Bitcoin’s Second Order Consequences

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Massena is a small town of about 12,000 people in Upstate New York. Now, there are more bitcoin mining machines than there are people. Several years ago, Coinmint took over an old aluminum smelting plant formerly owned by Alcoa and turned it into a bitcoin mining operation. The company I work for, US Bitcoin, did the same thing with a former sodium plant in Niagara Falls.

When industrial companies built these plants many years ago, and later abandoned them, I doubt they were thinking about bitcoin mining. This is a prime example of second order consequences. The first order consequence of Alcoa abandoning their plant was lost jobs and revenue. The second order consequence was providing the infrastructure necessary to expand Bitcoin’s footprint.

Bitcoin mining has first and second order consequences, too. A first order consequence is securing the Bitcoin network, which lets everybody buy and sell bitcoin. A second order consequence is people investing less of their money into gold and more into bitcoin. There are probably many other second order consequences we aren’t aware of yet. But there is one I don’t think gets enough attention – Bitcoin’s role in fighting climate change.

In case you weren’t aware, the whole world is trying to limit global warming to 1.5 degrees Celsius by 2050. Anything beyond this is potentially catastrophic to the planet. The US is helping this effort by targeting net-zero greenhouse gas emissions by 2050. Part of this effort includes decarbonizing the grid, i.e. being able to generate electricity without emitting CO2.

In the United States, 62% of the grid’s electricity is powered by fossil fuels like natural gas, coal, and petroleum. The result is billions of metric tons of CO2 being emitted into the atmosphere every year. Renewables, which are considered zero emissions, only make up 20% of electricity generation1. The rest is mostly nuclear (EIA).

Bitcoin fights climate change by helping decarbonize the grid. It does this through clean energy mining. Yes, bitcoin mining consumes a lot of electricity. But high electricity consumption is not a bad thing if it’s being powered by zero-emissions renewables.

Renewable energy is getting cheaper and cheaper by the year, and we have enough wind and sunshine to power nearly all the demand in the US. But quickly transitioning to a clean grid is not easy. There are three major obstacles that miners are uniquely positioned to address:

  1. Renewable energy is intermittent energy
  2. There’s not enough transmission capacity for new solar and wind farms
  3. The combination of 1 and 2 make it difficult to finance renewable projects

Let’s dive a little deeper on each of these.

1. Renewable energy is intermittent energy

Solar and wind energy depend on the sun shining and the wind blowing. Wind is less predictable, but we all know the sun shines brightest during the day. Unfortunately, peak electricity demand tends to be in the evening when everybody comes home from work and the sun has already set. Solar farms are generating the most electricity when there’s not enough demand, to the point where they are often asked by grid operators not to run to avoid overloading the grid. This is called curtailing. In order to satisfy demand when the sun isn’t shining and the wind isn’t blowing, we need to be able to store that electricity through large scale battery storage, which doesn’t exist yet.

2. There’s not enough transmission capacity for new solar and wind farms

As you’re reading this, there’s hundreds of gigawatts of solar and wind capacity waiting to get connected to the grid2. But it’s not going to happen anytime soon because there’s not enough power lines to distribute all that new electricity. Even then, grid operators need to perform lengthy studies to determine how they can bring that new electricity online without causing a blackout. Without transmission lines that can distribute that electricity across the grid, renewable projects need customers they can sell to directly.

3. The combination of 1 and 2 make it difficult to finance renewable projects

Decarbonizing our grid requires an overcapacity of renewable projects. Every healthy system has redundancy. But no one is going to overbuild if it doesn’t make economic sense to do so. The government knows this, so they offer tax credits and other incentives to boost the economics on new solar and wind capacity. But that only helps so much. Businesses need to be able to grow organically to sustain themselves in the long run.

To address these problems, we need an energy customer that: (1) Is able to buy excess supply during the day and willing to curtail when there’s excess demand, (2) Is willing to purchase power directly from wind and solar farms as transmission capacity gets built on the grid, and (3) Is able to help finance the growth of renewable energy as an end-user, not as a government subsidy.

It turns out bitcoin miners fit that customer profile. They can buy excess supply that otherwise would have been curtailed and shut off when there’s excess demand to keep the grid healthy. They can enter into power purchase agreements (PPAs) to buy directly from wind and solar farms. Finally, they are end-users whose primary business is converting electricity into bitcoin. As long as bitcoin miners continue making money, they can continue buying electricity which helps wind and solar operators make money, too. It’s a win-win.

Bitcoin mining alone will not help the US transition to a decarbonized grid by 2050. But it can certainly speed up the process. It is ultimately up to the miners to decide whether they want to be a part of this decarbonization effort. As we’ve seen earlier, it’s beginning to make economic sense for them to do so, but cheap electricity is just one of several variables that need to be considered when building a mining operation.

As the industry gets more regulated, it will be interesting to see whether any clean energy mandates get put on miners. My guess is this is highly likely, so it’s good to see the industry being proactive about their energy usage and how they can improve. My view is Bitcoin is here to stay. Which means mining is here to stay. So we may as well come together in a collaborative effort—miners, power producers, utilities, and government—to better understand the first and second order consequences of all our decisions so we can find the best path forward to decarbonization.

Notes

  1. The EIA defines the following as renewable sources of energy: wind, hydro, solar, biomass, and geothermal.
  2. To put this in perspective, 1 megawatt can power 600 family homes. 1 gigawatt equals 1,000 megawatts, or 600,000 family homes.

Correction on May 4, 2022: I mistakenly believed that renewable generators such as solar farms get paid to curtail, but it turns out this is not the case. Generators do not get paid for curtailed energy (h/t Blake King for his insightful article on Bitcoin Mining & the Grid).