Bitcoin Eats More Energy Than Ever. Rising Crypto Prices Aren’t All Good.

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Investors have cheered a jump in cryptocurrency prices this year, but the rally is spurring more transactions and may be luring more crypto miners into the fray—just as signs point to the environmental impact of Bitcoin surging to a record high.

The estimated network power demand of

Bitcoin
topped 16.2 gigawatts on Tuesday, according to the University of Cambridge’s Bitcoin Electricity Consumption Index. It’s an all-time high, reflecting how much energy is expended to “mine” Bitcoin and keep processing transactions. 

Bitcoin miners stand at the heart of a process called “proof of work,” which keeps the cryptocurrency network running. These miners use computers—often warehouses of them—to solve complex puzzles in a process that facilitates securing the network and processing transactions; the incentive for doing so is payment in Bitcoin.

This process requires vast amounts of energy, and how difficult these puzzles are, which affects how much energy must be used, is largely determined by how many miners are participating in the process.

With Bitcoin prices up some 70% so far this year—as digital assets have benefited from a broad boost in risk sentiment among investors—crypto mining is quickly becoming a more attractive business after a brutal 2022.

Skyrocketing energy prices, increasing competition, and months of low Bitcoin prices—the largest digital asset tumbled by two-thirds in 2022—wreaked havoc on miners and put intense pressure on their balance sheets. Shares plunged in publicly listed miners such as

Riot Platforms

(ticker: RIOT),

Marathon Digital

(MARA),

Argo Blockchain

(ARB.U.K.), and

Core Scientific

(CORZQ). Argo warned that it might have to file for bankruptcy; Core Scientific ended up doing so.

Despite the fact that Bitcoin has bounced back in 2023 and is on a bullish streak, the picture for miners hasn’t fully improved.

“Miners aren’t out of the woods just yet. Inflated power costs will remain a stubborn thorn in the industry’s side, and could quickly worsen if governments succeed in saddling miners with an added energy tax,” analysts at crypto-intelligence firm Coin Metrics wrote in a Tuesday note.

With each 1-cent uptick in energy prices—per kilowatt-hour—it makes the business case worse, adding an extra 78 cents in power costs per day for the most popular rig for mining firms, the Antminer S19, according to Coin Metrics.

“Even with the latest rally in Bitcoin price, daily revenue for the S19 has barely cracked $7, making every penny count. Without a sustained uptrend, mining margins may soon revisit the cold depths of winter 2022, when the average S19 briefly operated at a loss of more than $1.22 per day,” the analysts said.

The regulatory picture also looms large amid increasing U.S. scrutiny on crypto companies in recent months. While much of the crackdown has been driven by financial regulators, with enforcement actions from the Commodity Futures Trading Commission and Securities and Exchange Commission, miners aren’t in the clear.

As Bitcoin consumes more electricity—with the Cambridge index trending firmly upward—benefits to the climate from policies like those promoting electric vehicles look increasingly for naught. That could spur political action.

The Biden White House has in the past mooted a ban on digital asset mining, and more recently the Treasury Department released a budget framework on March 9 that included a 30% tax on electricity used by crypto miners. 

“With most miners already squeezed by razor-thin margins, a 30% increase to their primary operating expense would be a devastating blow to facilities in the U.S.,” said the analysts at Coin Metrics. “The enactment of this tax would have an immediate chilling effect on any additional investment into mining operations within U.S. borders.”

Write to Jack Denton at jack.denton@barrons.com