As oil rises above $100 amid rising tensions in the Middle East, the question for the Bitcoin network and miners is not whether their energy bills will rise, but whether the price of Bitcoin will fall.
According to research from Bitcoin mining software and services company Luxor’s Hashrate Index, the direct effect of oil price shocks on mining costs is likely to be limited, but the broader macroeconomic consequences could weigh more heavily on the industry.
However, the impact of rising oil prices is not zero on the Bitcoin network.
Luxor estimates that around 8 to 10 percent of the global bitcoin hashrate operates in electricity markets where energy prices are closely tied to crude oil. These operations are mainly concentrated in Gulf states such as the United Arab Emirates and Oman, with minor contributions from Iran, Kuwait, Qatar and Libya.
“The genuinely oil-exposed countries” are the Gulf states, Luxor wrote in its research note, adding that the UAE and Oman together account for about 6% of the network’s computing power or hashrate.
“These networks are primarily powered by natural gas derived from oil production, and electricity prices track crude oil more directly than in the United States or Russia,” the report says.
Meanwhile, Iran is estimated to hold another 0.8%, and other smaller contributors such as Kuwait, Qatar and Libya bring the total exposure to the crude oil-sensitive hashrate to approximately 8% to 10% of the network.
The remaining approximately 90% of the network runs in regions where electricity prices depend on natural gas, coal, hydroelectric or nuclear power, meaning that swings in crude oil prices have little direct influence on mining costs.
Impact on mining
What does this mean for bitcoin miners, who run energy-intensive machines to secure the network and validate transactions?
Luxor maintains that even if oil prices remain above $100 a barrel, the effect of rising electricity costs on the mining economy would likely be limited to a small portion of the grid. Electricity is the largest input cost for bitcoin mining.
Instead, the biggest risk for miners lies in how geopolitical shocks affect the price of bitcoin. According to Luxor, periods of macroeconomic stress often trigger risk-averse behavior in financial markets, which can put pressure on volatile assets like Bitcoin.
Recent data cited by the company shows that the hash price, a measure of profitability for miners, fell to a record low of $27.89 per petahash per second per day in February, driven largely by a 23.8% drop in the price of bitcoin during the same period.
For miners, Luxor concludes, profitability is much more sensitive to changes in the price of bitcoin than to changes in electricity costs.
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