Paying a high ‘energy’ price for crypto mining

September 20, 2018
Chris Wheal

Plattsburgh is a manufacturing city in New York state, a 20-mile drive from Canada. It’s a small city by US standards, home to approximately 20,000. Before it became the first city in the US to ban cryptocurrency mining in March this year, it may have been known (among fans of general knowledge trivia perhaps) that one of its most famous residents was John Henry Hopkins, who wrote the hymn “We three kings of Orient are”.

Aerial view of Plattsburgh town monument

But in the cryptocurrency sphere, Plattsburgh has gained a more memorable slug, achieving fame or infamy for becoming the first city in the US to impose a ban on cryptocurrency mining. Why? Because cryptocurrency mining and the mining farms set up to accomplish it are also renowned for their energy intensive usage and residents and businesses alike were unhappy with the resulting spike in their electricity bills.

Plattsburgh is not alone in bringing cryptocurrency mining to an official halt, other countries are also reviewing how to curb or stop the practice altogether, because of higher rates of energy consumption sometimes due to illegal mining operators stealing power.

Chasing a blockchain rainbow

In particular, the process of mining bitcoin is a heavy demand on a limited resource and one that is growing at worrying pace as individuals chase a pot of digital coin gold at the end of a blockchain rainbow. Statista puts total revenue raised from bitcoin mining worldwide jumping from $0.2m in 2010 to $2,073m in 2016.

You can find any number of YouTube videos and/or articles that breakdown how mining works and the different systems that allow for the release of cryptocurrencies in a trusted and decentralised way. There is proof of work and proof of stake but critics focus on the former used by bitcoin, ethereum and other digital coins when it comes to the need for heavy energy pull.

To prevent fraud and process transactions on the network, proof of work incentivises miners to solve a block mathematical problem (mining) by using a computer to do the expensive calculation. As brain power alone is not enough, the computer’s CPU does the heavy lifting to devise potential calculations.

The first miner able to solve the block is rewarded. Miners compete to solve the mathematical problem first and verified transactions are then stored on a distributed ledger or public blockchain. A primer that breaks down each step can be found here. Proof of work is still considered by many to be the most secure way a blockchain can operate.

As Blockgeeks describes when it comes to the “competitive nature of mining: more computing power is added to the network, the higher this parameter [threshold] increases, increasing also the average number of calculations needed to create a new block. This method also increases the cost of the block creation, pushing miners to improve the efficiency of their mining systems to maintain a positive economic balance.”

There are thousands of computers working on each block simultaneously and the machinery to do this has gotten more sophisticated, miners now have dedicated mining rigs with greater power than your average home computer. Currently, users participate in pools to share their power and split the rewards from blocks. Increasingly, larger operations are also taking over as seen here.

Curbing mining enthusiasm

It’s the onerous computing power requirement that saps electricity. Credit Suisse placed an estimate on incurred electricity costs of bitcoin miners at around 80% of their expenses. While Digiconomist, which publishes the Bitcoin Energy Consumption Index, estimates power consumption of the bitcoin networks is 73.12 TWh a year, more than the entire consumption of 19 European countries and it could easily power more than six million US households.

More than 70% of all mining activity was said to have taken place in China, that is until it instituted a nation-wide ban earlier this year which it has since enforced. Malaysia also cracked down on illegal mining operations, said to be triggered by complaints from residents that mining caused fluctuations in electricity supply and increased bills.

The energy consumption of bitcoin mining companies is growing at an alarmingly rate, giving cause for concern around the world.

Cryptocurrency mining is not illegal in Europe but the European Commission also acknowledged that it was aware of rising concern “on growing electricity consumption for cryptocurrencies, and blockchain technology in general” and planned to review and track cryptocurrencies impact on energy demand.

The European Commissioner responsible for digital economy and society, Mariya Gabriel seem to suggest that mining activity may be self-regulating when she responded to a recent parliamentary question.

Gabriel said: “The mining business model seems to be based on expectations of high valuation of the cryptocurrencies. As long as the price of electricity covers the electricity production costs, the growing electricity consumption, and cost, is likely to modify the demand for and value of cryptocurrencies.”

‘Energy angry’ industry

Although the EC is relatively muted in response to increased concerns, others are clanging bells and raising red flags. Back in January at Davos, the head of the IMF, Christine Lagarde had enough anxiety that she coined a new term telling Bloomberg TV that while there were many interesting aspects to bitcoin part of the dark side of cryptocurrency: “I would add that bitcoin’s mining is this huge accelerated use of computers to actually determine the value and incentivise the functioning of the mechanism is ‘energy angry’.

“We figure that in 2018 if it continues that system will consume as much electricity as Argentina, that’s big and in times of climate change when we look at how much coal is being used in some Chinese provinces to actually mine bitcoin it’s a big concern.”

Nicole S Glass / Shutterstock.com

Plattsburgh enjoyed some of the country’s lowest electricity rates due to a happy coincidence of its history and location on the Saranac river. Cheap supply makes it an attractive place for mining operations. However, when the new industry sucks so much more energy, they are not the only ones paying for their heavy usage. The pain is spread amongst all residents and other businesses, which in Plattsburgh meant a sharp rise in electricity bills.

Plattsburgh’s Mayor, Colin Read, told the New York Times that bitcoin mining consumed about “10% of the city’s power which forced the city to buy a growing amount of extra electricity on the open market, at rates up to 100 times higher than its base cost.”

All around unimpressed?

You need only read the reddit forums or comments beneath articles to see that many bitcoin enthusiasts and mining companies are less than impressed by arguments like Lagarde’s, which they view as largely hypocritical given that the 6.7trn euros global banking industry doesn’t have to account for its own downsides and deleterious environmental impacts.

The crypto-mining industry is cognizant of its negative environmental effect and proponents have said because cryptocurrencies are software based, a solution (albeit not found yet) can be easily implemented.

Residents in Plattsburgh see things slightly differently as its Mayor drew a comparison between the mining companies and another company using similar amounts of power that employed 200 people. Read said: “The mining companies? They hire a security guard,” he said. “And a guy who comes when something breaks.”

However, the issue isn’t black and white as Plattsburg’s ban is in place for 18 months. It will not accept any new applications and imposes a hefty $1,000 a day fine to anyone breaking it. The moratorium allows the city to “preserve natural resources, the health of its residents, and the “character and direction” of the city” and gives it time to reassess how and if cryptocurrency mining is worth the energy.

Post written by Chris Wheal
Chris Wheal is editor of OpenLedger's news and features service. An award-wining business journalists himself, he runs a team of freelance journalists from across the UK and north America.

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