See bitcoin investment funds likely to fuel miners’ massive energy use

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 directly in the asset, as opposed to betting on futures contracts.

The demand for the original cryptocurrency is only expected to grow, and bitcoin mining operators are in a 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 is likely to increase the miners’ prodigious energy consumption. Texas is a hub for bitcoin mining, and among other consequences, the increase could stress the state’s already vulnerable power grid.

The following is an edited transcript of their conversation.

Ben Hertz-Shargel: This will send a long-term price signal to these miners to redouble their efforts and to build newer and larger 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 not just dealing with growth of conventional data centers and crypto mines, but [electric vehicle] loading docks and manufacturing facilities. And so it is a challenge to handle all this increase in demand. Miners were already causing $1.8 billion a year in increased costs for Texas consumers, and that was before these ETFs were approved. And it’s really going to include it and possibly push it to extremes.

Lily Jamali: So it’s clear that the demand for bitcoin, if anyone thought it was going to disappear, it’s not happening, at least not in the short term. I also visited a bitcoin mining facility in New York state in late 2021, early 2022. I was struck by something you wrote about, saying that in 2022 bitcoin mining used 60% as much power as do it today. Why does it cost so much more to generate a single bitcoin now?

Hertz-Shargel: Well, eventually the demand for bitcoin increased. And there is an arms race happening every day, where bitcoin miners who operate ever larger data centers are capturing ever larger pieces of the pie in terms of the revenue generated by bitcoin mining. And so that arms race led to bigger and bigger facilities and more countries and bigger investments. And so, yes, the really scary statistic is that in 2022, mining consumed 20% as much electricity as global centralized data computation and data transmission combined. And the reason that’s a staggering statistic is that those two latter types of energy demand, data computing and data transmission, are really the fruits of the Internet, the cloud and now kind of emerging. [artificial intelligence] industrial revolution joined together. So the question is, you have to evaluate: Is the value that bitcoin provides, essentially a store of value like gold, worth one-fifth as much as the value that all those other forms of energy demand provide?

Jamali: Texas is the only state in the country, should we mention, with its own grid. Am I right?

Hertz-Shargel: Other states have their own network operator. But yes, Texas is self-sufficient in an electrical way that no other state is.

Jamali: Yes, and that’s why it’s especially vulnerable. And I asked this because we are approaching the third anniversary of the winter storm that left many 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 moments like these put bitcoin miners on the grid?

Hertz-Shargel: I think there is a miners’ claim, and I think there is a general belief, that they stop working when the network is stressed, when energy prices are high. In fact, many miners, which we have seen firsthand, continue to work even in these kinds of stressful conditions when prices are really high. Not only does this increase the price in an extreme way for consumers after the time, but it runs the risk of the network operator getting closer and closer to that point where it has to consider outages. So the reality is that these miners stretch the grid basically 24/7. And in some cases they turn off in extreme cases, but not all do. And so it just pushes the grid closer to that point that you don’t want to be where you risk turning the lights out on people.

Jamali: And I don’t know that long ago, bitcoin miners in Texas, specifically, were paid, or compensated, for putting power back on the grid during these extreme weather events. Is this still the case?

Hertz-Shargel: That is still the case. And what it does is it shifts the cost of the year’s network investment, which only gets more significant every year, back to other customers. And I think it’s also worth pointing out that the big tech companies are the biggest buyers of clean energy in the United States. Whereas bitcoin miners, what they do is they started to put their facilities near renewable facilities like a wind farm or solar farm. But all that means is that you’re still drawing the same power unit that another customer would have benefited from that facility. They don’t offset their demand sensibly.

Jamali: It’s interesting because that’s an argument that the bitcoin miners have made – the fact that they’re now starting to set up shop next to those existing renewable projects. They say: “Look, we help. We are not making things worse.”

Hertz-Shargel: That’s right. But it’s very intuitive to understand that if you parked a facility right next to, let’s say, a solar farm and started consuming the electrons from that facility, those electrons would have gone to another customer in Texas. So everything you do as the one they happen to consume, at the end of the day the overall demand on the grid goes up. And that means the grid operator has to send out ever more expensive and carbon-intensive generators to meet that increased demand you’ve caused. And so there’s no sustainability benefit, which is very different from what the big tech companies are doing by actually building new renewable facilities. These facilities therefore meaningfully offset the emissions associated with their, their demand.

Jamali: Are there any indications that regulation might help curb some of this activity?

Hertz-Shargel: Well, I mean, I think what we’ve seen across the country is that most states are more concerned with protecting bitcoin mining rather than restricting it. They usually enact 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 you can compare them to the size of cities or other extraordinary types of demand sources. And so I think that there was this idea that they want to limit how much they’re willing to pay them to limit. I do think it’s important to identify when they say they’re putting power back on the grid, what that means is that they’ve usually contracted for power from a generator, and they’re simply choosing to withhold consumption of that power, and they allow their supplier to liquidate the power to sell it to the grid. So they just make something available that would have been available anyway if it didn’t exist.

More about this

Here is Lily’s story of her visit to that bitcoin mining operation she mentioned. Her reporting focused on what local residents 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 put a partial moratorium on what is 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 wrote a book, “The Bitcoin Dilemma,” about the financial and environmental costs of this activity.

Something else that 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 growth has been explosive.