Topic: Hypothesis - bitcoin price is directly related to electricity consumption - page 2. (Read 296 times)

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.


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.


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.


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.

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.

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


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 

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.

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.

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.


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

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.

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