The crypto industry is in crisis. Crypto bigwigs all over the world, from the United States to South Korea, have been slapped with very public criminal charges concerning fraud. After the scandalous downfall of FTX, one of the largest cryptocurrency exchanges in the world, regulators have escalated a crackdown on digital currency firms, and there are many reports of “crypto contagion” bringing down non-crypto firms as well. But while the crypto sector is facing a particularly brutal chapter in its brief history, many cryptocurrencies are currently trading at remarkably high price levels. Just a few weeks ago, Bitcoin showed an amazing rebound as it traded above $28,000 for the first time since June. A large part of the increase in crypto prices has been attributed to investors who “see the digital currency as an alternative to the traditional banking system or who believe the Fed may slow its pace of interest rate increases,” according to reporting from the Wall Street Journal.
In response to the jump in crypto prices, more and more crypto miners are being lured into the industry. As a result, the industry that many had counted out entirely during the height of the crypto crisis is now on track to have a record year. Record greenhouse gas emissions, that is. According to the University of Cambridge’s Bitcoin Electricity Consumption Index, Bitcoins estimated network power demand is at an all-time high. Demand is currently hovering around 16 gigawatts, or about 138 TWh per year – about the equivalent of the entire country of Pakistan, a nation of 231.4 million people.
Bitcoin’s unfathomably large carbon footprint is a result of the cryptocurrency’s mining process. Bitcoin operates with a public ledger powered by the blockchain. In order for Bitcoin transactions to remain anonymous, secure, and authenticatable, each entry to the ledger requires complex computational problem-solving known as “proof of work.” The “miner” who solves this puzzle first receives a brand new Bitcoin in return. “Proof of work” is a process of pure trial and error – plugging in random solutions and seeing if it fits. This means that high power super-computers which can make more calculations in a shorter time have an advantage.
As those Bitcoins rise in value, more and more people are trying to solve proof-of-work puzzles. In theory, more miners would lead to the minting of more Bitcoin more often, which would flood the market and depress the currency. To prevent this from happening, Bitcoin is designed so that solving for proof of work gets harder and harder. Mining one Bitcoin is designed to always take about 10 minutes, regardless of how much computing power you have. As a result, Bitcoin miners constantly have to use more and more computing power, and often have entire warehouses full of supercomputers working away. The result is the same amount of Bitcoin, but with a much larger energy use and carbon footprint. In 2009, you could mine Bitcoin using just a few seconds’ worth of household electricity, whereas in recent years, you would have to use about 9 years’ worth.
It’s been a hard couple of years for Bitcoin miners, as setting up and running a mining operation is extremely costly, and the price of Bitcoin has been relatively low. But now, prices are up about 70% in 2023, and a lot of miners are getting back into the game, or joining for the first time. But they’re still operating with razor-thin margins. “Miners aren’t out of the woods just yet. Inflated power costs will remain a stubborn thorn in the industry’s side, and could quickly worsen if governments succeed in saddling miners with an added energy tax,” analysts at crypto-intelligence firm Coin Metrics stated last week.
Nevertheless, the industry is continuing to grow, as will its accelerating negative impacts on the climate. In response, policymakers are looking for ways to discourage energy-intensive crypto mining. Just last month, the Treasury Department released a budget framework featuring a 30% tax on electricity used by crypto miners. “With most miners already squeezed by razor-thin margins, a 30% increase to their primary operating expense would be a devastating blow to facilities in the U.S.,” said the analysts at Coin Metrics. “The enactment of this tax would have an immediate chilling effect on any additional investment into mining operations within U.S. borders.”
Indeed, in the past crypto miners have set up in poorer countries with weaker regulatory frameworks and subsidized energy, such as Kazakhstan and Kosovo, much to the detriment of those economically unstable nations. Other miners have looked to capture waste energy by setting up in oilfields from Texas to Siberia, where they can capitalize on natural gas that would otherwise be vented directly into the atmosphere. While miners are getting creative, however, the problem remains, and is growing at a brisk clip. Without a major change to the mining process or a complete collapse of the Bitcoin industry, policy approaches will be largely unable to stop its growing contribution to climate change.
By Haley Zaremba for Oilprice.com
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