I already have told you that the price has gone up 6 times with the hashrate and thus directly proportional electricity consumption just around 20%, right now miners are really not caring about electricity costs at all.
Take a look at how numbers look for an s19pro in terms of costs (even at 10cents/kwh) vs profit.
The price can go to trillions with the energy consumption making baby steps, the proof is what is happening for already 5 months.

That is not an assumption it is an assertion - it is the crux of my argument - I am saying that the network will not exceed 1% because socially and economically there is no justification for it to do so.  There is insufficient benefit to the world as a whole for more than 1% of worldwide electricity generation to be consumed by Bitcoin.

The whole theory is again flawed because you're expressing it in 1% globablly.
Some countries which are net importers of energy and they have limited capacity that is not flexible might raise an eyebrow even at 0.2%, some countries would not care even at 5% because they have spare capacity that simply stays offline for 90% period of the time. It's also a different thing in terms of what that 1% would represent to the budget of the country, for some is 6% (US case, and in this, we include oil and gas), thus 1% of it would represent 0.06  for other is less than 1% and it would go in fractions of a thousand.

Firstly that is why I have set my "limit" at more than double the current consumption - as I say above I don't know what the limit is, but I am arguing there is one and for the sake of the argument I picked a value to hang my hat on!

So basically there must be something out there because if it isn't things don't make sense to you and this is not tolerable  . You know, at this point rather than trying to find facts to back up your theory wouldn't it is better to see how many facts are against it and come up with a new one?

Secondly my prediction only sets an upper limit it does not set a lower limit at all.  As you rightly say there is nothing to prevent the price being far far below the maximum implied by the power consumption cap.  However, I would expect total consumption of the network to fall if the price fell and remained significantly lower for an extended period.

It won't.
If the price would crash to half its value the consumption will probably not go down even 1%, almost everything that is plugged in right now and burning energy would still be profitable and with new more efficient gear to come and replace the old ones it would still keep that consumption.
Remember, we were doing 120EH/s at 10k, at that rate of profitability, we could still consume more energy than now by 50% even if the price drops to 20k.

We'd need to have good historic power consumption data to model the past accurately, and to be fair we don't even have good current data let alone historic!) but as I say the values can clearly diverge significantly for a period, the question is can they stay apart or will they tend to converge?  I think the latter.

For at least one year there will be no converging point.
Simply put, there is not enough production capacity for new miners, there is a chip shortage, and they would need to produce 6 times more gear than they have in 4 years. One more doubling of the price which can be triggered by stimulus money or Amazon investing in BTC and Bitmain would have to increase its production capacity by 10x, which is simply not doable.
So no, at least for one or maybe two years there will be no converging as the consumption is currently heavily influenced by factors that have nothing to do with bitcoin.

As for the data, it's quite easy to approximate it
https://digiconomist.net/bitcoin-energy-consumption/

It's not rocket science, you just have to look at hashrate, what hashrate/w can miners deliver, and check when those were launched and when they stopped productions of certain models. Indeed it's approximate, it becomes muddy when suddenly old gear is back online after being retired but overall it does a pretty good job.

[Theb]

These are estimates for sustained prices – this does not mean that the price cannot go above those values, merely that it cannot maintain those higher values for an extended period.
Miners expenditure on other items (capital, maintenance, labour, etc.) is irrelevant to this hypothesis as it assumes the spend on electricity is a fixed maximum proportion of income and those costs are covered in the remainder. 

Something pretty technical to don't consider other costs in an operation of the miners. This might just be a coincidence and nothing really more above that since really there is more too it then the electrical consumption of mining operations to consider on the price of Bitcoin just like what I have said on the S2F model price prediction in order for it to be accurate must consider all factors which in your case you have only considered electricity as a expenditure. Your theory simple don't consider the basic supply and demand as well as other factors such as laws and regulations or even the possibility of these miners shifting to renewable energy or even consider them having upgrades onto a more efficient ASIC miner. Simply this theory about it being correlated to electrical consumption isn't accurate.

[Wilhelm]

If TS can explain to me how to mine bitcoin using only a power socket he would have a point....

TS is missing a few details like
- the cost of a miner
- non-continuous upgrades of mining hardware
- cooling costs
- administrative costs
- housing
- insurance
- etc...