Since the beginning of 2017, no asset class has been more impressive than cryptocurrencies. Whereas the stock market has been the traditional source of wealth creation, with investable money typically doubling around once a decade, the aggregate market of all digital currencies surged from $17.7 billion at the beginning of 2017 to as high as $835 billion earlier this month. That represents an increase in value of 4,500%, a number that would have taken the broad-based S&P 500 decades to deliver.
Bitcoin leads the charge for cryptocurrencies
Leading the way for this crypto-revolution is bitcoin, the world's most valuable virtual currency by market cap. Bitcoin was the very first digital currency to become tradable back in March 2010, and it's the cryptocurrency that merchants worldwide are most likely to accept. It also happens to be responsible for bringing blockchain technology into the mainstream.
Blockchain is the digital, distributed, and decentralized ledger that underpins digital currencies and is responsible for recording all transactions without the need for a financial intermediary, which is often a bank. Its evolution is based on the belief that the current financial system isn't efficient, and it looks to fix these flaws in three ways.
First, the decentralization of blockchain ensures that no single entity, including cybercriminals, can gain control over a cryptocurrency, thus making blockchain a potentially safer method of processing transactions. Second, as noted, there's no third-party bank involvement, which means less in the way of transaction fees. And lastly, transactions are processed and validated 24 hours a day, seven days a week, which means the possibility of settling payments in a matter of seconds or minutes, as opposed to waiting up to three-to-five days for banks to verify and validate payments.
Crypto-transaction validation is a big talking point
However, this last point, proofing transactions, creates much debate within the crypto community. You see, there are two primary ways of validating transactions. After all, there has to be a way to ensure that the same virtual coin isn't being spent twice. These two methods are known as proof-of-work (PoW) and proof-of-stake (PoS).
The latter method, PoS, describes a process whereby owners of a digital currency are chosen in a deterministic fashion to validate a block of transactions. In other words, the more of a certain cryptocurrency you own, the better chance you have of being chosen to validate blocks of transactions. There's minimal electricity usage with PoS, making it a particularly attractive (and cheap) method of transaction-proofing. Top cryptocurrencies currently using the PoS method include privacy coin Dash, and blockchain developer NEO.
The other method, PoW, is how bitcoin transactions are validated. The PoW method is highly electricity-intensive in that it requires "miners" with high-powered computers to compete with one another to be the first to solve complex math equations. These math equations derive from the encryption designed to protect bitcoin transactions from would-be thieves. The first miner to do so is given a "block reward," which means receiving payment in the form of virtual coin(s). These high-powered computers use a lot of electricity in attempting to solve these equations, which means it can be very profitable, or actually a money-losing venture, depending on electricity costs.
The most and least expensive countries in the world to mine bitcoin
Recently, Elite Fixtures examined 115 countries around the world to determine which are the most and least profitable to mine bitcoin. Or, in plainer English, which countries have the cheapest and most expensive costs to mine a single bitcoin, based on electricity costs.
In terms of the cheapest countries, Venezuela leads by a wide margin. The data shows that a single bitcoin can be mined for just $531, which, with bitcoin's current price of around $11,000, would yield a handsome $10,500 profit. Venezuela's electric industry is heavily subsidized, which pushes electricity costs in the country way down.
Yet despite no laws against mining bitcoin in Venezuela, police have been arresting those caught doing so, making it a risky proposition. It's also worth noting that Venezuela is planning to launch its very own Petro coin, backed by the country's oil reserves. Inflation in Venezuela has been off the charts recently, and President Nicolas Maduro is hoping the launch of this oil-backed digital currency could reignite growth in the beleaguered country.
According to Elite Fixtures, the next cheapest country to mine a single bitcoin is Trinidad and Tobago, where it costs $1,190. Today, this would work out to a nearly $10,000 profit per coin over electricity expenses. Unlike other Caribbean countries, Trinidad and Tobago has significant oil and gas reserves and is a net exporter of these fuels, allowing it to subsidize its electric industry.
On the flipside, the surprising country where mining a single bitcoin costs the most is South Korea. Mining just one coin will set an individual or business back $26,170, resulting in a loss of more than $15,000. South Korea has a sliding scale for electricity charges, meaning those businesses and people who use the most will pay a significantly higher rate than those businesses and people using a "normal" amount of electricity. This is particularly interesting given that South Korea is one of the most active cryptocurrency markets in the world.
The report goes on to note that a dozen of the 115 countries examined had costs to mine bitcoin that were higher than the actual price of bitcoin tokens at the time of analysis. For those curious, the United States was the 40th cheapest country, making it modestly profitable to mine bitcoin.
Understandably, these electricity costs probably won't remain static, and neither will the price of a bitcoin token. But there's certain to be a monumental difference in bitcoin mining profitability depending on where you live.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.