The Uncertain Future of Cryptocurrency

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As concern grows over bitcoin’s energy use, what’s next for cryptocurrency?

Cryptocurrency mining is driving up power prices in small towns with cheap electricity. Can Bitcoin be made more efficient, or is the future of crypto in another currency?

Written by Robert Walton, utilitydive.com, March 28, 2018

David Bowman started mining bitcoin in his apartment in 2014. As he puts it, “jerry-rigging around and busting the circuits here and there.” He has since expanded, though he balks at calling it a “commercial.” operation. Compared to his neighbors, his energy use is paltry.

Most anywhere else, his power demand for mining would have gone unnoticed. But Bowman runs Plattsburgh BTC, and the small city in upstate New York has improbably become the front line in a growing energy debate.

Here’s the issue: Bitcoin is a cryptocurrency begun in 2009 that leverages blockchain technology in order to operate without a central clearing authority. Transactions are confirmed by “miners” who are compensated for the computing power necessary to verify transactions in a few ways. But the primary incentive is being awarded new bitcoins, and as their value has risen, so has interest in mining the currency.

Bitcoin’s creators never imagined massive server farms and dedicated computing power, Bowman told Utility Dive. But that’s what happened.

People began pooling resources, launching what he calls “an arms race.” Bitcoin was once mined in the background of college kids’ laptops, but now all but requires Application-Specific Integrated Circuit (ASIC) hardware that does one thing and one thing only: mines Bitcoin.

The Bitcoin system creates 12.5 new coins every 10 minutes, awarded to the miner who solves a complex math problem and creates the “block” of transactions to be verified and added. There have been ample stories about whether Bitcoin is a bubble and what it’s really worth. The number of bitcoins awarded for solving the math problem halves roughly every four years. There is a limit to the total number of bitcoins, with the last one projected to be awarded sometime in 2140.

Currently valued around $8,000, the price has brought together investors spending millions to develop faster and more efficient mining operations.

“But a byproduct of that is gigantic centralized mining operations,” Bowman said. “And it’s also created rampant energy consumption.”

“It has become an arms race, and it definitely was not intended to be that way.”

How much and what kind of energy does Bitcoin use?

Bitcoin’s energy use is a widely debated topic, with estimates varying widely; according to the crypto-focused platform Digiconomist, the currency’s annual consumption is 57 TWh worldwide. Marc Bevand, an analyst and crypto entrepreneur, in January estimated a smaller amount, 18.4 TWh — while allowing that it could be as high as 27.5 TWh or as low as 14.2 TWh.

But Digiconomist also estimates annual global mining revenues at more than $7 billion, and costs of $2.9 billion, so the incentives are clear.

There is no question that Bitcoin uses a lot of energy, but the more important questions may be where it is coming from, and are miners paying their fair share of system costs. In the United States, miners have migrated to regions where cheap hydroelectricity is plentiful, such as the Pacific Northwest. But those concerned with Bitcoin’s potential impact on the Earth’s climate often point to China, and argue miners are utilizing cheap coal-fired generation.

By some estimates, most of the world’s power consumption for bitcoin mining comes from China — up to two-thirds, much of it from coal-powered plants in inner Mongolia.

Bevand doesn’t believe that, but not because he thinks Chinese miners are particularly altruistic or climate-minded.

As with many things, it’s a matter of dollars and sense.

“Since renewables have become the cheapest sources of energy, I am expecting the mining industry to drive up investments in renewables,” Bevand said via email. “Contrary to popular belief, actually a large fraction of miners in China are using hydroelectricity, plentiful and cheap in the Sichuan province. Hydro appears to still beat coal somewhat, even in China.”

Can Bitcoin be made more energy efficient?

Bitcoin is an energy-intensive industry, and energy makes up a large portion of miners’ costs. For Bowman, in New York, he says it’s about 25% of his cost — and will rise to about a third in a few years, for a variety of reasons.

“Energy is the single biggest cost of doing business,” he said. “And you have to upgrade [computing equipment] to be more efficient, if you want to remain competitive.”

There is no doubt that Bitcoin can be made more efficient, on a per-transaction basis, said Navigant analyst Richard Shandross. But that might be beside the point. Bitcoin’s large energy use is not a flaw, but a key feature in the system that makes the blockchain secure, he said.

“It’s the energy consumption that makes it so hard to defraud the currency,” Shandross explained. “It’s got to be very expensive and time consuming to rewrite a blockchain.”

Bitcoin works by tempting computers to solve what is essentially a complicated math problem. First to solve it gets the prize: currently, 12.5 bitcoins, and that user also adds the next block to the blockchain. As more Bitcoins are released, the problems get harder to solve, requiring more computing power. And over time, the number of bitcoins awarded to miners declines.

“The result may be a secure currency system, but tons of energy gets wasted in the process,” Shandross said.

Much of crypto mining’s energy use comes from keeping the computers cool, so there are a variety of solutions, including energy reuse and locating in cooler geographies. But according to Shandross, “energy reuse is not easy or simple,” and right now, the amount of servers on cryptocurrency systems that recycle thermal energy is at most 25%.

Geography plays a significant role in mining operations deciding where to set up shop. Right now it’s mostly China, the United States, the E.U. and Georgia, Shandross said. But Iceland has become a popular spot, just for its natural cooling, he added.

Natural cooling is good, and combined with cheap electricity, it’s why Bowman set up BTC Plattsburgh in upstate New York. Whether using an area’s natural temperature or running fans to suck the heat from server rooms, that energy is key and has a cost. “It will overrun any AC unit you try to run, so you just have to try and move the heat out,” Bowman said.

Possible alternatives

Bitcoin is not the only crypto currency out there. But it’s easily the most well-known and most-capitalized.There are many others and they do not all work the same.

Shandross said there are more than 1,500, though that figure comes with caveats about public access and structure. But there are at least 25 cryptocurrencies with individual market capitalizations above $1 billion, so while Bitcoin may dominate the headlines, it may not be the last cryptocurrency to become mainstream.

An alternative is being developed by the Ethereum network, which is second in overall value to Bitcoin. The currency would be based around a validation method called “Proof of Stake,” and Shandross said it uses less energy, though it is not “fully vetted.”

“I have a lot of love for Ethereum,” Bowman told Utility Dive. “It is a lot more efficient than Bitcoin and actually does useful things, too.”

Bowman predicts “a whole new breed of cryptocurrencies” will emerge, using smart contracts that can be programed to perform a wide array of tasks. You could borrow some of the computing power necessary for processing your coffee purchase, to test artificial intelligence ideas, for instance.

“We need to find ways to either make bitcoin more efficient somehow or possibly move into other currencies,” he said.

Back in Plattsburgh

While the future of cryptocurrency mining may be more efficient, today’s industry uses a lot of energy. And while there are plentiful existential questions to ponder about crypto’s global significance, in specific towns and cities, the impact is felt acutely.

The poster child is the Pacific Northwest, where cheap hydro has attracted, as Politico put it, “suitcases of cash” and mining operations up to 30 MW.

Compared to that, Bowman’s operation is tiny. But the same economic forces are at work. Plattsburgh has about 20,000 residents and its power comes from a limited supply of cheap hydro. In January, average bills jumped $10 because the city was forced to buy additional energy.

And Plattsburgh isn’t the only municipality dealing with the issue. In response, the New York Public Service Commission announced March 15 it would allow municipal utilities to charge bitcoin mining operations higher power prices.

Bowman set up shop in Plattsburgh, in an abandoned warehouse, when the cost of energy was around $0.018/kWh. It has risen since, and he expects it will continue to.

“They are definitely going to have to charge us more at some point,” he said, acknowledging the issue.

In the meantime, Plattsburgh is now the first city in the United States to temporarily ban new cryptocurrency mining operations. The mayor’s office has been involved in discussions of efficiency, and potentially using waste heat in other ways. But in a March 15 vote, the city council decided on an 18 month moratorium on licenses for new mining operations.

Bowman has been working as part of a local roundtable to find solutions and “figure out some ground rules,” to “make sure people aren’t subsidizing this whole thing.”

His own energy demands are around 25 kW to 30 kW; “small fry,” he said.

City officials say there is one company that runs two large mining operations — Coinmint’s local company North Country Data Center. Combined with a few smaller operations, Bill Treacy, manager of Plattsburgh’s Municipal Lighting Department, said bitcoin mining consumes 10% of the town’s power.

North Country Data is looking to build a much larger operation about two hours northwest of Plattsburgh, near the Canadian border. The company wants to repurpose a vacant Alcoa plant and has requested 15 MW of power from the New York Power Authority (NYPA).

Plattsburgh is a winter peaking municipal utility, thanks to the town’s access to cheap hydro. Residential rates are now about $0.045/kWh, so about 95% of homes use electric heating. “If we use the finite amount of hydro we get from NYPA, we have to buy more expensive supplemental power,” Treacy said. That happened twice this winter.

The existing bitcoin miners can continue to operate while the town takes a year and a half to consider its zoning and building codes.

The PSC’s decision to allow higher rates could be seen as discouraging new companies from locating businesses in New York, and the commission acknowledged that. In a statement, Chairman John Rhodes said the state wants to welcome industry, but must ensure business customers pay their fair share.

“This is especially true in small communities with finite amounts of low-cost power available,” he said.

Bowman said he understands the concern that miners are moving into towns, using the cheap energy and not giving back. “Big operations come in and are basically using up all the cheap power and not hiring many people … The way to bring more jobs is to innovate to look into blockchain technology and different business models.”

“For our part, we’re so small I can’t hire anyone. I don’t even regularly collect a paycheck,” he said.

This article was written by Robert Walton and was originally posted on utilitydive.com

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