China was at one point home to nearly three-quarters of the world’s total Bitcoin production. But now it’s cracking down on the highly popular cryptocurrency, with state media claiming that 90 percent of its mining operations closed on June 21. In response, the value of the currency has been going haywire, dropping that day to $28,680, its lowest level in a month, before rebounding to nearly $33,000 by Tuesday. But instability continues to loom due to a concurrent slide in demand; the U.S. Federal Reserve’s announcement of possible interest rate hikes by 2023 may have additionally spooked investors.
At any rate, China’s enterprising miners, who once had entire countryside regions and dedicated power plants for their use, are striking out West for new opportunities in countries embracing digital currencies. While nations like Kazakhstan are opening their virtual mines, so are some of the most crypto-enthused regions of the United States—many of them fossil fuel–heavy states with tepid financial regulation. It’s the new (digital) gold rush, folks!
But is it, really? And even if it is, how soon will the crash follow the boom?
First, some background. One of the many reasons a mass transfer of Bitcoin farms across the Pacific could be extremely damaging is the notoriously energy-intensive nature of the currency. Bitcoins are mined from the blockchain, the decentralized network of virtual transactions that every miner around the world is plugged into, through their computers and processors. To earn coins, which are heavily encrypted in order to ensure security and authenticity, miners (or their computers, at least) have to solve complex puzzles, which takes up ample processing energy. To break through these codes, the computer has to figure out a particular block’s matching “key,” an algorithm-generated alphanumeric code also known as a “hash.” To match this hash, the computer has to generate its own guessed hashes and try them on the block until it finds the correct one; the pace at which hashes are calculated and guessed to find the key is known as the hashrate. According to Blockhain.com, Bitcoin’s hashrate on Wednesday was equal to 104.041 terahashes per second, which translates to about 104 trillion individual hashes per second.
Standard processing units are usually too inefficient to keep up with such a rapid pace; however, the processing machines that are more energy-efficient can usually only be used for Bitcoin mining. These more economical processors tend to have a short life span, so when they die, they simply pile up as e-waste. That’s all just extracting the coins, mind you—sending coins to other users to actually use them for transactions also requires hefty electricity, as the majority of the computers cued in to the blockchain must verify each transfer in order to ensure its legitimacy. Between the number of computers interconnected, the processing units used, and the power required to both solve the puzzles and send coins, Bitcoin operations alone end up draining trillions of energy watts a year. And the Cambridge Centre for Alternative Finance estimates that as of 2020, not even 40 percent of Bitcoin is sourced from renewables.
China, the world’s largest carbon emitter, began this currency-shaking crackdown because it has been flailing in its climate goals. For the government, Bitcoin was an easy, sensible sacrifice. Even though the country had ample renewables reserves at hand for mining (especially hydropower), there were other issues for the world’s dominant crypto curators. A 2019 paper by Dutch economist Alex de Vries noted that the Sichuan region’s hydroelectricity efforts sometimes had devastating local environmental effects. And due to the erratic availability of the area’s water flow, power for servers often needed to be backed by fossil fuels. Indeed, there has been a surge in coal mining and burning in China in recent months, which concerned authorities directly linked to the rising demand for Bitcoin production and blockchain operations. This was especially apparent in the coal-heavy Xinjiang region, which accounted for 36 percent of China’s Bitcoin prior to the Xi Jinping administration’s clampdown. Plus, the government has also failed to provide sufficient energy access to about one-fifth of its population, a problem worsened by crypto’s power demands. You need only look at charts of Sichuan’s mining farms’ energy use to see the problem.
All this, in the region that provided Bitcoin’s “last major source of renewables.” Add to that the 2 gigawatts of energy use recently shut down in Xinjiang, and the crypto-mining situation in China appeared clearly untenable. So, what happens when all that mining equipment and manpower is simply exported overseas? We may be about to find out. Recently, various U.S. states have implemented legislation to make their confines friendlier to blockchain, Bitcoin, and other virtual currencies. Kentucky offered tax breaks for crypto miners, while Wyoming has formalized a system to make it easier for financial institutions primarily versed in digital currency to do business; a Chinese logistics firm recently airlifted 3 metric tons of mining machinery to Maryland. Local governments are joining the action, too. Miami Mayor Francis Suarez has not only spoken directly with Chinese companies about taking their Bitcoin operations to his city, touting its cheap nuclear energy reserves, but has also proposed special laissez-faire economic zones to just let these miners do their thing. (Coincidentally, this may or may not be our pitch for a terrible reboot of Miami Vice.) Miami, of course, has long been a major player in the Bitcoin game, hosting massive annual conferences of miners and investors (although this year’s may have been a COVID superspreader event). Other locales, including New York and Connecticut, are attempting to lure in crypto miners to revitalize old fossil fuel factories whose natural gas flares and dirty energy remnants could be used to supposedly power mining operations with efficiency.
Simply put, the list of U.S. cities and states catering to crypto enthusiasts at a time of major upheaval in the market is growing by the week—and proving incredibly attractive to miners. If you’re an American Bitcoin enthusiast, this is all very exciting. And if you’re a climate-conscious consumer who subscribes to Twitter CEO Jack Dorsey’s fallacious case that Bitcoin can incentivize the further buildout of renewable energy, well, all the better. (For what it’s worth, Kazakhstan, which is also offering incentives to China’s Bitcoiners, has only 6 percent of its grid powered by renewables.) But if you want a stark example of the likely environmental and business dangers of making the United States safe for Bitcoin, you couldn’t do better than to look closely at Texas—which is very eager to take in China’s Bitcoin expats.
Bitcoin mining operations have set sights on the regulatory (or lack thereof) paradise forming around the Chihuahuan Desert. Not only does Texas provide relatively cheap electricity prices, but new laws and political posturing by the state have brought a wave of cryptocurrency operations. In May, Chinese firm Bit Mining Limited entered into a $25 million contract for a Texas-based cryptocurrency mining data center. Virtual currency operations have even begun using oil and gas vent capture methods to power their server operations, feasting on fossil fuel energy that would otherwise likely go to waste. While at first glance this seems like a good thing, it provides yet another profit incentive for increased fossil fuel infrastructure while mitigating the cost of carbon-intensive externalities—basically, using fossil fuel energy that would go to waste only encourages fossil fuel producers to keep wasting. Now, state legislators have joined the Bitcoin train, following Wyoming in regulating the legal status of virtual currencies under Texas’ Uniform Commercial Code and clarifying the legal environment for Bitcoin investment as well as its use as collateral for economic operations. The bipartisan bill establishing this regime, Texas House Bill 4474, was supported by Gov. Greg Abbott—who signed it into law in early June, allowing the rules to take effect by early fall.
Several Texas lawmakers and political leaders have hailed cryptocurrency and the blockchain as boons to the local economy. After the April announcement of blockchain firm Blockcap Inc.’s new headquarters in Austin, former Gov. Rick Perry added to current Gov. Abbott’s support when he hailed the move as a critical accelerant of both job creation and sustainable economic growth. Sen. Ted Cruz lauded Bitcoin as a hedge against potential—but largely unfounded at the time—worries about hyperinflation of the American dollar following COVID-19 stimulus packages. A new industrial lobby known as the Texas Blockchain Council has also sprouted up, pushing legislation like HB 4474 in attempts to make Texas cozier for crypto companies.
But it’s unclear that crypto or blockchain technology will bring the windfall these Texans promise. For one, the possibility of major Bitcoin crashes has already threatened the economic outlook for places that go all-in on cryptocurrency—and will likely do so again. Take the example of the Texas city of Rockdale and surrounding Milam County, whose economy tumbled with the closure of a smelting facility and a coal power plant, among other rural infrastructure. For a while, hope came from Bitmain—a Chinese crypto company that promised to create hundreds of jobs in maintaining Bitcoin mining operations in the area. But when the price of Bitcoin dropped steadily at the end of 2018, mining machines shuttered, and Bitmain’s Rockdale facility never really went online. While crypto value and the possibility of Texan mining facilities have recovered, Rockdale shows that struggling small communities can never fully rely on these projects to come to fruition.
Plus, everyday Texans are not likely to benefit from a Bitcoin-mining explosion. Analyses from earlier this year found that about 2 percent of network entities control more than 70 percent of the world’s Bitcoin reserves. The Chinese Bitcoin miners heading to the U.S. are highly specialized and already wealthy, with Xinjiang’s miners having received more than $9.2 billion in mining fees since May 2020 alone. Due to the substantial equipment and energy needs, combined with a huge technical learning curve, it’s not easy to get anyone started on Bitcoin; it’s even harder to get crypto resources to underserved Texans in search of new economic opportunities amid a market full of experienced, financed foreign crypto veterans.
That’s not even mentioning the difficulty of taxing and policing crypto transactions. According to the Treasury Department, “Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion”—and there’s no guarantee that increased efforts by either Texas or the federal government will rein in these problems. HB 4474 as it stands does nothing to solve this problem, and we trust the ability of capable crypto experts to stay a technical step ahead of U.S. government intervention.
But even if there were a magically prosperous system of cryptocurrency flourishing in Texas, recent electrical grid struggles further complicate their Bitcoin gambit. Massive rolling blackouts during extreme cold in February and recent conservation alerts in June have underscored the Texas grid’s fragility. While there is some disagreement as to the exact problem in the state, what’s clear is that an independent grid with a lack of reserve margins can quickly lead to crises when demand rises sharply. This—combined with bureaucratic mishaps, issues with transmission reliability, weatherization failures, and unplanned infrastructure outages—all adds up to a grid unprepared for the massive output new crypto miners would need. And keeping in mind how ridiculous variable rate bills became during the winter blackouts, massive spikes in statewide energy consumption from new crypto operations could lead to financial disaster for everyday energy consumers.
According to the Bitcoin Energy Consumption Index, just this one virtual currency represents 131.80 TWh of energy consumption per year—roughly the power demands of the entire country of Argentina. With China representing more than 65 percent of the Bitcoin hashrate, that adds up to about 85 TWh of energy demand moving from the East Asian republic if crypto operations are to completely exit. And, while these estimates are extremely rough, that hashrate would likely equate to about 30 percent of Texas’ total power generation moving abroad. Good luck getting a stressed-out Texas grid to handle even a fraction of that new demand.
Plus, there’s the question of Texas’ energy economy. As we’ve mentioned, the Lone Star State has plenty of cheap energy, and it’s also one of the major states on the forefront of renewables development. But you have to consider why Texas’ energy is so price-efficient—one primary reason being the deregulation that made it susceptible to those fatal outages earlier this year. As University of Florida energy specialist Theodore J. Kury has written: “Consider the challenges facing two Texas generators that are identical in every way, except that one decides to invest in winterization. That company will have higher costs than its competitor and may be forced to submit higher-priced offers in the market, potentially losing out on opportunities to sell its electricity.” But what happens when the nonwinterized grid fails and Texans draw on the few supplies still available to them? As we saw earlier this year, a massive surge in price due to variable energy-billing rates. Ultimately, it ends up a Catch-22: Winterizing the grid and Bitcoin operations will be incredibly expensive. But without it, Texas will still have to pay more when the lights go out.
So sure, in the Texas summer, a hot new commodity is starting to virtually sizzle in the sun. But with rising temperatures, environmental concerns, a struggling energy grid, and existing difficulties in taxing and regulating cryptocurrencies, it’s worth asking: Is the impending Bitcoin boom really in the best interests of everyday Texans and Americans? It’s more likely a mirage.