The increasing cost of energy that was predicted by the World Bank is likely to have a direct impact on the crypto sector, particularly Bitcoin. The quest is if it will make so much difference? According to the World bank’s statement, it said the price of energy might maintain a level of historical proportions till 2024. It is still expected that the price will rise beyond 50% before the end of this year.

Since the cost of energy is the only overhead cost directly required in the process of mining Bitcoin, analysts have wondered what this could imply for the future of Proof of Work mining. The Managing Director of XBTO, Mas Nakachi, has said that the recent surge in the price of energy might possibly cause a smaller profit margin for miners, which will reduce the incentive for anyone to invest in mining.

Reduced Hashrate

A lot about the Bitcoin network depends on the maintenance of its hashrate, which includes its complex security. The hashrate refers to the grand total of computing power required to mine new blocks of Bitcoin. If there are no sufficient incentives to mine, it could frustrate miners out of the business of mining in the network. In 2021, the hashrate or the asset fell by 40% in one month due to the shutdown of mining activities in China by the government. However, there exists a loose nexus between the hashrate of Bitcoin and its consequent price action. 

The hashrate drop that occurred in the month of October 2020 had no effect on stopping the bullish run that followed the fall right afterward. Furthermore, after observing a drastic fall in the hashrate in the month of June 2021, the price of Bitcoin maintained a steady balance, and it struck a new height just a few months afterward.

The market does not react in panic at any point when there is a drop in hashrate because there is a safeguard kit in Bitcoin’s code which is referred to as “difficulty.” Bitcoin mining works such that if the number of participants on a network is reduced, so will the power requirement in mining a block. The reverse is the case for “difficulty.” It happens that if there is more power in the network, there will be a corresponding increase in difficulty.

This technique increases difficulty according to the surge of power guards against any form of malicious attacks on the Bitcoin network that might want to take advantage of mining power or rare events. Such attacks would cause miners to take leave of the network, as was the case in China.

Kevin Zhang, who works with Foundry, a top Bitcoin miner, said that following the Chinese shutdown of mining activities, and as hashrate fell from the Bitcoin network, difficulty adjusted downwards, and the amount of hashrate that was left active on the network received more of it in proportion to their share of the reward for mining.

It looks possible that the leading miners whose activities secure the progress of the Bitcoin network have a fixed price of energy in place as a contract that will shield them from the risk of increased energy cost, as the World Bank has predicted. On the other hand, there is a risk that many energy companies might no longer be able to keep to their side of the contract as a number of energy companies in the UK have gone bankrupt in 2021.

Whatever be the case, it might require something tougher for miners leaving the network to have any significant effect. The network lost 65% of its mining power in 2021, and it was regarded as just a speed bump. The impending energy crisis might just have the same impact.