Will Crypto Crash Or Save The Grid?

The crypto market can boom and bust like the energy market - and last year was certainly a bust.

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After plummeting in 2022, bitcoin and other digital currencies are starting to rebound, causing renewed concerns that crypto miners will disrupt electric grids and CO2 reduction plans.

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This has led to a rethinking of crypto companies' role in the grid, looking for ways to both limit power demands while also boosting ties to renewable energy, which has prompted them to reframe their role on the grid. A possible crackdown by a regulator could lead to a halt to unfettered electricity use in the near future, as the industry is aware of this possibility.

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“Cryptocurrency has many ethical holes, including its impact on the environment,” said Erran Carmel, a technology professor at American University.

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Cryptocurrencies have long been branded climate villains. "Mining" involves solving a series of computational puzzles using a fleet of computers for long periods of time in order to acquire virtual coins. These computers may be powered by natural gas or coal plants, causing a delay in the transition to renewable energy and increasing emissions that contribute to climate change.

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In August 2022, the White House Office of Science and Technology Policy reported that crypto accounted for 240 billion kilowatt-hours of global electricity use, more than Argentina used in one year.

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It was found in a White House report that the American crypto industry accounted for between 0.9 percent and 1.7 percent of the country's total electricity consumption, which was higher than all residential lighting, especially in the United States, which hosts about a third of the world's crypto operations.

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Last year, New York Gov. Kathy Hochul (D) signed legislation imposing a moratorium on new crypto mining in the state. Crypto mining has also been restricted or mandated to use renewable energy by other state and local governments.

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Olsen, leader of the Blockchain Association in New York state, said too many restrictions could hurt the industry's efforts to reshape its energy narrative.

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Other areas of the country have embraced this technology and enabled the kind of out-of-the-box thinking where we are not just relying on hydro, wind, and solar, but can also curtail emissions, capture waste, and contribute to the overall health of the economy. “We take a few steps back when we impose a moratorium."

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According to him, some crypto mines take root in areas where renewable energy might otherwise go to waste, providing a load that can support large-scale projects. Texas bitcoin companies have demonstrated that adjusting their demand can stabilize grid prices.

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Joe Burnett, a mining analyst with bitcoin company Blockware Solutions, said the strategy isn't just a regulatory dodge or a good spin for Bitcoin as a whole. Besides being good for business, it's also a good thing to do.

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According to Burnett, governments should let bitcoin miners fail if they are unprofitable and inefficient. "This industry has the potential to balance energy grids and enhance supply. That's a viable future for mining companies."

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The power dilemma

Between January and December of 2022, crypto mining's energy use dropped more than 60 percent, according to digiconomist.net.

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It reflects the so-called "crypto winter" of 2022 when many companies failed and investors left the volatile and still risky market.

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There was a thud near the end of the year in November 2022 when the cryptocurrency exchange called FTX Trading Ltd. collapsed after a liquidity crisis and allegations of fraud were made against its CEO Sam Bankman-Fried. This further lowered prices and raised regulatory scrutiny as the year ended.

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Mining naturally decreased with little reward. Research scientist Joshua Rhodes, who has consulted for crypto companies, said rising electricity and natural gas prices also dampened activity.

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"These systems are primarily powered by electricity. Rhodes explained that the process involves trillions of guesses at a particular number. Consequently, electricity prices rose as bitcoin prices fell. There are two sides squeezing you."

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In a study conducted by Hashrate Index, backed by mining company Luxor Technologies, 10 of the most popular states for cryptocurrency mining saw electricity prices rise between 2021 and 2022. As a result of that trend, Core Scientific and other crypto-mining companies likely filed for bankruptcy.

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Crypto companies in states with abundant hydropower and less natural gas experienced the smallest price increases and had the most stable markets, according to the report.

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“Miners learned a painful but important lesson in 2022: a low, long-term electricity price is essential to mining,” Hashrate Index wrote.

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During the rise in bitcoin prices since 2022, Hashrate Index also found a rise in the computing power behind bitcoin, which reached an all-time high on Jan. 20.

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Some states and countries have increased their regulatory attention as a result.

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In an effort to reduce greenhouse gas emissions, Oregon lawmakers have proposed a bill that would require crypto miners and data centers to reduce carbon emissions by more than 100 percent by 2040, as part of the state's greenhouse gas reduction goals. It is predicted that a new bill in Washington state will require large loads served by municipal and public utilities to meet clean energy standards similar to those that are currently applicable to customers of investor-owned utilities.

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There has been an influx of crypto companies seeking reliable hydropower at low prices in both states. There is also a moratorium on new crypto connections in British Columbia and Manitoba in Canada.

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It remains to be seen whether renewable requirements make a difference.

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It is worth mentioning that Missoula County, in Montana, adopted new zoning rules in 2021 that mandate that crypto miners be powered by renewable energy, which may be generated on-site or purchased elsewhere. As a result of the new rules, the county has seen a power drain and a rise in citizen complaints as a result of the mining operations of HyperBlock Inc., which set up shop in the county seeking out Montana's relatively cheap power rates.

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Bitcoin prices dropped in 2020, which led HyperBlock to file for bankruptcy.

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The county's Department of Planning, Development, and Sustainability said no new crypto companies have applied to come to Missoula County since the rules went into effect.

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In a September report, the Office of Science and Technology Policy recommended that any policy on cryptocurrencies take into account their environmental and electricity impacts. It also called for federal agencies to conduct reliability assessments and explore the possibility of developing environmental standards for crypto mining.

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A possible industry standard for energy conservation could also be developed by regulators and Congress, according to the report.

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Neither the Office of Science and Technology Policy nor the Department of Energy responded to E&E News' requests for comment.

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Crypto miners have been chased around the world by environmental regulations. Due to environmental concerns, the Chinese government cracked down on mining and cryptocurrency transactions in 2021, which led to a large share of the industry is based there.

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Several companies relocated to Kazakhstan and the United States, which are coal-rich countries. Based on the power mix in the new locations, the global industry used less renewable energy after that shift, according to a study published in the journal Joule.

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Bitcoin miners are drifting from country to country to find an unregulated environment as governments grapple with the environmental impact of the industry, according to American University's Carmel. He said that the United States offers a balance of unregulated sites and affordable energy at the moment.

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A path forward

The state of Arizona, however, is encouraging cryptocurrency miners to move in, eager to have an emerging technology take root there. Despite concerns elsewhere, miners say they can be responsible - and beneficial - grid participants.

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The Wyoming legislature is considering legislation that would create deregulated power zones for large industrial customers, which would allow them to operate off the regulated grid and obtain massive quantities of electricity at a low cost, allowing them to operate off the regulated grid. Some supporters argue that this could further enable renewables to be built to support those operations, while others have warned that it could undermine the business model for existing utilities in the long run.

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A total of 30 cryptocurrency mining companies are based in Texas, and the state is actively recruiting miners.

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A 291-day period in 2022 saw cryptocurrency miners consume about 477 megawatts of continuous power from the Electric Reliability Council of Texas (ERCOT), the grid operator for about 90 percent of the state's power consumption. An MW of electricity can power 200 homes at peak demand, according to ERCOT.

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The addition of a load that size raises reliability concerns for a grid that experienced widespread blackouts in 2021.

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The ERCOT announced in December a voluntary program to allow bitcoin miners to reduce power during high-demand periods. By selling back power when prices are higher, crypto mines can generate income by reducing grid demand during winter storms and heat waves.

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According to Rhodes, a Texas researcher, a flexible cryptocurrency industry could result in more renewables being added to the grid since the technology offers a low-cost source of power that does not require continuous operation.

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However, matching "controllable load with uncontrollable generation" requires companies to be "economically flexible.”

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Burnett said the mining industry could benefit from similar demand response programs by absorbing excess power from renewable sources and selling it during peak periods.

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Using demand response mode, you are able to provide power to consumers without having to pay these absurd rates, Burnett explained. During normal times, a lot of energy is wasted in the process of mining. In other words, we are talking about a lot of energy that is already wasted.

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Ed Hirs, an energy fellow at the University of Houston, wrote in Barron's editorial that allowing large users to sell back to the grid would drive up prices for other consumers.

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Demand response isn't likely to keep fossil fuel plants online longer even with demand response in the midst of an energy transition.

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Using 100 percent renewable power, Sustainable Bitcoin Protocol, a new company backed by Goldman Sachs Group Inc. and major bitcoin miners, seeks to make the environmental promise a reality.

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“Greenwashing is a practice that makes something appear more environmentally friendly than it is,” said Elliot David, Sustainable Bitcoin Protocol's head of climate strategy and partnerships.

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It is anticipated that the company will use third-party platforms to track all the energy sources going into a mining company and then offer a separate certificate, similar to a renewable energy certificate, to that company, which is available for sale on the market.

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According to David, the company does not just want to convince existing miners to use renewable energy, but as it grows, it hopes to achieve a positive impact on the entire industry as a whole.

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It can be said that Bitcoin is basically the conversion and monetization of electricity into a globally liquid currency, he said. Therefore, a city with a high energy cost could use it as a tool for enabling and unleashing the development of clean energy in its city. It is for this reason that we want to maximize the use of green sources."

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Carmel, the technology professor, said those efforts can be considered successful only if cryptocurrency mining is considered necessary.

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“It is important to keep in mind that, on a micro level, crypto mining companies may use alternative energy sources and work on a dynamic basis on the grid, which is a good thing. On a macro level, however, I believe that we have a responsibility to reduce the damage to the environment caused by any industry and of course any pollution," said Carmel. "That forces you to ask yourself: Is there a higher purpose to crypto, or is this just a Las Vegas casino for the crypto industry? ”

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