The cryptocurrency community loves a good narrative: “Fat Protocols Thesis;” “Bitcoin as a Store of Value;” “Miner Death-Spiral” — the list goes on. Spurred on by a recent CoinShares report on mining trends, Bitcoiners have taken to arguing that the network’s energy demand has a net-positive environmental impact. Their reasoning is that, as energy buyers of last resort, miners have been drawn to cheap renewables in otherwise hopelessly remote locations: “stranded assets.”
… further studies may yet prove that, at least in terms of the environment, not only does cryptocurrency do no harm, it could actually be doing good… Bitcoin mining may in fact be acting as an electricity buyer of last resort.
— Pg. 10, The Bitcoin Mining Network
This reasoning incorrectly assumes a) that renewable energy implies carbon-free and b) that energy markets operate as free markets. Miners cannot chase after curtailed energy for free, nor do they have any market incentive to pursue environmentally-friendly operations. This post will demonstrate how the evidence presented in the CoinShares report lends itself to a far different conclusion under more scrutiny.
For a tl;dr summary of this post:
Bitcoin mining has concentrated around regions with excess hydropower and it appears likely that >51% of the network runs on renewable energy. However, as miners have flocked to the electricity generated by large-scale mega dams, it remains intellectually dishonest to classify their operations as either carbon-free or environmentally-friendly. Free markets fail to price in externalities; why should Bitcoin miners act any differently?
Energy curtailment occurs when grid operators pay utilities to turn off generation services during periods of excess energy. In theory, Bitcoin miners would time their operations such that they coincide with peaks in renewable energy, when the price should be cheapest. But look across the world and you’ll find that no grid offers this type of supply-based pricing. In fact, most miners are better off running their operations during off-peak periods, when curtailment rates are at their lowest.
Stranded assets present a real niche market opportunity for Bitcoin mining. The caveat? Miners have no incentive to build out new energy generation. As energy nomads, they’re far more inclined to repurpose shuttered or underperforming energy infrastructure. Think coal and hydro, not solar and wind.
CoinShares should have applied more rigor in deriving its 78% renewable energy mix figure, conducting its energy consumption comparable analysis, and presenting trends in curtailment reduction.
For disclosure purposes, I do volunteer as a community ambassador for Enigma and have invested in Ethereum, both of which intend on implementing Proof-of-Stake. Some have taken offense to this in the past.
Conflating Renewable Energy with Environmental Impact
Christopher Bendiksen of CoinShares followed up on their report with a post entitled, “Beware of Lazy Research.” He reiterated that hydropower:
Comprises “the largest component, by far,” of Bitcoin’s energy profile
Allows Bitcoin to be “cleaner than almost every other industry”
Has no compelling transport or storage alternative to Bitcoin mining
Unfortunately, Bendiksen appears to have forgone his own advice in making the leap from the first point to the second. For if he had conducted any research at all, he would have noticed that his own team’s analysis contradicts his line of thinking. How so?
Page 8 of the report attributes the Chinese provinces of Sichuan and Yunnan with contributing renewable energy for some ~45% of the network’s hashrate. It then provides the reader with the table on the left, stressing that miners have sought out Europe and North America specifically for low hydropower utilization rates.
The recurring trend across these regions? Aside from Iceland and Sweden, they all claim ownership of some of the world’s largest mega dams. And for most of them, there’s an associated story about an influx of miner interest.
Sichuan has the Xiangjiaba Dam. It’s the world’s sixth largest.
Yunnan has the Xiluodu Dam. It’s the world’s third largest.
Washington has the Grand Coulee Dam. It’s the world’s seventh largest.
Oregon has the 1,242 MW capacity Bonneville Dam.
New York has the the 1,957 MW Moses-Saunders Power Dam.
British Columbia has the 2,917 MW capacity W. A. C. Bennett Dam.
Quebec has the Robert-Bourassa Dam. It’s the world’s tenth largest.
Norway has the 1,240 MW capacity Kvilldal Dam.
Russia has the Krasnoyarsk Dam. It’s the world’s eighth largest.
Georgia has the Enguri Dam. It’s the world’s second highest concrete dam.
Now, you might consider it obvious that miners would hone in on the largest sources of untapped electricity — the…