This week is Mining Week at CoinDesk and we’re publishing articles all about crypto mining. Be sure to check out Mining Week from Consensus Magazine on the CoinDesk website. The following is an excerpt from our overview article titled: Through It All, the Bitcoin Mining Industry Looks Set for Growth.
Crypto mining is mostly healthy.
A quick look at the Bitcoin network’s hashrate, a measure of the amount of computing power committed to running the network, shows a bountiful capacity with which to run crypto’s premier network. As of July 21, Bitcoin’s hashrate was 400 exahash per second, up five-fold from June 2021.
That said, in about nine months time, the entire economics of the mining industry will undergo a profound change, and there’s nothing anyone can do about it. In April 2024, we will see the fourth Bitcoin halving.
Right now, every time a bitcoin block is mined the owner of the machine that mines the block is able to claim the coinbase transaction. The coinbase transaction consists of up to 6.25 bitcoins. These new bitcoins are how bitcoins are minted. After the halving in April, that 6.25 BTC reward will become 3.125 BTC.
Miners earn money through network transaction fees and through the block subsidy (i.e. the coinbase) – with most earnings coming from the block subsidy. And so the halving means that, all else equal, miners will lose out on 3.125 bitcoins (~$90,000) worth of earnings per mined block.
Environmental headwinds
Bitcoin mining uses energy and, given Bitcoin’s growth in the last few years, we now operate in a world where energy markets and bitcoin mining are intimately tied.
Many have argued that mining is a way to improve energy grids, especially in states like Texas, since Bitcoin can operate as a “buyer of last resort” for energy and so provides utilities with some level of a predictable revenue source. Bitcoin miners participate in demand response programs (as do other types of businesses like supermarkets and hospitals), agreeing to help grid operators reduce stress on generators and transmission and distribution lines in exchange for lower electrical rates. This is in exchange for curtailing their energy use when demand for energy peaks.
On the other side, environmentalists argue that miners are using more energy than would otherwise be the case, and unnecessarily, and perhaps there’s merit to that argument. But predictable demand for energy should be preferred to outright wasting it.
A very mobile industry
Another thing that is fundamentally great about bitcoin mining is that it can be done anywhere.
Like in, say, rural Kenya, which is what microgrid developer Gridless is doing. Gridless, a startup backed by ex-Twitter CEO Jack Dorsey, has brought electricity to people in Kenya and Malawi who are otherwise excluded from the grid. They have set up hydropower microgrids and are mining bitcoin with the energy the people don’t use.
The regulatory aspect
In the wacky world of politics, China banned crypto mining in 2021 (although that lasted all but two seconds) and the White House came out swinging earlier this year proposing a punitive tax on crypto mining operations for “the harms they impose on society.”
And then there’s Sen. Elizabeth Warren (D-Mass.) who routinely criticizes crypto mining for its energy use and even created her own “anti-crypto army.” She also has come out against the fraud and crime crypto enables, recently zooming in on suppliers of fentanyl precursors.
Political grandstanding aside, most of the national rules targeted at miners don’t really exist. Where they do exist is at the state level, albeit not to a fatal extent.
Texas is a good example, whose State Senate passed a bill which would have limited bitcoin miners’ ability to participate in demand response programs only for it to be shot down in the State House.
The unpredictable aspect
Lastly, the mining industry has many inputs which are more or less predictable (or at least, logical). That said, there are many potential unpredictable factors which could crop up and turn it all on its head. We’ve already touched on the price of bitcoin. That’s unpredictable – who knows what the mining world would like if bitcoin hit $1.48k or $148k or $1.48 million. But there are many other potentially unpredictable things.
Just take Ordinals, Bitcoin’s answer to NFTs, which have mostly been created on Ethereum. Ordinals were incredibly popular earlier this year and they ushered in a huge spike to miner fees for a few months. While the Ordinals spike in miners fees has mostly fallen away, there’s always potential for innovators to create new ways to use the Bitcoin network, creating new demand for the services that miners provide.
Mining is still a young industry, and it's ripe for change.
– George Kaloudis
@gckaloudis
george@coindesk.com
