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The Political Geography and Environmental Impacts of Cryptocurrency Mining

July 10, 2019

Authors:

Heidi Samford, Lovely-Frances Domingo, Jessica L. Beyer

Since Bitcoin’s founding in 2009, thousands of Bitcoins have entered circulation. A popular conception of the “virtual” nature of cryptocurrency dominates, but cryptocurrency is deeply embedded in policy and physical environments. And, while most analysis of the phenomenon focuses on the disruptive impact of cryptocurrency on financial markets, cryptocurrency also negatively impacts the communities and the environment.

To maximize profits, cryptocurrency miners seek low cost electricity and permissive policy environments, creating environmental hazards and impacting local consumers without producing any benefit for communities. Cryptocurrency “miners” produce currency through energy intensive “mining” processes, requiring extensive computing resources. By the end of 2018, Bitcoin mining farms were projected to consume 0.05% of the world’s energy.[1] These energy consumption levels superseded, or were equivalent to the net power consumption of entire nations such as Ireland (3.1 gigawatts) and Austria (8.2 gigawatts).[2]

By the end of 2017, Bitcoin miners earned a total revenue of $53 million and Bitcoin had reached its highest price value since its founding, trading at $19,783.21.[3] In contrast to the potentially lucrative payout to Bitcoin miners, consumers in cryptocurrency mining heavy areas, such as Washington State’s Mid-Columbia River Basin, accrued nothing but public health and safety risks and negative impacts on their public utility services.[4] The lucrative nature of cryptocurrency mining combined has created a cryptocurrency-focused geopolitical landscape with miners looking for the most profitable geographical locations for mining in the US and abroad.

Cryptocurrency Mining

Most cryptocurrencies are characterized by their decentralized control. Instead of being corporate or government managed, the majority of cryptocurrencies have emerged from grassroots communities.[5] In the most general terms, individuals generate cryptocurrencies through using computers to solve puzzles and then store that information in a blockchain, a (usually) publicly accessible ledger and decentralized database.[6] A blockchain is a documentation method to encrypt digital information across a computer network, making it theoretically resistant to hacking and creating a public record of currency production and ownership.[7]

As the number of miners competing to unlock Bitcoins increases, the difficulty of the puzzles simultaneously increases to create a competitive computational race to prevent inflation and discourage monopolies. To continuously solve the renewing computational algorithms, mining servers require an immense source of energy. And, if the energy cost of mining exceeds the profits from the currency gained, there is no incentive to continue mining, simultaneously undermining the infrastructure that validates its monetary value.

This means that the more powerful the computer, the faster the internet connection, and the cheaper infrastructural services, such as electricity, the greater the possibility of profiting from mining cryptocurrency. Mining requires specialized equipment and space to store high speed servers. The extensive computer power required places large strains on the energy sector with the machines running continuously, the typical server consumes approximately 1.5 kilowatts of energy, costing anywhere between $3,224 and more than $9,000 to mine an individual coin.[8]

The cryptocurrency networks of Bitcoin, Ethereum, Monero and Litecoin all utilize the same system for creating currency.[9] However, as cryptocurrencies gain popularity, Bitcoin has maintained its market dominance accounting for 72% of all cryptocurrency use.[10] Due to the popularity of Bitcoin, the currency was responsible for 73% of the total power demand of the four currencies in 2017 and 68% in 2018.[11] New sets of Bitcoin transactions are issued for distribution every ten minutes, valued at approximately $145,000.[12] Because of Bitcoin’s market dominance, conversation around cryptocurrency mining impacts largely focus on Bitcoin’s impact. In 2018, the Bitcoin network consumed at least 2.55 gigawatts of electricity per year with the potential to grow up to 7.67 gigawatts in the near future, the equivalent of the net power consumption for a small country.[13]

Cryptocurrencies’ energy needs mean cryptocurrency mining is deeply geographically bound. Miners appear anywhere there is the combination of a permissive policy environment and cheap energy. For instance, China has been a dominant force in the cryptocurrency industry, harboring the world’s largest Bitcoin mining companies while simultaneously facilitating the most Bitcoin transaction traffic. China has been responsible for approximately 85% of the world’s Bitcoin trading transactions and hosts crypto-mines that account for 74% of all Bitcoin mining “hash power.”[14]

Regions in China, such as the Sichuan, Yunnan, Xinjiang, or Inner Mongolian contain an enormous amount of surplus energy available to mining operations. However, China has begun to exert regulatory pressure on provincial governments to encourage the closure of crypto-mines and has withdrawn incentivized tax deductions. In combination to energy policy measures, China has consistently attempted to enact financial regulations on cryptocurrencies. Notably, The People’s Bank of China, China’s central bank, implemented measures prohibiting domestic Bitcoin exchanges and banning the practice of raising public funds for the development new cryptocurrencies. Historically, China’s financial regulatory measures correlate with depreciations in Bitcoins value, most notably in 2014 when the price of Bitcoin in China fell more than 50% from its peak after the release the 2013 Bitcoin Notice.[15]

Due to China’s high crypto-mining production rate, prominence of mining companies, and considerable level of Bitcoin transactions, a regulatory crackdown there carries the potential to impact the global cryptocurrency market. However, instead of closing operations, we see mining operations transition to locations in North America and Northern European countries with looser regulatory environments and physical environments that favor the cost of crypto-mining production.

The Environmental Impact of Cryptocurrency Mining

The public narrative surrounding Bitcoin mining’s impact on the environment has been predominately negative, with conflicting accounts debating the level of cryptocurrencies’ footprint. Indeed, anywhere that cryptocurrency mining is dependent on dirty energy sources, such as coal, the environmental impacts are markedly negative, such as near the coal-fueled cryptocurrency mines in Mongolia.[16] However, most crypto-mining occurs in areas with renewable energy sources because costs are lower.

Depending on the energy source, researchers estimate that crypto-mining can produce 3-15 million tons of global carbon emissions.[17] China is one of the world’s largest producer, and consumer, of coal energy with mines in the Xinjiang and Inner Mongolian providences heavily reliant on coal energy sources to provide crypto-mining companies with cheap energy prices. Coal energy sources offer prices up to 30% cheaper than the average energy consumption prices for industrial firms.[18] However, when compared to the amount generated in the renewable energy sources in Canada, any cryptocurrency mined in China would generate four times the amount of CO2 emissions.[19]

Recent figures indicate crypto-mining facilities may subsidize the development of renewable energy resources by seeking the cheapest resource, optimizing consumption value. Bitcoin mining operations in China illustrate the relationship between renewable energy and crypto-mining. The providences that host most crypto-mining facilities correlate with providences that produce their energy from renewable resources. In 2017, 80% of China’s Bitcoin mining operations were based in Sichuan – a province that generates approximately 90% of its energy production from renewable resources, thereby accounting for 43% of global Bitcoin mining operations.[20] A report by CoinShares Research estimates that approximately 77.6% of crypto-mining facilities are consuming electricity derived from renewable resources, while the other 22.4% are obtained from fossil and nuclear producers.[21] Additionally, large-scale mines in other popular locations are primarily located in the Pacific Northwest, Upstate New York, Northern Scandinavia, Iceland, and Georgia – regions that extensively use renewable energy.

The profitability of cryptocurrency mining is dependent on the currency’s market value in concurrence with the price of electricity. If the value of a cryptocurrency depreciates below its cost of production, mining becomes unprofitable due to large energy expenditure. The most prosperous crypto-mines are facilities that can operate at the lowest cost by obtaining the cheapest electricity capable of supporting extreme consumption, supporting enormous cryptocurrency mining farms across the world with easy access to cheap energy, or access to surplus energy stores. As a result, miners seek cheap electricity markets while benefiting from policy environments that do not regulate the ways in which electricity can be consumed.

Impacts of Crypto-Mining on US Cities

The volatility of a cryptocurrency’s value and the need to maximize profit and minimize operating costs are important factors to consider when deciding on where to establish a mining operation.[22] To lower operating costs, miners have attempted to find affordable spaces that can store high-speed computer servers, cooling systems that diffuse heat generated by the servers, and that could handle a lot of electricity—enough to power up roughly a hundred homes. Meanwhile, policymakers have been left playing catch-up as mining has large impacts on local communities because of mining’s large energy consumption and illegal mining operations springing up in residential neighborhoods.

As early as 2012, crypto-mining pools began to emerge throughout the Mid-Columbia Basin in the state of Washington, comprising of Chelan, Douglas, and Grant counties.[23] This area benefits from a large energy surplus produced by hydroelectric dams along the Columbia River, in addition to other economically beneficial coal, natural gas, and nuclear power energy facilities. Combined, these energy source account for 29,900 megawatts of electricity, with 41% generated by hydroelectric dams alone.[24] Five hydroelectric dams in the Mid-Columbia Basin generate up to six times as much electricity than residents in this region consume. Most of the surplus energy is exported at higher prices,[25] enabling public utilities to keep electricity prices significantly low. Residents pay 26% lower than national average at 2.5 cents per kilowatt, while commercial businesses pay 21% below the national average.[26] As a result, low-cost energy is often seen as a “recruiting tool” for economic development, attracting large tech companies in the region to take advantage of cheap electricity and cheap land.[27] However, as crypto-mining facilities began consuming large of amount of energy within a district, exports of energy surpluses decreased, significantly raising the cost of residential electricity prices.

As a result of Bitcoin’s value rising from $300 to $19,000 between 2015-2017, Kaitlin Hetterscheidt reported there was an influx of cryptocurrency miners established facilities throughout the region in order to access low-cost energy.[28] In 2017, 16% of all major mining pools were based in the US.[29] As Paul Roberts reported, by the end of 2018, 15-30% of all mining operations in the world could be traced to mining pools located in the Mid-Columbia Basin.[30]

As Kimberlee Craig reported in 2018, the unprecedented demand overwhelmed public utility districts’ ability to support the large volume of applications for crypto-mining operations, threatened the district’s electrical grid infrastructure capacity, and caused a number of public health and safety concerns.[31] The surge of Bitcoin value and profitability of crypto-mining also encouraged “rogue operators”—unauthorized miners operating out of residential neighborhoods in addition to large scale companies. The lack of visibility and oversight in unauthorized cryptocurrency mining operations present serious risks to public safety and present negative impacts to a region’s energy grid. Rogue operators circumvent vetting systems and the impact assessment processes completed by established public utilities district (PUD) application channels.

Craig also reported that small-scale cryptocurrency mines in residential neighborhoods and houses are not properly equipped to handle the immense amount of energy consumption required to run multiple crypto-mining servers. Continual electricity usage at peak levels places substantial strain on residential power grids, causing degradation of grid equipment not designed for high density loads, and leaving the community vulnerable to fire risks for the miners’ neighbors.[32] Chelan County PUD reported consumption rates spiking at an empty Wenatchee apartment set up to mine cryptocurrency from a typical 500 kilowatt hours (kwH) to 11,000-plus kwH, dramatically surpassing what residential wiring is designed to carry and directly threatening the safety of the other residents. To keep the machinery cool, the miners were leaving the windows and balcony doors open.

Craig further revealed that in response to unauthorized cryptocurrency operations, Chelan County PUD began enacting additional enforcement steps, such as disconnection of service, imposing penalties, and reporting illegal operations as power theft to law enforcement officials. In addition, the PUD instigated a new high density load (HDL) classification in January 2017 to distinguish between crypto-mining energy consumers from regular commercial consumers, and recover the projected net costs incurred by the PUDs for providing energy to crypto-mining customers. This classification measures how energy is used, accounting for industries with portable and distributable units of power, volatile load growth, and high exposure to volatile commodity or asset prices. However, in March 2018, the Chelan County PUD passed a moratorium to halt the application for cryptocurrency mining energy service in March 2018 due to immense request volume.[33]

The Columbia Basin is not the only region to experience the repercussion of crypto-mining energy consumption. US-based crypto-miners gravitate to hydroelectric dam-powered regions across the country, including upstate New York where residents pay an average of 4.5 cents per kilowatt. There, local PUDs experienced similar challenges in balancing energy demands for economic development with sustainability and safety of the residential power grid.[34] Plattsburgh, NY received an influx of commercial Bitcoin miners, monopolizing power sources and exponentially increasing electricity demands on the municipality. In order to accommodate the increased, Plattsburgh was forced to purchase additional power for the city, and place an 18-month ban on new commercial mining operations.[35] In contrast, Massena’s Municipal in New York echoes efforts by Washington state’s Chelan County and implemented specialized rates for “high-density load customers” under individual service agreement in the United States.[36] The New York State Public Service Commission enacted protections from pricing spikes on existing customers in their municipality while still motivating economic development in the region by allowing access to cheap energy. Additionally, purchasing electricity directly from power stations allow to monitor surplus and isolate public consumption.

While crypto-mining companies claim that established facilities will attract development attention and other accompanying opportunities presented by the technology sector, crypto-mining offers few long-term benefits for the communities in which they are based.[37] Since crypto-mining is a principally automated process, the companies provide local communities with almost no employment opportunities. Additionally, due to the mobility and unpredictability of crypto-mining, the instability of operations pose significant threats to communities due to considerable shifts in Bitcoin’s value appreciation and ability to seek energy consumption in cheaper locations. Other than paying for the energy used, miners contribute little to the communities they operate in at the same time they can see significant personal economic benefit.

Implications

To mitigate crypto-mining activities’ impact on the public energy sector, local and federal governments need to create a regulatory environment that domestically manages the impact–including federal support for local efforts to grapple with this global phenominon. There is no ceiling to the price of Bitcoin, which means there is no limit to the resources that can be allocated to the crypto-mining process or the amount of mining that can take place.

The unbalanced energy consumptions that mining operations imposes on communities require strict energy regulations to sustain mining businesses, while simultaneously protecting local communities’ access to affordable energy. The biggest threat to the stability of crypto-mining facilities, and the municipalities in which they operate, rest in the lack of regulation and oversight. The legitimacy of selling surplus electricity to mining organizations is only starting to become legally clear with outlined regulations. Policy makers should consider ways to curb rouge operators while maintaining a balance between public safety and economic development.

Endnotes

[1] Zuckerman, Molly. “Bitcoin Mining To Use 0.5% Of World’s Energy By End Of 2018, Peer-Reviewed Research Shows.” Coin Telegraph, April 17, 2018. https://cointelegraph.com/news/bitcoin-mining-to-use-05-of-worlds-energy-by-end-of-2018-peer-reviewed-research-shows.

[2] De Vries, Alex. “Bitcoin’s Growing Energy Problem.” Joule 2, no. 5 (2018): 801-05. https://www.cell.com/joule/fulltext/S2542-4351(18)30177-6

[3] Browne, Ryan. “The Cheapest — And Most Expensive — Countries to Mine Bitcoin.” CNBC, February 15, 2018. https://www.cnbc.com/2018/02/15/the-cheapest-and-most-expensive-countries-to-mine-bitcoin.html.

[4] Craig, Kimberlee. 2018. “PUD Chelan County.” PUD Commissioners Halt Work on Applications from Bitcoin & Similar Data Operations (blog). March 19, 2018. http://www.chelanpud.org/about-us/newsroom/news/2018/03/20/pud-commissioners-halt-work-on-applications-from-bitcoin-similiar-data-operations.

[5] Taylor, Michael Bedford. “The Evolution of Bitcoin Hardware.” Computer, vol. 50, no. 9, 2017, pp. 58–66., doi:10.1109/mc.2017.3571056.

[6] Ankalkoti, P.,& S G, Santhosh.A Relative Study on Bitcoin Mining. Imperial Journal of Interdisciplinary Research, 3(5). May 2017. Retrieved from http://www.imperialjournals.com/index.php/IJIR/article/view/5024

[7] Wong, Joon Ian. “Chinese Money Dominates Bitcoin, Now Its Companies Are Gunning for Blockchain Tech.” Quartz, September 1, 2018. https://qz.com/1072907/why-china-is-so-hot-on-bitcoin/.

[8] Kharif, Olga. “The World Is Cracking Down on Bitcoin—Except Japan by Decrypted.” Bloomberg, April 18, 2018. https://player-origin.megaphone.fm/BLM4720501801 and McGeehan, Patrick. “Bitcoin Miners Flock to New York’s Remote Corners, but Get Chilly Reception.” The New York Times, September 19, 2018, sec. New York. https://www.nytimes.com/2018/09/19/nyregion/bitcoin-mining-new-york-electricity.html.

[9] Krause, Max J., and Thabet Tolaymat. “Quantification of Energy and Carbon Costs for Mining Cryptocurrencies.” Nature Sustainability 1, no. 11 (2018): 711-18.

[10] Hileman, Garrick, and Michel Rauchs. “2017 Global Cryptocurrency Benchmarking Study.” SSRN Electronic Journal, 2017. doi:10.2139/ssrn.2965436.

[11] Ibid.

[12] Nathaniel  Popper. “There Is Nothing Virtual About Bitcoin’s Energy Appetite.” The New York Times, January 21, 2018. https://www.nytimes.com/2018/01/21/technology/bitcoin-mining-energy-consumption.html.

[13]De Vries, Alex. “Bitcoin’s Growing Energy Problem.” Joule 2, no. 5 (2018): 801-05. https://www.cell.com/joule/fulltext/S2542-4351(18)30177-6

[14] Kaiser, Ben, Mireya Jurado, and Alex Ledger. “The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin.” 2018.

[15] Yue, Lu, and Greg Pilarowski. “China Bans Initial Coin Offerings and Cryptocurrency Trading Platforms.” Pilar Legal, September 21, 2017.

[16] Peck, Morgen E. “Why the Biggest Bitcoin Mines Are in China.” IEEE Spectrum: Technology, Engineering, and Science News, October 4, 2017. https://spectrum.ieee.org/computing/networks/why-the-biggest-bitcoin-mines-are-in-china.

[17] Kahn, Brian. “Mining Bitcoin Can Be More of an Energy Drain Than Actual Mining.” Gizmodo, November 5, 2018. https://earther.gizmodo.com/mining-bitcoin-can-be-more-of-an-energy-drain-than-actu-1830217426.

[18] Huang, Zheping. “This Could Be the Beginning of the End of China’s Dominance in Bitcoin Mining.” Quartz. Accessed March 23, 2019. https://qz.com/1172632/chinas-dominance-in-bitcoin-mining-under-threat-as-regulators-hit-where-it-hurts-electricity/.

[19] Krause, Max J., and Thabet Tolaymat. “Quantification of Energy and Carbon Costs for Mining Cryptocurrencies.” Nature Sustainability 1, no. 11 (2018): 711-18.

[20] Bendiksen, Christopher, Samuel Gibbons, and Eugene Lim. “The Bitcoin Mining Network.” CoinShares Research, November 26, 2018. https://coinshares.co.uk/wp-content/uploads/2018/11/Mining-Whitepaper-Final.pdf.

[21] Ibid.

[22] Peck, Morgan E. 2017. “Why the Biggest Bitcoin Mines Are in China.” IEEE Spectrum, October. https://spectrum.ieee.org/computing/networks/why-the-biggest-bitcoin-mines-are-in-china.

[23] Roberts, Paul. 2018. “This Is What Happens When Bitcoin Miners Take Over Your Town.” Politico Magazine, April 2018. https://www.politico.com/magazine/story/2018/03/09/bitcoin-mining-energy-prices-smalltown-feature-217230.

[24] Culverwell, Wendy. 2017. “Power Is What Powers the Mid-Columbia Economy.” Tri-City Herald, August 5, 2017. https://www.tri-cityherald.com/news/local/article165721382.html.

[25] Roberts, Paul. 2018. “Bitcoin Backlash as ‘Miners’ Suck up Electricity, Stress Power Grids in Central Washington,” May 26, 2018. https://www.seattletimes.com/business/bitcoin-backlash-as-miners-suck-up-electricity-stress-power-grids-in-central-washington/.

[26] Culverwell, Wendy. 2017. “Power Is What Powers the Mid-Columbia Economy.” Tri-City Herald, August 5, 2017. https://www.tri-cityherald.com/news/local/article165721382.html.

[27] Ibid.

[28] Hetterscheidt, Kaitlin . 2017. “Bitcoin Operations Overwhelm Chelan County PUD with Requests for Power.” North Central Washington’s Local Television Station, December 19, 2017. https://www.ncwlife.com/bitcoin-operations-overwhelm-chelan-county-pud-requests-power.

[29] Hileman, Garrick and Rauchs, Michel, 2017 Global Cryptocurrency Benchmarking Study (April 6, 2017). Available at SSRN: https://ssrn.com/abstract=2965436 or http://dx.doi.org/10.2139/ssrn.2965436

[30] Roberts, Paul. 2018. “This Is What Happens When Bitcoin Miners Take Over Your Town.” Politico Magazine, April 2018. https://www.politico.com/magazine/story/2018/03/09/bitcoin-mining-energy-prices-smalltown-feature-217230.

[31] Craig, Kimberlee. 2018. “PUD Chelan County.” PUD Commissioners Halt Work on Applications from Bitcoin & Similar Data Operations (blog). March 19, 2018. http://www.chelanpud.org/about-us/newsroom/news/2018/03/20/pud-commissioners-halt-work-on-applications-from-bitcoin-similiar-data-operations.

[32] Craig, Kimberlee. “PUD Board Acts to Halt Unauthorized Bitcoin Mining.” Chelan County Public Utilities District, February 4, 2018. https://www.chelanpud.org/about-us/newsroom/news/2018/04/03/pud-board-acts-to-halt-unauthorized-bitcoin-mining.

[33] Craig, Kimberlee. 2018. “PUD Chelan County.” PUD Commissioners Halt Work on Applications from Bitcoin & Similar Data Operations (blog). March 19, 2018. http://www.chelanpud.org/about-us/newsroom/news/2018/03/20/pud-commissioners-halt-work-on-applications-from-bitcoin-similiar-data-operations.

[34] Ong, Thuy. 2018. “Plattsburgh Has Become the First City in the US to Ban Cryptocurrency Mining.” The Verge, March 16, 2018. https://www.theverge.com/2018/3/16/17128678/plattsburgh-new-york-ban-cryptocurrency-mining.

[35] Hill, Brandon. “New York Town Bans Commercial Cryptocurrency Mining After It Torches Its Entire Power Budget.” HotHardware, March 16, 2018. https://hothardware.com/news/new-york-town-bans-cryptocurrency-mining-after-it-torches-its-entire-power-budget.

[36] “PSC Approves New Cryptocurrency Electricity Rates for Upstate Utility.” 2018. New York Public Service Commission. http://www3.dps.ny.gov/pscweb/webfileroom.nsf/ArticlesByCategory/BB3E5C36350EFF3A852582C8005D1D79/$File/pr18052.pdf?OpenElement.

[37] Roberts, Paul. “Bitcoin Backlash as ‘Miners’ Suck up Electricity, Stress Power Grids in Central Washington | The Seattle Times,” May 26, 2018. https://www.seattletimes.com/business/bitcoin-backlash-as-miners-suck-up-electricity-stress-power-grids-in-central-washington/.

This publication was made possible in part by a grant from Carnegie Corporation of New York. The statements made and views expressed are solely the responsibility of the author.