Thursday, October 27, 2011

Bitcoin: Natural Gas Equivalence Price, Coal Equivalence Price and Oil Equivalence Price

The previous post established that the energy to generate a Bitcoin is currently around 19 kWh/BTC. Although it may not be obvious to all, this gives a straight-forward way to calculate possible anchor points for the Bitcoin exchange rates by looking at electricity, natural gas, coal and oil prices - both regionally and globally.

If Bitcoin be considered an energy-dependent product, much like fertilizer, the price should theoretically follow developments in energy markets very closely - just like fertilizer prices.

Note that the following anchor points are estimated using the current difficulty level and energy prices.

The current US wholesale market for electricity gives a marignal cost of $0.83/BTC, as shown in our previous post. Residential prices are different from the wholesale market, however, and the current EIA short term market outlook report cites a US residential average of around 12 cents per kWh, giving a marginal cost of roughly $2.30/BTC.

Maybe somebody with more insight can tell me if residential/commercial US consumers easily can gain access to electricity close to wholesale prices?

European wholesale markets are around €60-€70/MWh, giving a marginal cost of around €1.24/BTC. Several places in Europe, it is fairly easy to get access to electricity at wholesale prices (plus a small margin), so a clever miner may have a marginal cost quite close to this.

Natural Gas
Natural gas can be used as a power generation fuel, and anchor points for natural gas could theoretically become anchor points for Bitcoin. So what is the natural gas equivalence price?

Natural gas is also a regional commodity, with large variations throughout the world. Current US prices are around $3.7/MMBtu, which translates into a marginal cost of  $0.53/BTC, assuming 45% power plant efficiency.

European natural gas is around €25/MWh, equivalent to a marginal cost of €1.06/BTC.

Coal is particularly interesting in this respect, because it is a power generation fuel that is priced globally (more or less). Current coal price (CIF ARA, API#2) is around $117/tonne, which gives a marginal cost of $1.12/BTC.

Since oil is priced globally, it is interesting to try the same exercise with oil. A current price of $109/bl gives a marginal price of around $3.50/BTC - which is quite high, mostly owing to the inefficiency of burning oil for power generation.

Someone with access to an efficient gas-fired power plant in the US and wholesale gas markets, miners could get a marginal cost of $0.53/BTC. With access to wholesale electricity markets miners could achieve a marginal cost of $0.83USD/BTC or €1.24/BTC. And at current exchange rates, that is a very lucrative proposition. Even at US consumer electricity prices, the value of mining currently appears positive, although much more costly at $2.30/BTC.

The main conclusion, however, is that Bitcoin could in theory follow energy prices. Natural gas, oil and coal often move in parallel - and since Bitcoin can be considered an energy-dependent product, much like fertilizer which tracks developments in energy markets very closely, it should in principle also track energy markets.

As the commodity best reflecting global energy prices, will oil be the commotidy to track for Bitcoin traders?

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