Years ago, when Bitcoin’s blockchain was much shorter, mining cryptocurrency could be done on a mobile phone. Those days seem quaint now, as mining tokens has now become so energy-intensive that it can actually push local electricity prices up due to increased demand.
This was the finding of a recent study published by the National Bureau of Economic Research.
The research specifically involved the most well-known cryptocurrency, Bitcoin, due the way it works. Miners create new Bitcoins by solving mathematical problems that help verify transactions along the blockchain. The more Bitcoins that are produced, the more difficult it becomes to mine new ones, as the difficulty of the calculations scale with the total computational power of the network. This is why, when the cryptocurrency was young and worth only fractions of a cent, people could mine new tokens on their phones or laptops. Now that one Bitcoin costs tens of thousands of dollars, mining requires dedicated equipment that uses large amounts of electricity.
The researchers examined the electricity market of upstate NY, which attracted cryptomining operations early compared to other states, especially in the northern counties, due to its cold climate, cheap electricity, and proximity to large hydropower sources. What they found was that cryptomining operations consume so much electricity that it pushes the demand curve up on the local community and, with it, the average electric bill.
“We find that cryptomining leads the average household and small business in NY to pay an extra $88 and $168 in their electricity bills per year, respectively. In aggregate, NY households and small businesses pay $204 million and $92 million more per year, respectively,” said the study.
At the same time, the paper noted that cryptomining operations tend to be very lucrative and so, therefore, very taxable as well. The researchers found that cryptomining towns in Upstate NY generate almost $40 million in additional government revenues, thus recovering about 14% of the losses. As a result, it is estimated there is a net consumer surplus loss of $257 million in Upstate NY. Adding on to this, the paper estimates that these increased bills generates up to $415 million more in revenues for electricity producers. Given margins of at least 15% in the electricity generation sector, this would imply a lower bound on the producer surplus gain of $62 million.
The researchers also found that such operations entering a city can have the effect of crowding out energy use from other businesses. The paper pointed out a case where a Norwegian ammo manufacturer could not expand production to meet increased demand due to the Ukraine war because a TikTok data center was using up a lot of power. Researchers turned to China, which previously had hosted a major portion of cryptocurrency mining before the 2021 ban, to examine the effects of electricity rationing in response to mining operations.
“We find that after cryptomining enters a city, local fixed asset investments decline annually by 19%, and wage levels decline by 10%. These results, which are robust to a battery of robustness specifications and are consistent with parallel trends assumptions, suggest that cryptomining tends to crowd out other business uses of electricity. The results also suggest that these crowded-out industrial uses of electricity would have led to larger investments in the physical and human capital of the local economy in the years following the entry of cryptomining,” said the paper.
The shock of cryptominers entering a city, continued the paper, is associated with a 8.2% drop in local GDP. Taken together, the researchers said these findings suggest that it is possible that local economies suffer as a result of crowding out in the electricity market. Despite this, the paper argued a total ban would likely just shift the problem around versus solving it entirely. Instead it suggested dynamic electricity pricing might help mitigate the impact.
“Given the estimated net negative effects on local communities, we consider policy tools that governments could use to mitigate the impact on their jurisdictions. An intuitive intervention would be to simply ban cryptomining. This, however, would likely only shift the problem to other jurisdictions that did not impose a ban and would also prevent the local government from earning additional tax revenues from cryptominers. Another option is to implement electricity pricing schemes or dynamic quotas in order to minimize the adverse impact on the local community,” said the paper.
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