Millions of people who have neither mined nor traded a bitcoin are nevertheless paying for bitcoins to exist. That’s because the vast computing power needed to create new bitcoins consumes enormous amounts of electricity and has driven up energy bills for residents and businesses, according to University of California at Berkeley’s Matteo Benetton and Adair Morse and Chicago Booth’s Giovanni Compiani.
In the United States, crypto mining could cost residential and business ratepayers $1 billion a year, the researchers estimate. Bitcoin miners have been draining so much electricity in parts of China that the authorities are kicking them out of the country, in part to reduce coal consumption and help meet the nation’s carbon-reduction targets. Cheap electricity in places such as Texas is expected to make the US a leading refuge for crypto miners.
Bitcoin mining, or crypto mining, is the process of generating new bitcoins by solving ever more complicated puzzles. It’s much like using computers to crack complex codes. As more of the tokens are mined, the puzzles get harder, so people engaged in the activity need more powerful computers. Bitcoin mining now consumes 0.5 percent of the world’s electricity, and usage is rising, according to the researchers.
Benetton, Compiani, and Morse focused on Upstate New York and China as two of the world’s major bitcoin-mining locations. They analyzed public records of electricity prices and usage, as well as Bitcoin prices, starting with 2007 in China (just before Bitcoin debuted there) and 2016 in New York (shortly before it became a mining center). Benetton and Compiani received financial support from Ripple’s University Blockchain Research Initiative. Ripple Labs supports the cryptocurrency XRP.
In Upstate New York, where a quarter of US crypto mining takes place, the researchers find that electricity rates have gone up in response to rising demand. Their study demonstrates that because of bitcoin mining’s power usage, households paid an additional $165 million a year in energy costs, while businesses paid an extra $79 million. In China, where more than two-thirds of the world’s crypto mining took place over the past decade, electricity rates are set by the government and inflexible to demand. Crypto miners there were crowding other industries out of the market and forcing electricity to be rationed, the research suggests.
When Bitcoin prices were high, the effects were magnified, Benetton, Compiani, and Morse find in their analysis of bitcoin exchange rates relative to the US dollar. Crypto miners are compensated in bitcoins, “so the higher the price of Bitcoin, the higher the reward, and the more there is incentive for miners to mine intensively,” Compiani says.
When crypto miners entered a local economy in China, fixed asset investment dropped by 0.36 percent annually and wages fell by 0.68 percent, the researchers find. A potential solution would be for governments to levy additional taxes, but most governments already view bitcoin miners as a solid source of revenue because their taxable profit margins can be high. Local governments relying on bitcoin miners for tax revenue will be hesitant to drive them to other towns by applying local levies.
At the same time, the researchers calculate that in Upstate New York, crypto mining was associated with an increase in tax revenue of just $40 million, while the local welfare cost including higher electricity bills came to more than $240 million.
That’s not to say bitcoin mining is all bad. The researchers point to potential benefits—for example, of the taxes the industry does pay—and suggest future research might focus on other societal goods, such as the democratization of payment systems. Still, their conclusions about the total social costs of crypto mining might be generous, as they did not account for the environmental effects.
One other wrinkle—the supply of bitcoins is capped at 21 million. Since 2010, nearly 19 million coins have been mined. While it may seem that the bitcoin supply limit will cause the energy drain to go away, it’s not going to happen soon. The puzzles are becoming so complex that mining the last bitcoins will take longer and will be even more energy intensive, like trying to draw the last drops of oil from a once-flourishing well.