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Investors have welcomed the rise in cryptocurrency prices this year, but the rally has led to more transactions and potentially attracted more crypto miners, a sign that bitcoin's environmental impact is at an all-time high.
On Tuesday, online demand for bitcoin electricity reached 16.2 gigawatts, according to the Cambridge University Bitcoin Electricity Consumption Index. This is a record-breaking figure that reflects the amount of energy spent on bitcoin “mining” and transaction processing.
Bitcoin miners are at the heart of the so-called “proof of work” process that keeps cryptocurrency networks running. These miners use computers, often their own repositories, to solve complex puzzles in network security and transaction processing; the motivation for this is payment in bitcoins.
This process requires a lot of energy, and the difficulty of the puzzle, which affects the amount of energy used, is largely determined by the number of miners involved in the process.
The price of bitcoin has risen by about 70% this year as the digital asset has benefited from heightened investor risk appetite, making crypto mining an even more attractive business after a brutal 2022.
Rising energy prices, increased competition and months of low prices for bitcoin, the largest digital asset set to fall by two-thirds in 2022, are hurting miners and putting significant pressure on their balance sheets. Shares fell among listed miners such as Riot Platforms (ticker: RIOT), Marathon Digital (MARA), Argo Blockchain (ARB.UK) and Core Scientific (CORZQ). Argo warns that they may declare themselves bankrupt. Thus ended Core Scientific.
While bitcoin has rebounded in 2023 and is doing well, the situation for miners has not improved completely.
“The miners haven't left yet. Electricity prices will continue to be a thorn in the industry and could quickly deteriorate if the government succeeds in raising the energy tax on miners,” analysts at research firm Coin Metrics wrote. Post on Tuesday.
As energy prices rise by every penny per kilowatt-hour, the business case worsens, adding another 78 cents a day for the company's most popular rig, the Antminer S19, according to Coin Metrics.
“Even with the recent rise in the price of bitcoin, H19 has a daily income of just over $7, which is worth every penny. Without an uptrend, mining margins will soon return to the cold depths of winter 2022 when H19 averages less than $1.22 per day. In short, with big losses,” the analyst said.
The regulatory picture is also looming amid increased scrutiny of U.S. crypto firms in recent months. While most of the pressure comes from financial regulators, with enforcement action from the Commodity Futures Trading Commission and the Securities and Exchange Commission, miners remain in the dark.
As Bitcoin consumes more electricity and the Cambridge index shows a strong upward trend, the climate benefits of policies that promote electric vehicles become less and less important. This can provoke political action.
The Biden White House has previously imposed digital asset mining bans, and the Treasury Department recently released a budget structure on March 9 that includes a 30 percent tax on electricity used by miners. crypto:
“With most miners already at minimum margin, a 30 percent increase in their core operating costs would be a blow to U.S. rigs,” said a Coin Metrics analyst. "The imposition of this tax will directly impact additional mining investment within US borders."
Email Jack Denton at jack.denton@barrons.com