Bitcoin at energy crossroads as miners flee China
Will ex-Chinese mining rigs tap Iranian hydrocarbons, or seek greener power sources in North America?
Bitcoin miners are fleeing China after Beijing imposed a regulatory crackdown. This has created a big opportunity for the power-hungry cryptocurrency to end its reliance on cheap Chinese coal-fired power and clean up its image. The energy markets where they redomicile will be reshaped by new, decentralised revenue streams – and redefine bitcoin’s contentious carbon emissions footprint.
This time it is for real.
The People’s Republic of China, the bitcoin mining capital of the world, has tried to ‘get tough’ with bitcoin so many times before. Now Beijing is finally following through on its threats, prompting several mining pools to pause operations or shut down entirely.
This has triggered an exodus of ex-Chinese mining capacity to friendlier jurisdictions around the world where electricity is cheap.
China currently hosts around 65% of the world’s total bitcoin mining capacity. Where will these rigs go?
Initial indicators suggest many will flock to North America, where a growing emphasis on environmental, social and governance (ESG) metrics is pushing more miners to tap lower carbon sources to power their energy-intensive operations (as covered at length in Energy Flux).
“A lot of calls are being made from Chinese miners to North America looking for hosting power,” said Peter Wall, CEO of Canada-focussed zero-emissions bitcoin miner Argo Blockchain.
“The Chinese government has made many previous moves against crypto over the years. This time it seems to be coming from a higher level and a more centralised authority. So everyone I’ve spoken to in China and North America is taking this more seriously,” he told Energy Flux in a telephone interview.
This observation is supported by reports that at least one major Chinese mining pool is moving in that direction:
The Chinese ‘hashing’ (computing) diaspora will reshape the bitcoin mining map and redirect the flows of capital that these operations generate. Owing to their intense power requirements, mining revenues can monetise stranded energy resources and prop up out-of-the-money power generators.
This can skew the electricity markets that support miners, with unexpected consequences. The Islamic Republic of Iran is becoming a significant participant in the bitcoin network, hosting an estimated 3.8% to 4.5% of the world’s total hashing power. Some of this is said to be located in Mosques, which enjoy highly subsidised power rates.
Tehran was this week accused of using Chinese-backed bitcoin miners to evade US sanctions by using hydrocarbons that it cannot export to power mining rigs. According to Elliptic, a firm that specialises in blockchain analytics for cryptocurrency compliance:
“In 2019 Iran officially recognised cryptoasset mining, later establishing a licensing regime that required miners to identify themselves, pay a higher (but still very low) tariff for electricity, and to sell their mined bitcoins to Iran’s central bank. Thousands of unlicensed mining farms have subsequently been identified and shut down – including in mosques, which receive free electricity.”
Isolated from the world economy, Iran welcomed investment from China in Iranian energy and bitcoin mining projects. This video purports to show Chinese bitcoin company RHY’s giant mining facility under construction in Rafsanjan, central Iran, in 2017. The facility was at the time being expanded to 175 MW:
Iran reportedly suffered blackouts in January, prompting some to blame Chinese bitcoin miners – although outages are common across Iran due to chronic underinvestment in power infrastructure.
Everything to play for
Peter Wall of Argo Blockchain said it is “too early to say” where ex-Chinese miners will end up. Most if not all are privately owned entities, so are not subject to the same ESG pressures as their publicly traded rivals.
“They are going to go where the power is cheapest. But fortunately a lot of the cheapest power these days is renewable,” he said.
Over the weekend, Argo met with other leading North American miners to discuss ESG issues related to bitcoin with Tesla CEO Elon Musk, whose criticism of bitcoin’s fossil fuel usage sparked a sharp crypto selloff.
“The more we can decarbonise bitcoin, the better,” Wall told Energy Flux after the meeting. “The more we can get Chinese miners off coal the better. One way we can do that is to make it very difficult or impossible to mine there.”
Beijing is doing that job for them. The question now is whether uprooted bitcoin miners will balance financial and environmental objectives to partner with low carbon power producers, or prioritise cheap electrons above all else.
With bitcoin facing heightened environmental scrutiny, the cryptocurrency can ill afford to be perceived as ditching Chinese coal only to run on Iranian oil and gas and facilitate sanctions evasion.
The redrawing of the mining map could be the cryptocurrency’s best opportunity yet to demonstrate the benefits it can bestow upon cleaner energy sources by enabling investment in renewables. If short-termism prevails and enough climate-conscious investors turn their backs on bitcoin, it might not get another chance.
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