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The Securities and Exchange Commission recently approved spot bitcoin exchange-traded funds, so for the first time, people can invest in funds that include bitcoin with no crypto wallet required. A “spot” fund invests in the asset directly, as opposed to making bets on futures contracts.
Demand for the original cryptocurrency is only expected to grow, and bitcoin mining operators are in position to satisfy it. Two years ago, Marketplace’s Lily Jamali visited one in New York state. Stacks of computers burned through tons of power to generate new bitcoins, she reported.
Ben Hertz-Shargel of the consultancy Wood Mackenzie told Lily that the SEC’s move will likely expand the miners’ prodigious energy consumption. Texas is a hub for bitcoin mining, and among other effects, the increase could stress the state’s already vulnerable power grid.
The following is an edited transcript of their conversation.
Ben Hertz-Shargel: It will send a long-term price signal to these miners to redouble their efforts and to build newer and bigger facilities. And Texas, like certain other states, is really in the crosshairs of multiple types of load growth, or energy demand growth, where they’re dealing with not only growth from conventional data centers and crypto mines, but [electric vehicle] charging depots and manufacturing facilities. And so it’s a challenge to deal with all of this increase in demand. Miners have already caused $1.8 billion per year in increased costs for consumers in Texas, and that was before these ETFs were approved. And this is going to really lock that in and potentially drive it up to extreme degrees.
Lily Jamali: So it’s clear that demand for bitcoin, if anybody thought that was going away, that’s not happening, at least not in the short term. I also visited a bitcoin mining facility in upstate New York in late 2021, early 2022. I was struck by something you wrote about, saying that in 2022, bitcoin mining consumed 60% as much power as it does today. Why does it cost so much more to generate a single bitcoin now?
Hertz-Shargel: Well, ultimately, demand for bitcoin has gone up. And there’s an arms race that happens every day, where bitcoin miners who are operating ever larger data centers capture ever bigger pieces of the pie in terms of the revenue that bitcoin mining generates. And so that arms race has led to ever bigger facilities and more countries and greater investments. And so, yeah, the really scary statistic is that in 2022, mining consumed 20% as much electricity as global centralized data computing and data transmission put together. And the reason that is a staggering statistic is those two latter types of energy demand, data computing and data transmission, are really the fruits of the internet, the cloud and now the sort of budding [artificial intelligence] industrial revolution put together. So the question is, you have to evaluate: Is the value that bitcoin provides, essentially being a store of value like gold, worth one-fifth as much of the value that all of those other forms of energy demand are providing?
Jamali: Texas is the only state in the country, we should mention, with its own grid. Have I got that right?
Hertz-Shargel: Other states have their own grid operator. But yes, Texas is self-contained in an electrical way that no other state is.
Jamali: Yeah, and so it’s especially vulnerable. And I asked that because we’re approaching the third anniversary of the winter storm that left a lot of people without power. It ended up killing 250 people. And just this week, the state went through a winter freeze. So help us understand how much pressure in moments like this do bitcoin miners place on the grid?
Hertz-Shargel: I think there is a miners’ claim, and I think there is popular belief, that they stop operating when the grid is stressed, when energy prices are high. In reality, a lot of miners, we’ve seen firsthand, continue to operate even in these kind of stressed conditions when prices are really high. This not only raises the price in an extreme way for consumers after the fact, but it does risk the grid operator getting closer and closer to that point where it needs to consider brownouts. So, the reality is these miners are stretching the grid basically 24/7. And in some cases, they do turn off in extreme cases, but not all of them do. And so it just pushes the grid closer to that point you don’t want to be where you’re running the risk of having to turn the lights out on people.
Jamali: And I know as of not that long ago, bitcoin miners in Texas, specifically, were getting paid, or compensated, if they put power back on the grid during these extreme weather events. Is that still the case?
Hertz-Shargel: It is still the case. And what that does is it shifts the cost of the year’s grid investment, which is only growing more significant every year, back on to other customers. And I think it’s also worth pointing out that the big tech companies are the largest buyers of clean energy in the United States. Whereas bitcoin miners, what they do is they have begun to site their facilities near renewable facilities like a wind farm or solar farm. But all that does is, you’re still drawing the same unit of power that some other customer would have benefited from from that facility. They’re not meaningfully offsetting their demand.
Jamali: This is interesting because this is an argument that the bitcoin miners have made — the fact that they now are starting to set up shop next to those existing renewables projects. They say, “Look, we’re helping. We’re not making things worse.”
Hertz-Shargel: That’s right. But it’s very intuitive to understand that if you park a facility right next to, let’s say, a solar farm and start consuming the electrons from that facility, those electrons would have gone to some other customer in Texas. So all you’re doing as the one who happens to consume them, at the end of the day overall demand on the grid goes up. And that means that the grid operator needs to dispatch ever more costly and carbon-intensive generators to meet that increased demand that you caused. And so there is no sustainability benefit, which is very much unlike what the big tech companies are doing by actually causing new renewable facilities to be built. So those facilities meaningfully do offset the emissions associated with their, their demand.
Jamali: Are there any indications that regulation might help cap some of this activity?
Hertz-Shargel: Well, I mean, I think what we’ve seen around the country is that most states are more concerned to protect bitcoin mining rather than constrain it. They usually introduce legislation that prevents a state from “discriminating” against the type of data center or facility based on its purpose. I do think Texas, there has been some backlash because of the awareness [that] these are massive energy loads that you can compare them to the size of cities or other sort of extraordinary types of demand sources. And so I do think that there was this notion that they want to limit how much they’re willing to pay them to curtail. I do think it’s important to identify when they say they’re putting power back on the grid, what that means is they have usually contracted for power from a generator, and they simply choose to withhold consuming that power, and they allow their provider to liquidate the power to sell it to the grid. So they’re just making available something that would have been available anyway if they didn’t exist.
Here’s Lily’s story from her visit to that bitcoin mining operation she mentioned. Her reporting focused on what locals in Massena, New York, thought about the arrival of bitcoin mining in their struggling regional economy. One resident called crypto “techno-wizard bullshit.”
A few months into 2022, the state of New York placed a partial moratorium on what’s known as proof of work mining, citing the environmental impacts. Before that, Plattsburgh, New York, became the first municipality in the country to ban the practice after undergoing what former Mayor Colin Read called a “crypto mining arms race” in the MIT Technology Review. Read happens to be an economics professor and has written a book, “The Bitcoin Dilemma,” about the financial and environmental costs of this activity.
Something else Ben Hertz-Shargel mentioned in our interview is that New York is an exception. Many states are eager for the business. Here’s a tracker that looks at the amount of energy consumed by specific bitcoin mining companies in Texas, where the growth has been explosive.
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