Crypto Chronicles: Fake Money, Real Climate Consequences

12. Money for Nothing, and Carbon for free... (8 min read)

Photo by Kanchanara on Unsplash

Happy Thanksgiving to our US readers. Hope you have recovered from the food coma : )

Dear reader, this post is the first of a two-part series on Cryptocurrency and The Climate.

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If you have paid any attention to the tech and finance world in the last couple of weeks, you must have heard a lot of noise about how crypto exchange FTX vaporized overnight, with its charismatic founder Sam Bankman-Fried suddenly facing a barrage of questions from creditors who poured billions into it.

But this post is not about crypto investing, the financial jolt to investors, or the broader adoption of cryptocurrency in a post libertarian dream techno-universe. There are enough YouTube moguls peddling it for me to elaborate on.

Instead, it’s about crypto, particularly its poster child Bitcoin, how it’s created, and the reality of the world as it exists today: the raging shit-storm heading our way as climate change.

In short, even if you don’t invest in crypto (smart), never plan to (wise), and simply are wary of whatever new-fangled “world changing” stuff that finance bros peddle (enlightened), I am here to tell you that, unfortunately, you should care.

Because we have a problem.

While crypto isn’t exactly useful enough to purchase groceries, buy airplane tickets, pay your rent or just buy a coffee - you know, things most people do - it’s extremely useful if your goal is to screw over our carbon emission goals by pumping out emissions rivaling those of entire nations.

The money may not be real, but its problems very much are. Mining Bitcoin is requires computing a lot of random numbers. Like a lot. Billions of numbers, on sophisticated computer chips for days or weeks at an end… to obtain 1 Bitcoin. In the crypto jargon, this is called “Proof of Work” (POW).

Bitcoin POW Consumes As Much Electricity as The Netherlands

Because no government or central authority issues the currency, there has to be a way to ensure that currency supply remains limited¹ and actually has value and does not end up like Zimbabwean currency.

That is where the POW comes in. You earn Bitcoin by generating large random numbers on computers, spending time, money and energy to keep them running. Worse, as more Bitcoin gets mined, more POW is necessary to continue mining it. So, with time, Bitcoin mining will use more energy. In 2024, experts expert the energy costs to mine 1 Bitcoin will double.

Now, if you haven’t spent your career running large math calculations on big computing clusters, you might wonder how bad can it really be. But as someone who does that day in and day out to for scientific research, let me assure you it is an absolutely massive amount of electricity. As scientists, we respect that and hope that our goal of advancing human knowledge more than makes up for the energy investment. But Bitcoin has no such qualms, as we will see.

Note: A lot of the analysis shown here is based on the work of Alex de Vries, the founder of digiconomist.net, and one of the first researchers who identified and brought awareness to this problem, and was kind enough to share his recent paper with me.

If you think this isn’t bad enough, here is another statistic:

The total amount of carbon we are preventing from being emitted because of our switch to electric vehicles = 50 million metric tons

The total carbon emissions from Bitcoin mining = 60 million metric tons

Basically, as long as we are mining Bitcoin, all the effort in the last 10 years from engineers, scientists, entrepreneurs and governments for our EV revolution is essentially pointless from a carbon emissions standpoint. Let that sink in.

Bitcoin Refugees Head to Countries with Cheap Electricity and Low Regulation

In mid 2021, the Chinese government banned crypto mining. Chinese Bitcoin miners led the world in most digital currency mined, and sucking vast amounts of electricity from a struggling Chinese power grid, which was powered mostly by coal and hydro. As a country with a huge manufacturing base that depends on reliable electricity, it was already suffering rolling blackouts due to power shortages. The solution was obvious and immediate: Ban all large sources of power demand that are wasteful or frivolous, and Crypto certainly lies at the top of the list. I would guess that grown men playing on their Xbox for 8 hours a day would come a close second, but I digress…

Anyhow, the aftermath was chaotic. Crypto miners had invested vast sums of money in expensive computing hardware and they needed to recoup their investment. As always, business looks for places where costs are low, regulation is almost non-existent, capitalism reigns over the land, and energy is plentiful.

Welcome to the United States.

CO2 footprint from Bitcoin as of August 2021: The aftermath of China’s ban on Crypto mining and the industry’s mass exodus to the US. Source: De Vries et al, 2022

The United States has laid out the red carpet for crypto refugees from China. Kazakhstan is a close competitor, as it went a step ahead and declared crypto mining as “official business activity”, so that its cheap natural gas can be attractive to power energy grids for legally sanctioned mining crypto. Today, around 8% of the Kazakh fossil-fuel powered electricity grid goes towards mining fake digital coins² while it suffers power shortages and rolling blackouts.

They say everything is big in Texas. And it definitely applies to Crypto.

Around 9% of all crypto in the world, is mined in Texas. Experts estimate this will rise to 20% next year. Other states, watching Texan tech bros rolling in money, started luring in crypto mining companies, despite not having enough renewable energy capacity. Kentucky is infamous for giving them tax breaks, so that the miners can use its struggling coal power plants that are already unprofitable. Ditto in New York and Montana.

In fact, these states have restarted previously closed, heavily polluting coal plants, because Crypto miners invested in them. These coal plants have long been unprofitable in the US because of cheaper wind and solar energy, but as long as the price of Bitcoin keeps soaring, even such inefficient power sources become financially viable.

It gets worse. A recent paper argues that up to 30 highly polluting power plants in New York that are closed, risk being operational again if crypto miners are not legally prohibited.

Want an Unstable Power Grid? Invite Crypto Miners

If you really want to appreciate the consequences of large scale crypto adoption to the power grid, no better place to see it than Texas.

Around 65% of Texas’ power comes from natural gas and coal, while the rest are from wind and solar. Here is what sets it apart from other US states: Texas is the only state that has not connected its power grid to the rest of the US, so they can’t borrow power from other states if demand increases or supply goes down³.

This leads to the events in Feb 2021: The infamous Texas power blackouts caused by climate change induced extreme cold weather, which made natural gas pipelines in-operational, while also increasing heating demand in cities. As a result, hundreds died in the cold, and electricity became astronomically expensive because demand exceeded supply.

Now add crypto to the mix.

Currently, around 4% of the power is consumed by miners, with over thousands of applications pending to be approved. That is equivalent to the power consumption of Texas’s largest city, Houston. The miners claim that they won’t destabilize the grid, because they will simply switch off their computers if the demand rises, so that the grid does not break down for people with legitimate power needs.

Anyone who has run calculations on these expensive machines knows this is nonsense. Why? The miners have spent thousands on their computers, and can only make a profit if it’s running 24/7/365, especially as the POW gets harder every passing year.

Worst of all, there are no laws which enforce that they shut down when power demand surges (due to heat waves or sudden winter storms).

So the strategy now is to just “trust” the get-rich-quick businesses will not crash the grid and put the people before their profits (We all know how that game goes). Sometimes they do shut down, but not because of altruism. Large crypto companies often negotiate advance, cheap contracts for electricity. During times of power surge, the electricity becomes more expensive, and they sell it back to the grid, making millions⁴. The grid then passes on these costs to the people. Free market is a wonderful thing.

Is This A Good Use of Humanity’s Resources?

At a fundamental level, the world is all about effective management of limited resources at our disposal. While we widely appreciate this logic for water, fuels and food, it is less so in finance and tech. Large-scale resource consumption for a digital quantity that much of humanity is yet to find a tangible use for, while diverting computers, electricity and even renewable energy⁵, is questionable at best, and scandalous at worst. We also have smart technical talent getting attracted to “easy money”, instead of using their skills in areas that actually matter, like climate change adaptation (Given the state of global politics, does anyone still believe we’ll escape the 1.5 degree C warming forecast?).

Digiconomist @DigiEconomist

The current crypto price crash may have some positive environmental benefits as miners are forced out of business. Every $1,000 drop in the Bitcoin price will reduce power demand of the BTC network by roughly 0.75GW and save 10k metric tonnes of CO2 per day.

Dylan LeClair 🟠 @DylanLeClair_

There’s a lot of bitcoin mining companies that are dead in the water at these prices/hash rate. We’ve got some carnage to churn through.

This should not be too controversial. Just because electricity is cheap, does not mean its carbon-free. It is no coincidence that Bitcoin mining is concentrated on major fossil fuel producing nations with some of the cheapest electricity prices in the world, even though the owners of these mines may come from nations where electricity is expensive. Even in China, where crypto mining is banned, recent study shows there is a massive underground industry thriving. Considering most of the Chinese grid is coal-based, we are likely under-counting the already horrendous emissions.

You may wonder why Bitcoin and Crypto are still a thing. It’s because several crypto enthusiasts make some powerful arguments on its perceived value and future contributions to the society. Some cryptocurrencies have even agreed the POW is kinda insane, and are switching over to less energy consuming methods. Others argue that this is a price worth paying for saving the world from a future dictatorship.

Yet, it’s increasingly apparent that these claims are becoming flimsier by the year. That will be the next post. And as always… I would love to know what you think. Do you own crypto? Why or why not?

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1. I’m aware the US federal reserve creates dollars out of *cough*,*cough*, thin air when the economic conditions worsen, but that is a whole other topic that needs a separate newsletter, and from someone far more qualified than me.

2. The US is the largest Bitcoin producer currently, but its emissions are lower than Kazakhstan because it’s using a lot more renewable energy.

3. There are some exceptions. Years of US government subsidies for renewable energy, coupled with plentiful sunshine and wind in Texas, has in some places led to more power installations than what people in the area can consume - this happens a lot in West Texas, bordering New Mexico. In these places, Crypto mining is a welcome customer. But this is a minority.

4. This is now under federal investigation, because the Crypto miners got tax breaks, and yet managed to make money off the government in times of crisis.

5. Carbon-free electricity still consumes raw materials and resources to manufacture them. The crypto industry refuses to acknowledge that carbon-free does not mean “resource-free”.