Mining and the Environment

When I wrote about Bitcoin and Ethereum, I briefly discussed the topic of mining. It is time to get deeper on this important issue and to also discuss the environmental impact of cryptocurrencies.

In the simplest terms, under the Proof of Work (PoW) process used with Bitcoin, a miner’s computer solves a mathematical problem and writes transactions to the blockchain. This process gets more difficult and complex over time as the size of a particular cryptocurrency grows and the number of transactions increases. Miners earn a small amount of the crypto for performing these tasks.

When Bitcoin got started, people were able to mine BTC on a single laptop. Now you have big companies building large warehouses with thousands of computers mining 24/7/365. Mining can be done anywhere in the world, and it tends to move around based on the cost of power and the regulatory regime.

For miners to turn a profit, the cost of their mining must be less than the value of the cryptocurrency they receive. Miners need to secure a space, typically a warehouse location, to hold their large number of computer processors. They need to pay for the hardware and staff these spaces with technicians. However, once the operation is set, the largest cost is for the power to run the computers and climate control. As a result, miners are constantly searching for cheaper sources of energy, often from renewable sources or excess power in grids.

If the cost of mining exceeded the value earned, then the miners would stop doing their work and the value of the crypto would plunge rapidly toward zero. This is a risk to be considered, but at this time it seems fairly remote. It would likely take aggressive taxation or many locations banning mining for this to occur. With Bitcoin specifically, there is also the issue of a fixed supply that will eventually run out of BTC to reward miners. This might happen in about 100 years, so not an immediate concern. If the price of BTC is high enough then the transaction fees will be enough incentive to keep this going strong.

Cryptos take a ton of heat for the impact they have on the environment, since this power is effectively “wasted” securing the blockchain. This is a legitimate complaint. A bank like Chase or Wells Fargo doesn’t have to run servers in this way to know how much cash each account holds or to process money transfers. They can do it in a centralized server farm much cheaper than cryptocurrencies can. New blockchains have been launched with the express purpose of requiring simpler calculations to reduce the amount of energy utilized. These are important efforts, and I expect them to make a difference in the future.

Initially, mining gravitated to countries outside the U.S. that offered cheap power and limited regulations. Over time, the reliability of the power grid and concerns about the stability of rules led to more miners turning to the United States. Today about 35% of the BTC is mined in America, with Kazakhstan (18.1%), Russia (11.2%), and Canada (9.6%) rounding out the top four. As recently as September 2020, China made up 65% of the BTC mining capacity, but the government has cracked down on the activity and mining has effectively gone to zero in the country.

Numerous miners have become publicly traded companies in the U.S. Investors have used miner stocks as a proxy for BTC holdings, as their stocks tend to fluctuate in line with BTC prices. This is not perfect, but for the less crypto-adventurous it is not a terrible play. A few big miners are Riot Blockchain (RIOT), Hut 8 Mining Corp (HUT), and Marathon Digital Holdings Inc (MARA). Each has a market cap of $1–4Bn.

We’ll wrap up on this topic with a quick discussion of Proof of Work (PoW) versus Proof of Stake (PoS). I promise you don’t need to know the details here, other than PoS is much cheaper than PoW, but it might allow you to feel smart at a cocktail party one day. As discussed at the start of this post, with PoW the miner solves a mathematical problem and then writes to the blockchain. This is hard and requires a bunch of computer power. Some of the newer blockchains are using PoS, where a miner proves it owns an amount of the crypto and then writes to the chain. This requires way less computational power and thus way less energy, like 100x less.

That’s enough for now on the topic of mining. This should give you a good sense of some of the core issues and set us up for future exploration when necessary.

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Writing about Crypto and web3 for business executives

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Brian Zwerner

Brian Zwerner

Writing about Crypto and web3 for business executives

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