Bitcoin: turn coal into bitcoin? Dirty secret of the hottest market in 2017

Bitcoin has a dirty secret.

The cryptocurrency has impressed the markets with breakneck profits this year as investors flocked to an asset that only exists in cyberspace. However, the laborious creation of every digital Bitcoin by private computer networks has real consequences in the form of massive energy consumption – including fuels, which cause most of the pollution.

An example of this are eight 100-meter-long metal warehouses in northern China. Bitmain Technologies Ltd. operates a server farm in Erdors, Inner Mongolia, with approximately 25,000 computers dedicated to solving the encrypted computations that are used to generate each bitcoin. The entire operation is powered by electricity generated from coal, as are a growing number of cryptocurrency mines that are popping up in China.

According to the Digiconomist Bitcoin Energy Consumption Index, the electricity consumption of global industry could already amount to 3 million US households, exceeding the individual consumption of 159 countries. As more Bitcoin is created, the difficulty of the token-generating calculations increases, as does the electricity demand.

“It’s gotten dirty producing this,” said Christopher Chapman, a London-based analyst at Citigroup Inc.

Energy has always been part of Bitcoin’s DNA. The person credited with creating the currency, identified only as Satoshi Nakamoto, developed the system that gives out virtual coins for solving complex puzzles and uses an encrypted digital ledger to keep track of all work and every transaction. As the market grew from a hobby culture in 2009 to a global phenomenon this year, large networks required more and more computing power.

Bitcoin prices rose more than 2,000 percent on some exchanges over the past year, hitting a record of more than $ 17,500 this week. Cboe Global Markets Inc. started offering Bitcoin futures on December 11th and hit $ 18,850 on the first day of trading. There are other cryptocurrencies like Ethereum and Litecoin, but Bitcoin is by far the largest.

China, which gets about 60 percent of its electricity from coal, is the largest operator of computer mines and probably accounts for about a quarter of all electricity used to generate cryptocurrencies. This is the result of a study of the industry published in April by Garrick Hileman and Michel Rauchs at the University of Cambridge.

China Bitcoin Snip

Around 58 percent of the world’s largest cryptocurrency mining pools were located in China, followed by the US with 16 percent. China is the largest producer and consumer of coal, and server farms in provinces like Xinjiang, Inner Mongolia and Heilongjian are heavily dependent on fuel.

Expand demand

Estimates of how much electricity goes into the production of cryptocurrencies vary widely – from the performance of a large nuclear reactor to the consumption of the entire Danish population. However, analysts agree that the industry’s power consumption is growing rapidly – especially after a price rally in which Bitcoin was almost four times as valuable as it was three months ago.

According to Alex de Vries, a 28-year-old blockchain analyst with accounting firm PwC, total power consumption in Bitcoin mining has increased 30 percent in the past month.

“The energy usage is insane,” said de Vries, who started the Digiconomist blog to highlight the potential pitfalls in cryptocurrency. “If we use this on a global scale, it will kill the planet.”

Some analysts dismiss such claims as overly alarming, noting that even the high-end estimates of demand account for only about 0.1 percent of global consumption. Advances in technology can also make operations more energy efficient.

However, the production of cryptocurrency becomes more and more expensive as the energy consumption of the process increases. Miners – especially the big ones – will look for the cheapest electricity to improve the volatility of weather prices, according to the Cambridge study. Electricity costs in China, which has overcapacity of coal-fired power plants and enormous fuel reserves, are well below what consumers in the US or Europe pay.

More difficult puzzles

Bitcoin’s algorithm dictates that after a certain number of tokens have been created, more work is required for the next batch, said James Butterfill, head of research and investment strategy at ETF Securities Ltd. in London, who has dealt with cryptocurrency markets.

Using estimates of electricity prices and the increasing speed at which calculations need to be made, Butterfill estimates that the marginal cost of each bitcoin will more than double from $ 6,611 in the fourth quarter to $ 14,175 in the second quarter of 2018. At the beginning of 2017 the cost was $ 2,856. As costs rise, miners are at greater risk if prices fall.

“You will have a hard time finding anywhere that it is not profitable for me,” said Butterfill, who set up computers at his home in England to mine in his free time and joined a network of 120,000 others to do the Processing to promote capacity and return on investment. “But when you’re investing in a bitcoin rig, you have to think long-term, and with such high volatility, it probably still doesn’t make sense to mine bitcoin in Europe.”

Not all cryptocurrency mining is dirty. Computers in Iceland are powered by geothermal systems. Even in China, some focus on hydropower plants in Sichuan and Yunnan.

‘Bad news’

In Austria, Hydrominer IT-Services GmbH has installed servers in hydropower plants. This is the cheapest option, said Michael Marcovici, a company founder who started mining in 2013.

“To be honest, we didn’t start this as an environmental project,” said Marcovici. “It’s bad for Bitcoin to be constantly informed about this dirty energy. People don’t want dirty energy to be used up. The problem, however, is that energy is just too expensive in Europe. ”

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