The Bitcoin mining industry is in a state of flux. Between the recent limitations imposed – whether in Europe or North America – due to the convergence of various factors such as the global energy price crisis caused by the consequences of the war in Ukraine, or the recent bankruptcy of Core Scientific, a key player in the mining ecosystem whose computing power was equivalent to 10% of the total hashrate or the growing environmental pressure from various environmental activist groups, the latest example being the Sierra Club, Bitcoin miners are being put to the test, and with the price of the crypto-currency having lost more than half of its value over the past year, their rewards have not been as great as hoped, especially in light of the massive investments and debts incurred in order to mine the precious crypto asset.
This will reshuffle the deck in a rapidly expanding industry, as we see in this overview.
Reminder of the basics of bitcoin mining
To put it succinctly, Bitcoin mining is the use of computers to solve complex mathematical algorithms in order to validate transactions on the Bitcoin blockchain; the miners who solve these algorithms the fastest get a reward in the eponymous crypto asset. But while miners initially relied on personal computers to solve these calculations and validate transactions, the industry has gradually become more professional due to the immense amount of energy required to fuel the computing capacity of ever more powerful computers, which has inevitably led to the emergence of highly specialized mining equipment and large mining centers. Furthermore, the more computing power you have, the more likely you are to be the first to solve the equation, and therefore to be rewarded, which creates a strong speculative effect.
Since the Ethereum Merge, which allowed Vitalik Buterin’s network to move to a Proof of Stake (PoS) model, Bitcoin is the only highly capitalized cryptocurrency (at the time of writing, the total capitalization is more than 370 billion euros) that operates on a Proof of Work model and can therefore be mined, the only highly capitalized crypto-currency (at the time of writing the total capitalization is more than 370 billion euros) to operate on proof of work and therefore to be mined.
As recalled above, computer performance and computing power are essential; this race for the highest hashrate has fostered innovation, and the latter has eventually given birth to ASIC (Application Specific Integrated Circuit) technology, which is today a kind of standard for the young industry. But what is an ASIC? Well, they are simply computers whose sole function is mining, that is, calculating a very complex function: in the case of Bitcoin, it is to calculate the SHA-256, which is none other than a cryptographic puzzle whose solution allows the validation of new blocks on the blockchain in order to collect the rewards associated with mining them.
According to the protocol developed by Satoshi Nakamoto, a block is mined approximately every ten minutes. In 2009, the reward for mining a block was set at 50 BTC. The mechanism of halving this reward, also called “halving”, is provided by the Bitcoin protocol, and occurs every 210,000 blocks, or about every 4 years. It went to 25 BTC on November 28, 2012 and then to 12.5 BTC on September 7, 2016. Today, mining a block of Bitcoin pays only 6.25 BTC.The halving of the mining reward is scheduled to last until 2140 or until the 21 millionth Bitcoin is created. The reward will then have reached 1 Satoshi, the ultimate subdivision of the king of cryptocurrencies equivalent to : 0.00000001 BTC.
Retrospective of bitcoin mining
There’s no doubt about it, despite its recent tumult, the Bitcoin mining industry has experienced significant and diverse growth since its inception in 2009.
In the beginning, China was the main place of cryptocurrency mining until its brutal ban by government authorities; it alone accounted for 70% of the world’s hashrate in June 2021, before dropping to zero the following months. Today, China has resumed mining but in a clandestine way and no longer occupies the first place of the podium, now devolved to the United States. Other countries such as Canada, Kazakhstan, Russia, Congo or Salvadore have innovative strategies to take part in the Bitcoin mining industry.
Energy costs, as Peter Wall, CEO of Argo Blockchain, whose many facilities rely on Quebec hydropower, reminds us, are the main challenge for the mining industry; in a recent interview he states that:
85% of the total costs of a mining farm are for electricity alone.
Because Bitcoin mining requires a lot of computing power, and therefore electricity, it’s easy to understand why China has been the preferred location for miners; its low-cost labor and numerous hydroelectric facilities, not to mention the lack of scruples there about using coal to produce electricity, have seduced the miners of the first hour.
Since the outright ban on Bitcoin mining in China, miners have been looking for new fertile ground, but also for cheap sources of energy to reduce their operating costs and, surprise, this has led to an increasing use of renewable energy to the point where some environmental projects are rethinking their business model from top to bottom. A central and counter-intuitive point to which we will return later.
It should be noted that the increasing competition within the industry has also been a challenge for individual miners and small businesses. Large mining centers with economies of scale and access to cheap power sources have reduced their operating costs. As a result, smaller operations have found it increasingly difficult to remain competitive, and the majority of mining is now done by structured companies, not, as some still imagine, by individuals operating solo with batteries of computers plugged into the national power grid.
Finally, the uncertainties surrounding the regulations that govern this type of activity have presented, and continue to present, an additional challenge to the industry, as these vary considerably from country to country. Some jurisdictions have taken a rather favorable approach to Bitcoin mining, while others have banned it altogether; nevertheless, innovation often outpaces legislation and forces it to be constantly rewritten. A perpetual headache, then.
What about regulations of bitcoin mining?
Innovation is not possible without regulation. However, the balance to be found between a total permissiveness that ultimately harms innovation and a suffocating control that would risk killing it is tenuous.
In the fall of 2022, events couldn’t have gone more wrong – Europe mired in the war in Ukraine saw winter coming with fear due to the general rise in electricity prices, FTX sank dragging down many important players in the crypto ecosystem, sullying the image of the crypto ecosystem as a whole in the eyes of the majority – the European Commission published a document in which we can read that :
Given the current energy crisis and the increased risks for the coming winter, the Commission urges Member States to implement targeted and ambitious measures to reduce electricity consumption by crypto actors. (…) If load shedding in the electricity systems is necessary, Member States should also be prepared to stop crypto mining. (…)
But in the long run, as evidenced by the Markets in Crypto assets (MiCa) law that will take effect in 2024, Europe is not closing the door on the industry. Some jurisdictions, like Switzerland, have taken a favorable approach to Bitcoin mining, while others, like France, have taken a more restrictive approach.
As for outright prohibition, it is wise to remember that in China this has only contributed to the growth of an underground ecosystem whose hashrate still represents a major portion of the world’s hashrate.
In any case, Europe is not the only one that seeks to better understand and frame the practices of this new industry, whose complexity of the ins and outs slows down their understanding by political decision-makers and civil society.
North America, whether it be the United States or Canada, is a chosen land for mining. As these federal states still lack a national regulatory framework, the task of legislating this industry has so far been left to the states or provinces, resulting in diametrically opposed situations within the same country. Some states, such as Wyoming, have passed favorable laws for Bitcoin miners, while other states, such as California, are stricter. In Canada, provinces such as British Columbia and Quebec have favorable electricity rates for miners and are considered to be welcoming grounds.
As for Kazakhstan, which was once the Wild West of the new El Dorado due to its immense energy resources, the government launched a pilot project to create a special economic zone for Bitcoin mining in 2018, where miners can benefit from preferential electricity rates and other tax incentives. However, since the pilot project, there have been no specific regulations to oversee cryptocurrency-related activities in the country.
Finally, let’s note the Bitcoin City project, which El Salvador’s young president, Nayib Bukele, has made his personal hobbyhorse despite setbacks since the adoption of Bitcoin as a legal currency in the country. The project is moving forward as El Salvador passed a law on January 11 on the issuance of digital assets. This law is the first step towards the foundation of Bitcoin City, which President Bukele plans to finance by issuing bonds backed by the Bitcoin currency. The idea is to raise a billion dollars, half of which will be directly reinvested in the purchase of Bitcoin, while the other half will be used to finance a gigantic mining farm drawing its electricity from the Conchagua volcano. A green initiative that leads us to our next point.
The environmental challenge of bitcoin mining
As noted in the introduction, pressure from environmental activists on the mining industry is growing. And yet, miners are at the forefront of the renewable energy race. According to the latest report from the Bitcoin Mining Council, a global forum made up of the world’s leading mining companies, the share of green energy in the mix used reached a record 59.5% in the second quarter of 2022. So it’s fair to ask why environmentalists have stepped up their fight against this sector.
Here are the main reasons why environmental activists oppose the mining industry:
- Global impact: Bitcoin mining requires a huge amount of energy, even if it is produced from renewable sources. This energy could be used for other, more desirable purposes.
- Local impact: it is possible that Bitcoin mining facilities using renewable sources could be located in rural or wilderness areas, which could have a negative impact on local ecosystems.
- The issue of sustainability: the use of renewable sources for Bitcoin mining may not be sufficient to significantly reduce the greenhouse gas emissions associated with this activity.
- The debate on relevance: some believe that Bitcoin is a useless innovation and that it does not bring any real added value to society, so they do not see the point of spending energy resources to keep it running.
- The issue of regulation: for many activists, current regulations are not strict enough to regulate Bitcoin mining in a way that protects the environment.
These grievances are legitimate, but there are many disagreements, especially when it comes to the usefulness of Bitcoin.
Sebastien Gouspillou, co-founder of BigBlock Datacenter, a group specializing in mining, said in a 2021 interview on the Anita Posch Show that:
Bitcoin is simply the best monetary system we can dream of. It comes close to a perfect currency and to the monetary ideal thought by several economists such as Friedrich Hayek, Maurice Allais or Milton Friedman.
So for him to hear environmental activists say that Bitcoin has no use is almost blasphemy. But, very sensitive to the climate and energy issues of our century, Sebastien Gouspillou is doing everything to mine in environmentally and socially sound conditions. According to him, the mining industry can become a driver of the energy transition. He explains:
Today all renewable energy projects are heavily subsidized by the states, not very profitable and to reach financial balance it is a painful mission. The crypto mining industry offers another form of subsidy to green energy producers.
The best example of such a phenomenon is the Virunga National Park in Congo, which decided to mine Bitcoin with the resources at their disposal, mainly land and hydroelectric facilities. According to the World Wide Fund, the Virunga forest represents the second lung of the planet behind the Amazon. Yet the Congolese government contributes only 1% of the park’s funding. Add to this several epidemics (Ebola, Covid 19), widespread lockdowns and numerous killings by rebels operating in the region, and you have the perfect cocktail to make this park die. That’s why the Virunga authorities have taken up Bitcoin mining.
In an article for the MIT Technology Review, Emmanuel de Merode, the park’s director since 2008 reveals that :
The revenue from the sale of Bitcoin helps us pay the salaries of the park’s employees, or fund infrastructure projects like roads or water pumping stations.
He estimates that last year’s mining revenue was $500,000, while tourism activities were at a standstill, due to covid. In addition, Virunga National Park earned $1.2 million through a partnership with Christie’s for a sale of NFTs called CyberKongz, which capitalized on the reputation of monkey NFTs, well known in the ecosystem. Emmanuel de Merode humbly admits:
This is what got us through the Covid period.
A winning solution, therefore.
Another major project worth mentioning in this state of affairs is one revealed by Bitcoin Magazine on Jan. 12. Generation Hemp Inc, one of the leading hemp processors in the U.S., has rebranded itself as Evergreen Sustainable Enterprises Inc, while announcing a new strategic direction for its operations. Their first project will be a Bitcoin mining farm based in Costa Rica.
After buying out 80% of the shares of Toro Energía, a company that owns a hydroelectric dam near San Jose, through their subsidiary, Cryptorica LLC, Evergreen Sustainable Enterprises Inc. plans to take advantage of this cheap and renewable energy to mine Bitcoin. This project is not unrelated to the recent fall in the price of professional mining equipment caused, among other things, by the bankruptcy of players such as Core Scientific, which, too indebted, resell their machines at a loss, to the delight of new entrants.
That, in a nutshell, is where the Bitcoin mining industry stands at the beginning of 2023. An industry under pressure, therefore, but whose agility of the players favors its ever more innovative development.