Minting money from Megawatts Bitcoin is a peer-to-peer network for exchanging digital tokens, Bitcoins. Launched in early 2009, there are now 14M of projected 21M Bitcoins in circulation worth $4B in market cap, the annual transaction turnover is $20B. The Bitcoin network relies on a computationally intensive “hashing” process to clear transactions into the shared transaction ledger, the blockchain, in a process known as mining. We define a profit function for mining as function of the total network hashrate, miner revenues and technology parameters. Using the profit function, we find the breakeven points, the maximum profitability point, the maximum hashrate and the shortest profitable payback period of the Bitcoin mining network. Finally, we evaluate mining profitability for three generations of Bitcoin mining processors and deployment environments, and predict the future evolution of the mining network.

1. c Copyright Sveinn Valfells & J´on Helgi Egilsson 2013-15.
Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA)
Minting Money With Megawatts
How to mine Bitcoin profitably
Sveinn Valfells, PhD1
& J´on Helgi Egilsson2
1
linkd.in/wtaHi5
2
Faculty of Economics
University of Iceland
Presented at University of Iceland, April 17, 2015
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2. Outline
1 A Brief Outline of Bitcoin
2 How to Mine Bitcoin Profitably
3 About the Authors
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3. A Brief Outline of Bitcoin
Outline
1 A Brief Outline of Bitcoin
2 How to Mine Bitcoin Profitably
3 About the Authors
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4. A Brief Outline of Bitcoin
Bitcoin Is A Platform For Storing And Transmitting Value
Bitcoins are tokens for transacting on a distributed ledger, the blockchain [1, 2, 3]
Figure : Private–public key public used for
authentication (top); transactions broadcast
on a peer-to-peer network (bottom).
Figure : New transactions timestamped with
SHA256 hash every 10m.
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5. A Brief Outline of Bitcoin
The Blockchain Has Many Potential Applications
Bitcoin 2.0: Applications and extensions of the blockchain [5, 6]
“[T]he distributed ledger underlying [the Bitcoin] payment systems is a
significant innovation”
— Bank of England [4]
Text, multimedia embedded into the
blockchain.
Multi-signature transactions.
Colored coins: Tagged Bitcoins
redeemable for assets.
Sidechains: Alternate blockchains
connected to Bitcoin blockchain.
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6. A Brief Outline of Bitcoin
Bitcoin Has Large Addressable Markets
Bitcoins are fungible, divisible, impossible to counterfeit, supply is prescribed
“Money is whatever is widely accepted, be it gold, bitcoin or the
immovable circular stones of Yap in Micronesia.”
— FT [7]
Global asset classes (value storage)
Private investment in gold >$1T [8].
London housing stock >£1T [9].
Global payment streams (value transmission)
Growing global non-bank payments (major economies) >$609B (2011) [10].
PayPal 25% YOY increase in payment volume to $180B in 2013 [11].
“In an extreme case, virtual currencies could have a substitution effect
on central bank money if they become widely accepted.”
— ECB [12]
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7. A Brief Outline of Bitcoin
Bitcoin Is Growing Like Bacteria In A Petri-Dish
Money will rotate into cryptocurrencies from traditional assets, payment streams [13, 14, 15]
Cryptocurrency economics: Endstate is one dominant network, 2–3 runners-up.
Price Supply Market Cap Turnover
Current $219 14.1M $3.1B $19.0B
Annual growth rate 1.7× 0.3× 2.0× 2.0×
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8. A Brief Outline of Bitcoin
Bitcoin Ecosystem Is Rapidly Evolving
Developed countries lead Bitcoin adoption [17, 18]
Milestones to date (2009–15):
> 5.5M downloads of official client.
5M active hosted wallets.
Accepted by 75,000 merchants.
300Petahash computing power.
>$600M in venture funding from
leading VCs.
Ecosystem of exchanges, payment
processors, ATMs, payment cards,
wallets, miners, vault storage, PtP
lending.
Bitcoin foundation established.
Over 6,000 full nodes active.
Figure : Active Bitcoin nodes [16].
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9. A Brief Outline of Bitcoin
Many Governments Recognize Bitcoin
Regulatory framework for cryptocurrencies is falling into place [19, 20, 21]
[Virtual currencies] may hold long-term promise, particularly if the
innovations promote a faster, more secure and more efficient payment
system.
— Ben Bernanke, November, 2013
Relevance Regulatory situation
US Largest
economy
Federal authorities define as asset (IRS) or
currency (FinCEN); CA legislates, NY regulates.
CN 2nd largest
economy
Credit bubble, FX controls in place, authorities
effectively shutting down Bitcoin exchanges.
DE Largest EU
economy
Recognized as “private money”.
UK Largest
FX/gold
markets
Same tax treatment as FX and investment gold.
Bank of England research into use of digital
currencies.
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10. A Brief Outline of Bitcoin
Bitcoin Is Not Fully De-Risked
Mainstream adoption faces hurdles
For
Strong brand recognition.
5+ years of development.
Diverse community of committed
participants.
Rapidly growing market cap,
turnover.
Rapidly growing ecosystem.
Regulatory acceptance in many key
jurisdictions.
Against
Consumer adoption still limited.
Market cap small, liquidity low.
Ecosystem immature.
Conflicting regulatory approaches.
Concentrated ownership.
Potential for market manipulation,
collusion.
Regulatory uncertainty in some key
jurisdictions.
Lack of price anchoring.
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11. How to Mine Bitcoin Profitably
Outline
1 A Brief Outline of Bitcoin
2 How to Mine Bitcoin Profitably
3 About the Authors
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12. How to Mine Bitcoin Profitably
Hashes Protect The Integrity Of The Blockchain
Miners search for SHA256 hashes of new block headers [22]
SHA256 example:
The quick brown fox jumps over the lazy dog
c03905fcdab297513a620ec81ed46ca44ddb62d41cbbd83eb4a5a3592be26a69
Blockchain hashing:
Field Purpose Updated when... Size (Bytes)
Version Block version number New protocol version 4
hashPrevBlock 256-bit hash of the previous
block header
A new block comes in 32
hashMerkleRoot 256-bit hash based on all
of the transactions in the
block
A transaction is accepted 32
Time Current timestamp as
seconds since 1970-01-
01T00:00 UTC
Every few seconds 4
Bits Current target in compact
format
The difficulty is adjusted 4
Nonce 32-bit number (starts at 0) A hash is tried (increments) 4
Block Hash
345 981 000000000000000003e560d227c225b5cdf 7bcee3358d53222d5d0af 6240db4d
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13. How to Mine Bitcoin Profitably
Hashes Protect The Integrity Of The Blockchain
Miners search for SHA256 hashes of new block headers [22]
SHA256 example:
The quick brown fox jumps over the lazy dog.
b47cc0f104b62d4c7c30bcd68fd8e67613e287dc4ad8c310ef10cbadea9c4380
Blockchain hashing:
Field Purpose Updated when... Size (Bytes)
Version Block version number New protocol version 4
hashPrevBlock 256-bit hash of the previous
block header
A new block comes in 32
hashMerkleRoot 256-bit hash based on all
of the transactions in the
block
A transaction is accepted 32
Time Current timestamp as
seconds since 1970-01-
01T00:00 UTC
Every few seconds 4
Bits Current target in compact
format
The difficulty is adjusted 4
Nonce 32-bit number (starts at 0) A hash is tried (increments) 4
Block Hash
345 981 000000000000000003e560d227c225b5cdf 7bcee3358d53222d5d0af 6240db4d
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14. How to Mine Bitcoin Profitably
Miners Claim New Issue And Transaction Fees
Reward for computing timestamp of new blocks [15]
New issue halves every four years.
Supply limited to 21M Bitcoins or
21 × 1014 Satoshis.
Market sets transaction fees.
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15. How to Mine Bitcoin Profitably
Mining Is A Growing Market
Mining uses custom processors (ASICs) and data centres [15]
Total investment ≥ $100M (est).
Rapid transition from CPUs to GPUs to
FPGAs to ASICs.
Mining revenues $568M per annum.
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16. How to Mine Bitcoin Profitably
Miners Compete For Network Share
Costs determined by design of processors and data centres
X Incremental hashing capacity.
B Bitcoin price.
S + F New supply plus
transaction fees.
h0 Initial hashing capacity.
C Operational costs.
z Technological factor of
production.
NRE Non-Recurring Engineering
costs.
T Amortisation period.
π(X) =
X
h0 + X
× B × (S + F) − X × C −
1
T
×
X
z
+ NRE (1)
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17. How to Mine Bitcoin Profitably
Profit Function Determines Network Size
Key points are function of technology and investment time horizon
Maximum hashrate
hCAP =
B(S + F)
C
(2)
Hashrate of maximum profitability
h∗
=
h0B(S + F)
C + 1
zT
(3)
Breakeven hashrate
h
Upper/Lower
BE = h0 +
(B(S + F) − h0(C + 1
zT
) − NRE
T
)
2(C + 1
zT
)
±
(B(S + F) − h0(C + 1
zT
) − NRE
T
)2 − 4(C + 1
zT
)h0
NRE
T
2(C + 1
zT
)
(4)
Implied amortisation TImplied
From discriminant in Equation 4, calculate implied amortisation, TImplied , (shortest
profitable payback period).
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18. How to Mine Bitcoin Profitably
Moore’s Law Is Key Efficiency Driver
Semiconductor technology will improve efficiency in near and medium term
C Operational cost.
CLC Co-location and power cost.
POW ASIC energy efficiency.
PUE Datacentre energy
efficiency.
UTZ Equipment utilisation.
C =
CLC × POW × PUE
UTZ
(5)
CLC NRE INV POW PUE UTZ
$/kW/month $ $/PHa/s W/GHa/s None None
Generation One 150 2M 10M 0.8 1.2 0.8
Generation Two 100 4M 1M 0.4 1.1 0.9
Generation Three 50 8M 0.5M 0.1 1.03 0.99999
Table : Characteristic price and performance numbers for three generations of Bitcoin
mining ASICs and their deployment environments [23, 24].
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19. How to Mine Bitcoin Profitably
Network Fast Approaching State Of The Art
First and second generations outdated at $219 and 327 PHa/s [15]
First generation no longer profitable.
Second generation close to economic limit.
Only Generation Three has short payback
TImplied .
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20. How to Mine Bitcoin Profitably
Network Has Room For Growth
Generation Three can triple network size at current price
hLower
BE hUpper
BE h∗
hCAP Margin
T = 0.5 PHa/s PHa/s PHa/s PHa/s %
Generation One nan nan nan 133 -146
Generation Two nan nan nan 491 33
Generation Three nan nan nan 4660 93
T = 1
Generation One nan nan nan 133 -146
Generation Two nan nan nan 491 33
Generation Three 360 465 409 4660 93
T = 3
Generation One nan nan nan 133 -146
Generation Two nan nan nan 491 33
Generation Three 331 1245 642 4660 93
T = 5
Generation One nan nan nan 133 -146
Generation Two 340 352 346 491 33
Generation Three 329 1768 762 4660 93
Generation Three is “State of the Art”.
Maximum processor power efficiency
doubles every three years [25].
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21. How to Mine Bitcoin Profitably
Mining Has Room For Profitable Growth
Only well capitalized miners with latest technology are competitive
Network size Mining network supports profitable growth to ≈ 1200 PHa/s.
Power usage Estimated total power requirement ≈ 120 MW (using Gen Three).
Efficiency Efficiency can improve substantially while Moore’s Law is valid.
Dynamics Miners will compete on technology, operational efficiency and cost
of capital.
Endstate Window to entry has narrowed, market will consolidate to 3-5
leaders.
Revenues Revenues will shift from new issue to transfer fees.
Key factors Expectations of Bitcoin price and volatility will determine level of
investment (TMarket versus TImplied ).
Surprises New applications, eg, merged mining with sidechains; new
processor platforms, eg, graphene.
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22. About the Authors
Outline
1 A Brief Outline of Bitcoin
2 How to Mine Bitcoin Profitably
3 About the Authors
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23. About the Authors
Some Relevant Previous Remarks
Bitcoin is potential dynamite waiting to be ignited.
— Communication with Teddy Shalon, August, 2011
Bitcoin can easily be projected to rise to $20 – $120 within three years.
— Communication with Pamir Gelenbe, January, 2013
We expect Bitcoin mining revenues to grow to $600M within three years . . . network
capacity will rise 50–300×. The total energy requirement will be at least 12 MW and
possibly as much as 70 MW.
— Memorandum to Landsvirkjun, August, 2013 [26]
I encourage people to do their own research and only risk as much as they are willing
to lose in Bitcoin or any other virtual currency.
— BBC Newsnight, November, 2013
MtGox failure is not systemic . . . trend of Bitcoin will continue upwards but will be
interspersed with price spikes and corrections.
— BBC World News & BBC World Business Edition, February, 2014
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24. About the Authors
References
[1] Satoshi Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. http://bitcoin.org. May 24, 2009.
[2] Wikipedia. Bitcoin. http://en.wikipedia.org. Retrieved April, 2015.
[3] Dirk Merkel. Bitcoin for beginners, Part 2. http://www.javaworld.com. December 6, 2011.
[4] Robleh Ali, John Barrdear, Roger Clews and James Southgate. Innovations in payment technologies and the emergence of digital currencies.
http://www.bankofengland.co.uk. Quarterly Bulletin, Q3 2014.
[5] Bitgo. Based on graphic by Bitgo. http://www.bitgoinc.com/. Downloaded April, 2015.
[6] Adam Back, et al. Enabling Blockchain Innovation with Pegged Sidechains. http://www.blockstream. October 22, 2014.
[7] Financial Times. Iceland’s daring raid on fractional reserve banks. Financial Times. April 9, 2015.
[8] Wikipedia. Gold reserve. http://en.wikipedia.org. Retrieved June, 2013.
[9] Savills. UK Housing Stock Climbs [to] £5T. http://www.savills.co.uk. February, 2013.
[10] Global Finance. Payments Volumes Worldwide. http://www.gfmag.com. Based on BIS report published January, 2013.
[11] Ed Parry. Financials. https://www.paypal-media.com/about. Retrieved, April 2014.
[12] European Central Bank. Virtual Currency Schemes. http://www.ecb.europa.eu. October, 2012.
[13] Wikipedia. Network effect. http://en.wikipedia.org. Retrieved June, 2013.
[14] Wikipedia. Geometric Brownian motion. http://en.wikipedia.org. Retrieved June, 2013.
[15] Blockchain.info. Bitcoin Block Explorer. https://blockchain.info. Retrieved, April 17, 2015.
[16] Bitnodes. Global Bitcoin Node Distribution. https://getaddr.bitnodes.io. Retrieved, April 14, 2015.
[17] Sourceforge. Bitcoin. http://sourceforge.net. Retrived April, 2014.
[18] CoinDesk. State of Bitcoin 2015: Record Investment Buoys Ecosystem. CoinDesk. April 10, 2015.
[19] Wikipedia. Legality of Bitcoins by country. http://en.wikipedia.org/wiki/Legality_of_Bitcoins_by_country. Retrieved April, 2014.
[20] HMRC. Revenue & Customs Brief 09/14. http://www.hmrc.gov.uk. March, 2014.
[21] Bank of England. One Bank Research Agenda . http://www.bankofengland.co.uk. 2015.
[22] Wikipedia. SHA-2. http://en.wikipedia.org. Retrieved February, 2015.
[23] The Bitcoin Wiki. Mining hardware comparision. https://en.bitcoin.it. Retrieved, August, 2013.
[24] Nermin Hajdarbegovic. Kncminer plans 16nm bitcoin mining asic launch in 2015. CoinDesk. November 18, 2014.
[25] Jonathan Koomey & Samuel Naffziger. Moore’s Law Might Be Slowing Down, But Not Energ Efficiency. IEEE Spectrum. March 31, 2015.
[26] J´on H Egilsson & Sveinn Valfells. Global Payment Processing Using Icelandic Energy Resources. Memorandum for Landsvirkjun. August, 2013.
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