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Despite a widespread assumption that Bitcoin mining is bad for the environment, there are many factors that could one day lead it to be encouraged rather than denounced by regulators.
Genesis Digital Assets, an industrial-scale Bitcoin miner, is planning a self-hosted Bitcoin mining data centre in Sweden. This centre is expected to be online by 2024 and have up to 100 megawatts of power capacity for mining proof-of-work crypto coins such as Bitcoin, enough to power more than 16,000 US homes for a year.
However, instead of using electricity produced from coal or gas, this centre will be powered by 100 percent carbon-free energy sources, with a mix of 54.5 percent hydro, 42.8 percent nuclear and 2.7 percent wind power.
This comes after a plan in November to build a self-hosted Bitcoin mining data centre in West Texas with 300 megawatts of capacity.
Since June 2021, Genesis has raised more than $500m to expand its Bitcoin mining operations in North America and the Nordic region, led by Paradigm Ventures and Kingsway Capital on two separate occasions.
“This latest expansion aligns with GDA’s focus to identify ways to power our facilities with clean energy while also creating jobs for the local economy,” said Tim Liepold, head of power at Genesis Digital Assets.
Energy intensive
Despite a vote of confidence in Bitcoin from investors, its perception as an eco-friendly form of payment is virtually non-existent. There have been calls from multiple regulatory bodies for action to be taken over the energy and carbon intensity of crypto mining.
In the US, the Financial Stability Board (FSB) is keeping a close eye on cryptocurrencies and climate-related complexities. Both Sweden and France are keen to limit the energy intensiveness of crypto. And in the EU, there was a vote on whether to ban mining and transactions from energy intensive cryptocurrencies such as Bitcoin.
Just last week, Fabio Panetta, the European Central Bank’s digital euro chief, said “it would be ideal to be less tolerant of Bitcoin-type technologies”, given the “enormous amounts of energy” proof-of-work coins use.
Concern for the environmental impact of crypto is not unjustified, as previous analysis from VIXIO has shown. The issue lies in the mechanism for proof-of-work coins, such as Bitcoin, Ethereum and Dogecoin, the dominant crypto coins in the world today.
Proof-of-work is defined as when a crypto miner has demonstrated they have performed a certain amount of computational work in a specified interval of time to earn the right to validate a given transaction.
Crypto miners are engaged in a race against each other, all competing to perform the validation, which earns them some cryptocurrency. And given cryptocurrency is typically issued at a determined rate, the more people compete to validate, the more complex the maths problem becomes, the more energy is needed to run the computers.
If crypto becomes more highly valued, not only does it incentivise investors to buy crypto coins, it also incentivises more miners to compete for their business. This means the energy intensiveness of proof-of-work coins rises exponentially for a given linear rise in coin price as this drives the complexity of the problem required to validate.
This can be demonstrated by the Cambridge Bitcoin energy consumption index, which shows significant swings in power demand occurring after December 2020, when the price of Bitcoin started rising.
This culminates in significant energy usage, 137TWh annualised as of April, 4 2022, equivalent to the entire energy consumption of a middle-sized European country. Or to put it another way, this is nine times more than the consumption used by Google according to its 2021 environment report.
Providing key infrastructure
However, despite being so energy intensive, that is not the full story, as there is a large but subtle difference between energy and carbon intensive.
A research paper by CoinShares estimates that, in 2019, around 75 percent of energy used by crypto miners was from renewable sources, making the green investment by Genesis Digital Assets a mainstream decision.
There are good reasons for crypto miners going green. For a start, crypto mining can occur anywhere on the planet, allowing miners to locate near energy sources that are both cheap and plentiful.
In China for example, before the ban on the use and mining of crypto, miners used unwanted hydroelectric power during the rainy season. In Sichuan and Yunan provinces alone, 50 percent of Bitcoin globally was mined during the rainy season, versus 10 percent in the dry season, showing that miners are actually moving around, searching for the cheapest energy.
Moreover, such use of green energy brings several positive externalities, bringing not only more green energy production capacity onto the market but also more innovation through greater investment. This should help create cheaper, more efficient technology for everyone to benefit from in the future.
Even in oil producing countries, crypto miners can help maximise the current energy gain from fossil fuels, using flared gas which is usually burned as a by-product of pumping oil.
Additionally, crypto miners can function as a quasi means of energy storage, one of the most important factors in the drive for achieving net zero.
In this scenario, instead of costly energy storage solutions, utility companies would simply pay crypto miners to not use electricity, which could release large amounts of energy over a short period of time and would make energy production from renewables more viable.
This is already a strategy used by national grids, which sometimes pay factories to not use electricity, which helps stabilise electricity demand, making their lives easier. However, unlike factories, the ability of crypto miners to power down in seconds makes them far better partners for this strategy.
These points are supported by a research paper from Square and the Bitcoin clean energy initiative, which posits crypto mining as an “ideal complementary technology for renewables and storage”, specifically dealing with the “daily intermittency challenge”.
Not everyone is convinced. Regulators are still seeking to limit the use of proof-of-work coins. Analyst Ben Hertz-Shargel of energy research consultancy Wood Mackenzie, also noted concerns that crypto mining would only raise peak demand, ultimately adding stress to the system, rather than smoothing the peaks and troughs of energy demand.
In time, however, the potential is there for the ambitions of crypto miners, regulators and the general public to realise the green benefits of blockchain.
