Surveying more than 100 Bitcoin mining companies, it is clear that this industry is poised to increase energy consumption more than any other.
This is the editorial opinion of Ritabratha Santra, an engineer focused on energy technology.
I bought my first Bitcoin in 2016. I was a sophomore in college and it was my second year living in the U.S. While I was adjusting to the new lifestyle I found myself living, I came across an article about Bitcoin.
I had saved some money from my campus job. As someone who has seen devaluing my parents hard earned money, the value proposition of Bitcoin immediately became clear to me and I made the second biggest mistake of my life: I bought Bitcoin from Coinbase (for $1500) instead of mining and hoarding it (HODL’ing)! If you’re wondering what my biggest mistake was: two months later I got an internship in Germany, so I sold the bitcoin to buy a ticket to Berlin, and six months later one bitcoin was worth about $16,000!
The Energy Trilemma and Bitcoin
One of the many things that stood out about my new lifestyle in the US is the reliable access to electricity. Growing up in India, I witnessed how a lack of energy affected health, knowledge and opportunity.
Today, developed economies consume as much energy as 12 times the average in some developing economies. There is over 900 million people who do not have access to electricity but we burn enough gas every year to power all of sub-Saharan Africa. In other words, we burn enough gas (emitting carbon dioxide or CO2) to provide energy for millions of people without creating any economic value because we don’t have the technology to cost-effectively transport the energy to where it’s needed most.
I believe that the energy trilemma, the need to balance energy reliability, affordability and sustainability, is one of the great challenges of our lifetime—we must eradicate energy poverty and meet the additional energy demand from emerging economies while actively decarbonizing to achieve carbon neutrality.
Bitcoin mining serves as a means of capturing the wasted economic potential of excess energy resources, accelerates otherwise expensive but innovative development of renewables and is therefore central to solving the energy trilemma.
First trend: When Harry meets (stuck) Sally
Innovative monetization of stranded or excess energy resources will create positive economic opportunities and drive the growth of Bitcoin mining.
Every energy producer, regardless of the carbon intensity of the energy it produces, has to deal with excess energy that cannot be redeemed. As hydrocarbon production increases, reservoir pressure drops and producers inadvertently end up producing gas that is often expensive to transport and therefore they have no choice but to flare/flare it. In fact, according to recent articlethe amount of gas flared globally is equivalent to Russia’s total natural gas imports into Europe before sanctions imposed over its invasion of Ukraine.
According to the IEA, we need to curb gas flaring by over 90% to reach our net-zero goal by 2030, as shown in the figure below. Likewise, renewable generators often have to reduce power production to meet grid demand, and in the absence of a battery, this often means wasted power.
Many energy producers who lack bitcoin mining capabilities partner with bitcoin miners to effectively monetize such otherwise wasted or blocked energy in the absence of transmission infrastructure. Oil giant ExxonMobil already did pilot project launched with Crusoe Energy for Bitcoin Mining. Likewise, renewables giant Nextera and bitcoin miner Marathon operate a joint facility in King Mountain, Texas.
Perhaps the only thing better than a joint venture is a vertically integrated mining company.
To minimize some of these energy price and availability uncertainties, we monitor Bitcoin mining companies that own the source of energy production ie. they produce and use their own energy, cutting out the middlemen. Examples range from companies owning natural gas (such as 360 mining and Canary mining), to the HPP (Bitfarms), to solar energy (Viable mining) assets and many more.
Although there are previous cases of Bitcoin accelerating in other ways expensive renewable energy company (like OTEC) development in the US, we are more likely to see similar cases in countries with favorable Bitcoin mining policies. For example, El Salvador, which is currently producing over 50% of its electricity from renewable energy, there is huge potential for geothermal energy as shown in the picture below. There is currently a a huge boost by the government of El Salvador to develop these geothermal resources for sustainable Bitcoin mining.
Trend Two: Software is eating the (mining) world
The specialized optimization software category can be an attractive investment for investors who are hesitant about capital-intensive digital infrastructure companies.
Bitcoin mining is a highly efficient capital allocation mechanism and the closer it gets to the invisible hand of the free market. In the past year, several Bitcoin mining companies such as Core Scientific, Celsius, Calculate north and Butterfly Labs declared bankruptcy, while several others like it Argo Blockchain and Iris Energy were on edge. The price of energy and the ability to efficiently capitalize on the energy demand of the network has a huge effect on the operating profit margin of a Bitcoin mining company; this problem creates a need for energy optimization and efficient use.
I have created a separate category in my market map for companies that solves these optimization problems for bitcoin miners. Also, some mining as a service (MaaS) companies like Lancium offer a bundled software solution for managing computing/mining operations as well as optimizing energy consumption.
But building a Bitcoin mining infrastructure is a big investment and involves risk due to the volatility of Bitcoin’s price and the cost of the energy required. To de-risk these investments (to some extent) by diversifying their offerings, many MaaS companies are building data centers for low-latency computing. With the astronomical rise of cloud computing, the demand for latency-agnostic computing has increased significantly over the past decade and is expected to increase by 10% on an annual basis until 2030.
MaaS companies are well-positioned to build data centers because it resonates with their existing capabilities to build efficient computing infrastructure solutions, thereby greatly increasing their total addressable market.
Trend Three: The Swiss Army Knife of Decarbonization
Just like a Swiss army knife, Bitcoin mining drives energy-efficient decarbonization in many ways. Diversion of coal waste and its sustainable combustion, using natural resources to conserve key wildlife habitats, landfill methane capture and using this energy to mine bitcoins creates positive economic value for society. Actually there are over 120,000 orphan wells in the US alone, releasing methane equivalent to the production of seven million to 20 million metric tons of CO2 per year and endanger life in the surrounding communities.
Assuming an average cost of $100,000 to plug such a well, and that only 10% of those wells would be suitable for redirection using Bitcoin mining, that’s a $1.2 billion market!
Bitcoin mining uses electricity and is therefore only as clean as the source of electricity. However, as we integrate more intermittent renewables to the grid, the need for grid balancing increases, which can be addressed by flexible workloads such as Bitcoin mining and data centers in certain places.
The electrical energy used in Bitcoin mining is converted into heat. Just like energy producers who try to monetize their excess energy by mining bitcoins, bitcoin miners can monetize lost heat by capturing and redirecting it. Here a great example on how Bitcoin mining can drive waste heat recovery.
In creating my market map, I saw companies that are diverting heat from bitcoins for agricultural purposes, such as greenhouse chambers to they grow tulips, distill whiskey or for home heating. In addition to a sustainable revenue model, the winners will be the efficient consumers of energy and heat used.
Due to the decentralized nature and low barrier to entry, creative destruction is built into Bitcoin mining by design. Bitcoin miners who constantly innovate to improve operational and energy efficiency will thrive in this industry.
This is a guest post by Ritabratha Santra. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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