US turns up the heat on crypto miners

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week we’re taking a look at the mining business.

We know that mining bitcoin comes at a cost. The US is now keen to discover exactly who loses out.

Energy consumption for mining crypto is usually measured in terms of swimming pools, towns or medium-sized countries.

Many blockchains — like the one bitcoin is built on — require powerful computers to work around the clock to solve complex mathematical problems as a means of securing the network and validating new transactions. It takes huge amounts of processing power and it’s a race between miners. There is only one winner but many losers who expend energy for no return.

But if that energy is wasted, the US Energy Information Administration wants to know who the largest offenders are. This week it said it would start tracking the electricity consumption of crypto mining companies.

The EIA estimates that bitcoin mining accounts for 2.2 per cent of total electricity consumption in the US and is worried about its growing demands and states’ ability to maintain other services. Moreover, it has concerns that consumers in states with high concentrations of miners, such as Georgia, New York and Texas, may be paying more in energy prices.

“At the time of writing this, much of the central United States is in the grip of a major cold snap that has resulted in high electricity demand,” said EIA administrator Joe DeCarolis in a memo.

“The combined effects of increased crypto mining and stressed electricity systems create heightened uncertainty in electric power markets, which could result in demand peaks that affect system operations and consumer prices,” he added.

He cited the example of Plattsburgh in New York in 2018, then a centre for bitcoin mining. Demand in the cold winter outstripped supply, according to a Congressional report, and electricity had to be purchased elsewhere. The local energy commission estimated that Plattsburgh’s crypto miners contributed to an increase of nearly $10 to consumers’ monthly electricity bills in January 2018 alone.

So the EIA is asking 82 crypto miners operating about 150 facilities in the US about their energy consumption. It wants to know whether they source their energy from coal or environmentally friendly renewables such as solar or wind energy.

The agency is using an emergency request, a mechanism that bypasses usual processes to start collecting information. It was used after the Iraq war in 1991, and also to determine retail prices of petrol, and the impact of Hurricane Sandy in the New York area in 2012.

“[The EIA’s action] is a starting point to proper scrutiny,” said Alex de Vries, founder of the Digiconomist website, which tracks the environmental impact of crypto mining. “The fact this is an ‘emergency’ request underscores that this is being taken very seriously.”

That scrutiny comes as a pivotal time. Bitcoin is up 50 per cent in the past six months and the EIA noted that hash rate, or the amount of computing power needed for the network to process transactions, has doubled in the past year.

A scheduled plan in April this year will halve the incentives made available to miners that verify new blocks of bitcoin transactions.

That update — commonly referred to as the bitcoin halving — is expected to supercharge bitcoin’s price (yes, we’ve heard this before) and has prompted the biggest mining firms to splash more than half a billion dollars on new equipment in a bid to stay competitive in the booming market.

As attention naturally turns to mining companies ahead of the halving, you can expect crypto’s evangelists to roll out common defences for the sector.

They claim the industry has been cleaning up its act, turning to renewable energy sources instead of fossil fuels. Its defenders will also frequently claim miners default to the cheapest available energy that would otherwise go to waste if it weren’t for the (checks notes . . .) innovative sector.

But neither of these claims has ever been fully satisfying. “We see a lot of unsubstantiated claims regarding the environmental performance of this sector, so we may finally get some clarity,” added de Vries.

Obviously, with a power consumption that rivals nation states it’s no surprise mining has been controversial for many years. In 2021 Sweden’s financial regulator said renewable crypto mining threatened the country’s ability to meet key international obligations.

“You can fool people into thinking it’s all green . . . but that energy should have gone to another use,” said Kaveh Madani, director of the UN’s University Institute for Water, Environment and Health.

But if the EIA’s latest move is anything to go by, scrutiny is ramping up just in time for crypto’s next marquee event in April.

What’s your take on crypto mining and its climate record? As always, email me at scott.chipolina@ft.com.

Weekly highlights

US crypto exchange Coinbase hired former UK chancellor George Osborne as an adviser on Wednesday, saying it hopes to rely on his “insights and experiences as we grow Coinbase around the world”. It is still fighting a lawsuit filed by the US Securities and Exchange Commission last summer, which alleges it failed to register as a national securities exchange.
Crypto exchange Binance has been sued on behalf of the victims of Hamas’s attack on Israel on October 7 last year. The lawsuit, filed in the Southern District of New York, is seeking damages from not only Binance and Zhao, but also Iran and Syria.

Soundbite of the week: The FTX dumpster

Administrators for FTX, the failed exchange once led by convicted fraudster Sam Bankman-Fried, ditched plans to restart business this week after failing to sell it.

At a court hearing in Delaware, FTX attorney Andy Dietderich didn’t mince his words. Via The Guardian:

“FTX was an irresponsible sham created by a convicted felon.”

“The costs and risks of creating a viable exchange from what Mr Bankman-Fried left in a dumpster were simply too high.”

Data mining: A reprieve for Grayscale

If you’re a loyal subscriber to this newsletter you will know that it’s been a bittersweet month for asset manager Grayscale.

Having led the way in finally getting the SEC to approve a spot bitcoin ETF, it was able to convert its bitcoin trust, with $28bn of assets under management, into an ETF.

It came with far higher fees than rivals and right away many investors used the conversion as an opportunity to get out. Around $5.1bn left but that might be slowing now, as this chart shows.