As tensions rise in the Middle East and oil prices soar above $100, the question facing the Bitcoin network and miners is not whether their electricity bills will rise, but whether the price of Bitcoin will fall.
The direct impact of the oil price shock on mining costs may be limited, but the broader macroeconomic consequences could put more pressure on the industry, according to research from Bitcoin mining software and services company Luxor Hash Index.
However, the impact of the surge in oil prices on the Bitcoin network is not zero.
Luxor estimates that approximately 8% to 10% of the world’s Bitcoin computing power operates in the electricity market, where electricity prices are closely tied to crude oil. These operations are mainly concentrated in Gulf countries such as the United Arab Emirates and Oman, with smaller contributions from Iran, Kuwait, Qatar and Libya.
The “real oil-exposed countries” are the Gulf states, Luxor wrote in its research, adding that the United Arab Emirates and Oman together account for around 6% of the network’s computing power, or computing power.
“These grids run primarily on natural gas from oil production, and electricity prices do track crude oil more directly than in the United States or Russia,” the report said.
Iran, meanwhile, is expected to hold another 0.8%, while other smaller contributors such as Kuwait, Qatar and Libya expand crude-sensitive hashrate exposure to roughly 8-10% of the network.
The remaining roughly 90% of the network operates in areas where electricity prices are driven by gas, coal, hydro or nuclear energy, meaning fluctuations in crude oil prices have little direct impact on mining costs.
Impact on the mining industry
What does this mean for Bitcoin miners who run power-hungry machines to secure the network and verify transactions?
Luxor believes that even if oil prices remain above $100 a barrel, the impact of rising electricity costs on mining economics is likely to be limited to a small part of the network. Electricity is the single largest input cost for Bitcoin mining.
Instead, the greater risk for miners is how geopolitical shocks affect Bitcoin’s price. Luxor said periods of macro stress tend to trigger risk-off behavior in financial markets, which can put pressure on volatile assets like Bitcoin.
The latest data cited by the company shows that hashprice, a measure of miner profitability, fell to an all-time low of $27.89/petahash per second in February, largely due to a 23.8% drop in Bitcoin prices during the same period.
Luxor concluded that for miners, profitability is much more sensitive to changes in Bitcoin prices than to changes in electricity costs.
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