• December 9, 2023

Why Bitcoin May Actually Speed Up The Transition To Renewable Energy

ÖOne of the great secrets of Bitcoin for a long time has been the amount “mined” from dirty coal. This became an international debate when Tesla CEO Elon Musk suddenly stopped accepting Bitcoin as a means of payment for the company’s cars He pointed to the coal that was used for mining in his tweet: “We are concerned about the rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially after coal, which has the worst emissions of any fuel.”

The miners immediately rushed to launch a PR campaign. Two days after Elon Musk’s tweet, listed crypto miner Argo announced that it had signed a new agreement similar to the Paris Agreement. It is called the “Crypto Climate Accord” (CAA) and promotes the decarbonization of industry. Two main goals of the CAA are to achieve net zero emissions from electricity consumption by 2030 and to achieve net zero greenhouse gas emissions by 2040. To date, 40 signatories, including 20 well-known cryptocurrency companies, have been involved in the agreement.

But will the agreement be on everyone’s lips?

The agreement sounds ambitious. After all, almost all companies feel the peer pressure to achieve net zero emissions. But is it realistic for mining operations? Crypto mining is a business and needs to be profitable. For the renewable initiative to be successful, it must therefore make financial sense.

There are plenty of bitcoin hobbyists out there who would debate for hours about why bitcoin should replace fiat currency, but the data shows that miners are only driven by profits.

How do miners decide which coin to mine?

The University of Cambridge conducted its 3rd Global Cryptoasset Benchmarking Study. During the survey, the researchers asked the miners how they decide which crypto coin to mine. The three most important criteria are money-driven. Namely, 70% of miners consider the daily reward amount and the price of Krypoasset to be their two most important criteria, and only 13% chose coins based on their ideology or personal affection.

(Source: 3rd Global Cryptoasset Benchmarking Study by the University of Cambridge)

The point: Miners are not a group of ideological people; In order for them to switch to renewable energies, this must be confirmed by profits. Now things get interesting. After the fixed costs of capital goods, utilities (electricity costs) make up the largest cost of a miner. Therefore, when the cost of electricity goes down, it is the greatest leverage to their profit margin. After all, crypto mining is about maximizing the number of hashes (volume) per kW of electricity.

Breakdown of the hashers per region

(Source: 3rd Global Cryptoasset Benchmarking Study by the University of Cambridge)

The most efficient way to get the highest hashes / kW is to use solar and hydropower. Why? These are, of course, the cheapest ways to generate electricity – outside of government-subsidized energy.

Here is evidence of that relationship: During the rainy season, half of the world’s mining takes place in one region of China – Sichuan. The reason is simple – the abundance of hydropower in the region. During the rainy season, electricity prices in Sichuan are as low as anywhere else in the world. As a result, only 5% of Sichuan’s bitcoin mining comes from nuclear power plants or coal burning, and 95% comes from renewable energy. The data clearly shows that miners will try to use the cheapest source of energy.

Since their profit margin is closely aligned with electricity costs, Bitcoin miners are far more motivated to switch to renewable energy – compared to many other industries that are slowly moving to clean energy.

Bitcoin could accelerate the global transition to renewable energy

A key feature of a mining operation is that Bitcoin can be mined anywhere in the world. Why is that important? This provides a solution to two of the biggest problems facing utility companies that produce renewable energy.

Pain point # 1: Renewable energies are often not stable in their energy production. For example, solar energy receives a surplus of energy during the sun, but no energy at night. Unfortunately, battery technology has not advanced enough to store an abundance of energy during the day and release it on a large scale at night.

Pain point # 2: Many of the renewable energy stations are in remote areas where the country is large to expand solar, hydropower, and wind farms. Here, too, battery technology is not advanced enough to make it economically viable to store and transport energy from these rural regions in the urban centers, where a large part of the energy demand is located.

SOLUTION: Bitcoin mining is not tied to locations. The operations can exist anywhere in the world, allowing the miners to use power sources that are inaccessible for most other applications. As an example, consider hydropower (a source of clean energy). According to the US Energy Information Administration, only 7% of the US’s energy source came from hydropower. Still, hydropower accounts for 62% of mining energy:

Power source for hashing facilities

(Source: 3rd Global Cryptoasset Benchmarking Study by the University of Cambridge)

Why the big discrepancy? The answer is simple: we mentioned earlier that half of the world’s crypto mining in Sichuan occurs during the rainy season. In the past, huge amounts of renewable hydropower were wasted each year in Sichuan and Yunnan during the rainy season. However, it has become the most popular region for crypto mining, accounting for nearly 10% of global bitcoin mining in the dry season and 50% in the rainy season.

ARK Invest and Square’s Thesis

This is at the heart of ARK Invest and Square’s thesis that Bitcoin is promoting the expansion of renewable energies. Currently, utilities have little incentive to expand their renewable energies due to the lack of technology to store and transport energy. However, bitcoin mining is already pouring into rural areas, where most of the renewable energy is generated. As a result, utilities will have customers for their excess energy. Square Crypto, an official report from Square’s crypto division, tweeted this point on April 21, 2021:

Square crypto tweets

Bottom line: Crypto Mining has a simple calculation – lowering electricity costs is the greatest lever to their profit margin. Therefore, there is a great incentive for them to switch to clean energy, where the costs are cheaper. Additionally, miners’ demand for clean energy will stimulate utilities to expand their renewable energy capacity long before battery technology is ready to run the world on 100% clean energy.

The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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