As oil rises above $100 amid escalating tensions in the Middle East, the question for the Bitcoin network and miners is not whether their electricity bills will rise, but whether the price of Bitcoin will fall.
The direct effect of oil shocks on mining costs will likely be limited, but the broader macroeconomic consequences could weigh more on the industry, according to a study conducted by bitcoin mining software and services company Luxor’s Hashrate Index.
However, the impact of the oil price surge is not zero on the Bitcoin network.
Luxor estimates that around 8-10% of the global bitcoin hashrate operates in electricity markets where electricity prices are closely linked to crude oil prices. These operations are mainly concentrated in Gulf states such as the United Arab Emirates and Oman, with smaller contributions from Iran, Kuwait, Qatar and Libya.
“The countries truly exposed to oil” are the Gulf states, Luxor writes 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 run primarily on natural gas from oil production, with electricity pricing that tracks crude more directly than in the United States or Russia,” the report said.
Meanwhile, Iran is expected to hold another 0.8%, and other smaller contributors like Kuwait, Qatar and Libya bring the total exposure to crude-sensitive hashrate to around 8-10% of the network.
The remaining 90% of the grid operates in regions where electricity prices depend on natural gas, coal, hydropower or nuclear power, meaning fluctuations in crude oil prices have little direct influence on mining costs.
Impact on mining
What does this mean for Bitcoin miners, who use power-hungry machines to secure the network and validate transactions?
Luxor says that even if oil prices remain above $100 per barrel, the effect on the mining economy of rising electricity costs would likely be limited to a small part of the grid. Electricity is the largest production 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 such as Bitcoin.
Recent data cited by the company shows that hashprice, a measure of profitability for miners, fell to an all-time low of $27.89 per petahash per second per day in February, largely due to a 23.8% drop in the price of bitcoin over 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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