Who Pays for Bitcoin’s Running Costs?
Bitcoin has significant running costs and many people do not really understand who pays them. Here’s what you should know.
Bitcoin mining is usually the most cost-intensive process in the Bitcoin ecosystem. That is because it uses powerful computational hardware, with robust processing speeds that consume a lot of energy. The running costs mainly arise from the huge initial costs of buying the equipment and, staggering amounts of electricity needed to run them. To start bitcoin trading you can visit online trading platform https://bitlq.net/
That impacts substantial running costs. For instance, 1 kWh costs about $0.1, without the hardware costs. That means mining Bitcoin would cost about $7 billion in electricity bills in just one year. Some experts claim mining accounts for almost 2% of Bitcoin’s market capitalization annually. So, who pays for all those costs?
The Settlement of Bitcoin Running Costs
Bitcoin miners usually pay for the energy they use directly. They provide a critical service to the network, verifying and validating Bitcoin transactions and minting new tokens for circulation. The network then, reimburses them through block rewards. The Bitcoin rewards for miners comprise of two parts; the transaction fees and block subsidy.
The subsidy mainly pertains to newly created Bitcoin tokens, doubling up as an incentive to miners and the initial Bitcoin distribution vector. Monetary supply inflation finances the subsidy, hence, it is levied on all Bitcoin holders. Users pay the transaction fees to have their transactions validated on the blockchain.
You may be wondering how the running costs can be settled without anyone losing money. Truth is, Bitcoin offers no freebies and, the blockchain network pays constant maintenance costs to keep it running.
Bitcoin users also cover part of the running costs, directly and indirectly. However, they mainly do that through transaction fees. For instance, traders and individual Bitcoin users pay transaction fees to get their payments verified and validated on the blockchain. The costs usually vary based on transaction volumes and frequency. Nevertheless, paying higher transaction fees usually facilitate faster payment processing since it presents a more lucrative incentive to miners.
Putting Bitcoin’s Running Costs into Perspective
Millions of people who have never mined or traded Bitcoin are unknowingly paying for its existence. That is because the vast computing power required to generate new Bitcoin tokens consumes enormous amounts of electricity, driving up the energy bills for residents and businesses over time.
Crypto mining in the United States could cost residential and business tenants almost $1 billion annually. Bitcoin miners have been draining so much electricity in countries like China that the authorities decided to kick them out. Cheap and readily available electricity in areas such as Texas will make the United States a leading destination for crypto miners.
Researchers established that the electricity rates in places like Upstate New York, with about a quarter of all US mining operations, have increased due to the growing demand. Bitcoin mining’s huge energy consumption led households and businesses into paying an additional $165 million and $79 million annually in electricity bills.
In China where more than two thirds of the world’s crypto mining operations have occurred in the last decade, the government sets the electricity rates and they are inflexible to demand. Bitcoin miners were reportedly overcrowding other industries, forcing the providers to ration electricity. The effects magnified when Bitcoin prices surged as many miners increasingly joined the network to compete for the rewards. Higher Bitcoin prices translate into more potential rewards for miners, hence, better incentives for constant mining.
Bitcoin’s limited supply of 21 million tokens only would make some people to think that the energy drain and overall running costs will reduce over time. However, that is not true as the puzzles also become more complex, taking much longer and even more energy to solve. Nevertheless, all Bitcoin users including miners pay for its running costs.
