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Soaring Energy Prices Bring Bad News for Bitcoin

Rising electricity costs are likely to significantly impact a significant portion of the crypto space.

Rising energy costs will probably lead to a consolidation within the bitcoin mining community, the largest ETF operator focusing directly on the sector said.

Josh Olszewicz, head of research at Valkyrie Funds, a Nashville, Tennessee-based investment firm in digital assets, told Bloomberg that "it is going to hit the least efficient miners the hardest eventually.” 

“If the electricity cost keeps rising, that’d prevent them from mining with as much profitability," he said.

Shares of the Valkyrie Bitcoin Miners ETF have slumped 19% over the past three trading sessions before rebounding on Tuesday. 

The fund, launched in February, rose about 4.8% to $22.23 at last check.

Energy price hikes may have a bigger impact on the miners in Europe, Olszewicz said. 

The U.K. joined the U.S. to ban oil imports from Russia on Tuesday in response to the invasion of Ukraine.

The breakeven price for Bitcoin miners is far below the current market price and most Bitcoin miners will still make a profit and survive the volatility in energy prices, Olszewicz said.

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Environmentalists have raised concerns about bitcoin mining, as it requires a great amount of power and specialized computers to secure the bitcoin network and get rewards in the token. 

Bitcoin Is Getting Harder and Harder to Mine

Energy costs are one of the most important factors to determine how much a miner’s profit is.

Mining difficulty, which is a measure of how difficult it is to process a Bitcoin block, has gone down for the first time since December, according to data from BTC.com. 

A lower level of mining difficulty indicates less computing power from mining machines online.

The biweekly update went up as high as 9.32% in late January before the Russian attack on Ukraine, which was the third largest increase in mining difficulty over the last year.

Mining difficulty has been on a rapid recovery and exceeded record highs since Beijing banned crypto mining last May and forced the mining industry to exit China. 

The U.S. has become the new Bitcoin mining hub, where it hosts the majority of Bitcoin miners in the world.

Texas is becoming the world capital for bitcoin mining, according to Fortune, which recently reported that the Lone Star state is on course to become the world's largest producer, dwarfing any foreign nation and the combined output for the rest of the U.S.