The real-world costs of the digital race for bitcoin – 07/24/2023 – Market

Texas suffered from a lack of electricity. Winter storm Uri knocked out power plants across the state, plunging tens of thousands of homes into icy darkness. As of late February 14, 2021, nearly 40 people have died, some from freezing cold.

Meanwhile, in the husk of an old aluminum foundry an hour outside of Austin, rows upon rows of computers used enough electricity to power about 6,500 homes as they raced to earn bitcoins, the world’s largest cryptocurrency.

Computers performed trillions of calculations per second, searching for an elusive combination of numbers that the bitcoin algorithm would accept. Roughly every ten minutes, a computer somewhere guesses correctly and earns a small number of bitcoins, which in recent weeks were worth around $170,000 each.

In Texas, computers continued to run until just after 12:00 am. Then the state grid operator ordered them turned off, under an agreement that allowed it if the system was about to fail. In return, it began paying bitcoin company Bitdeer an average of $175,000 an hour to keep computers offline. Over the next four days, Bitdeer would earn more than $18 million by not trading, with fees paid by Texans who weathered the storm.

The New York Times identified 34 of these large-scale operations, known as bitcoin mines, in the United States, all of which put immense strain on the power grid and most find new ways to profit from it. Your operations can create costs – including higher electricity bills and massive carbon pollution – for everyone around you.

Until June 2021, most bitcoin mining was in China. Then the country kicked out bitcoin operations, at least for a while, citing energy usage among other reasons. The United States quickly became the global leader in the industry.

Since then, exactly how much electricity bitcoin mines are using in the country and its effect on energy markets and the environment are unclear. The Times, using public and confidential records as well as the results of studies it commissioned, presented the most comprehensive estimates to date of the energy use of the largest operations and the ripple effects of their voracious demand.

In some areas, this has caused prices to rise. In Texas, where 10 of the 34 mines are connected to the state’s electrical grid, increased demand has caused power customers’ electricity bills to rise by nearly 5%, or $1.8 billion a year, according to a simulation performed for the Times by energy researcher and consultant Wood Mackenzie.

Additional energy use across the country also causes as much carbon pollution as adding 3.5 million gasoline-powered cars to America’s roads, according to an analysis by WattTime, a nonprofit technology company. Many bitcoin operations promote themselves as being eco-friendly and located in areas rich in renewable energy, but their energy needs are too great to be satisfied from these sources alone. As a result, they have become a boon to the fossil fuel industry: WattTime found that coal and natural gas power plants kick in to meet the 85% of demand these bitcoin operations add to their grids.

Its enormous power consumption combined with its ability to shut down almost instantly allows some companies to save and make money by deftly pulling the levers of US energy markets. They can avoid fees charged during peak demand, resell their electricity more expensively when prices skyrocket, and even get paid for offering to switch off.

In some states, bitcoin operators’ revenue can come from other high-powered customers. The clearest example is Texas, where bitcoin companies are paid by the network operator for promising to shut down quickly if necessary to avoid blackouts. In practice, they are rarely asked to hang up and instead earn additional money while doing exactly what they would be doing anyway: chasing bitcoins.

Several of the companies are being paid through these agreements most of the time they operate.

In interviews and statements, many of them have said that they are no different from other big energy users, except for their willingness to shut down quickly to benefit the grid. Several objected to the method the Times and WattTime used to estimate their emissions, which calculated the pollution caused by the additional energy generated to meet the mines’ demand, showing that it came predominantly from fossil fuels.

Companies said this method applied an unfair standard to them.

“The cited analysis can be used to attack any energy-consuming industry,” said David Fogel, CEO of Coinmint, which operates in upstate New York. “I think the whole idea of ​​singling out specific sectors like this is unfair.”

Many academics who study the energy industry have said that bitcoin mining is undoubtedly having significant environmental effects.

“They add hundreds of megawatts of new demand when we’re already facing the need to quickly cut fossil energy,” said Jesse Jenkins, a Princeton professor who studies emissions from the power grid.

“If you care about climate change,” he added, “that’s a problem.”

Lee Bratcher, president of the Texas Blockchain Council, a bitcoin lobby group, said in an email that the industry encourages the development of new natural and renewable gas plants. But, according to energy industry experts, while some current wind farms may be benefiting modestly, renewable generation takes years to build and often requires commitments from customers who can guarantee they will buy power for a decade or more.

According to Jenkins, the nearly constant energy demand of bitcoin operations is more likely to keep fossil fuel power plants running than it is to lead to more renewable energy.

Some bitcoin companies WattTime found to be the biggest polluters call themselves renewable energy sources.

For example, the CEO of Riot Platforms described bitcoin mining as “uniquely beneficial and renewable energy friendly”. Ninety-six percent of the energy demand added by the company’s mine was met by fossil fuels, WattTime analysis showed.

Miners power game

Bitcoin mining produces steady income, but using so much electricity can also be a business model.

Moments of extreme weather provide especially glaring examples. Take June 23, 2022 – the eighth consecutive day of temperatures of nearly 37 degrees in Austin, which allowed Riot Platforms to demonstrate various ways to turn electricity into cash.

Like many industrial buyers, the company had pre-purchased its power at a fraction of the price available to residential customers. The Riot mine operates at 450 megawatts – the largest in the country.

Every day of that June, their computer guesses earned bitcoins worth an average of around $342,000. But the company had two additional ways to improve its profit margins.

First, she signed up for the Responsive Reserve Service, a Texas utility program that offers a way to quickly reduce voltage if the grid becomes overloaded, acting as blackout insurance. The program pays miners and other companies for promising to stop using electricity upon request. In reality, they are rarely asked to close, yet they are paid to deliver on the promise.

From 12:00 a.m. to nearly 4:00 p.m. on June 23, Riot earned over $42,000 from the program as it continued to mine bitcoins.

At that time, the company switched to the second technique: avoiding the fees Texas charges for maintaining and strengthening the power grid. She did this by briefly hanging up almost completely.

By 6:30 pm, the company had resumed mining. Had Riot been operating fully all day, it would have incurred around $5.5 million in fees — costs that are largely covered by other Texans. Over the course of the year, this saved Riot over $27 million in potential fees.

The company’s actions were described in data published by the Texas grid operator, the Electric Reliability Council of Texas, or Ercot. Although the records refer to energy providers by pseudonyms, the Times was able to identify six of the 10 Texas operations in the data.

A final mechanism allows some companies to earn extra cash when electricity prices skyrocket: they can stop mining and resell electricity to other customers. That earned Riot around $18 million last year.

With bitcoin mining, the company earned US$ 156.9 million in 2022.

After accounting for the savings and revenue for each of the strategies, Riot told investors that its 2022 electricity cost was 2.96 cents per kilowatt-hour.

In comparison, the median price for other industrial companies in Texas was $0.072. For residents, $0.135.

‘Texas will be the crypto leader’

These opportunities have led some of the nation’s biggest bitcoin operations to choose Texas.

“It’s a huge financial burden for Texans,” said Ben Hertz-Shargel, who leads network-related research at Wood Mackenzie and was on the team that conducted the market-based simulation for the Times based on historical Ercot data. Because of the way the Texas market operates, the increases are steeper for residential customers, Hertz-Shargel said.

Others say rising prices will encourage the development of cheaper types of power generation.

In Texas, companies have powerful allies. Governor Greg Abbott said in a tweet that “Texas will be the cryptoleader” and hosted the Texas Blockchain Council at the governor’s mansion. The former interim CEO of the network has declared himself “pro-bitcoin”, and the current vice chairman of the network’s board is a former board member of the Texas Blockchain Council. Still, in March, three Republican state senators banded together to sponsor a bill that would restrict tax breaks for miners and place strict limits on their participation in programs like the Responsive Reserve.

In Rockdale, where two of the nation’s largest mines operate outside city limits, local administrator Barbara Holly told the Times that the town used to be “a pretty wealthy little community.” She said that changed when a large industrial plant that generated thousands of jobs closed more than a decade ago. “It just cut this community’s legs,” she said.

It used to be the old aluminum smelter, now home to the Bitdeer mine.

Translated by Luiz Roberto M. Gonçalves