THE ESG OF BITCOIN! WHO DOES WHAT & WHERE…AND THE ENVIRONMENTAL, SOCIAL & GOVERNANCE COSTS INVOLVED.


Bitcoin mining…the hydro-electric, coal and ESG costs.


The following piece is I suppose, a follow on to my article back in March, ‘ESG…another buzzword to try and remember…!’. You see, I have been an advocate of Bitcoin ever since I started issuing Technical Analysis market commentaries on it, back in September 2015. Then it was trading around USD 350 per Coin. I have written articles and spoken about it many times, how I liked it as a concept, …being a version of 21st Century Gold, etc…! I still find it and blockchain’s elegant solution to many problems, attractive. However, this article is not about the beauty of Satoshi Nakamoto’s idea. Rather, it is about the real-world cost of mining Bitcoin…and other Coins…and how a good idea has met up with the reality of real world environmental, legal and social costs.


In part, this was prompted by the excellent piece Chris Clothier, Fund Manager at CG Asset Management wrote back in April…and part by the story I heard some while ago, about a town in China that believed it saw economic growth prompted by strong electricity demand from a relatively small (I seem to remember), nearby, hydro-electric dam. In this story, the demand, some three quarters of the power output from the dam, was being channelled into a new industrial area near the town. However, the town’s officials saw relatively few local people working there. Indeed, they saw very few people seemingly working there at all. Their investigations were prompted because the town was having rolling power blackouts, or outages, due to the demand from this industrial area. When investigated, they found a huge warehouse had been converted into a server farm designed to mine for Bitcoin…and


demand from the air conditioning and cooling units used to cool the servers…were the main cause of the electricity demand that was now starving their town of electricity….and in the eyes of the officials, not producing viable products they could use, or could sell. I recall in this story, they cut off the electricity more or less, immediately. You’ll have to forgive my lack of detail on this…but it was some two or three years ago…maybe more, that I heard of this story


So…let’s now take a look at what the costs of mining Bitcoin really are. It is estimated that electricity consumption for Bitcoin mining alone, so no other Coins, is about 116.38 TWh per year. To give you an idea of scale, that is somewhere between the whole of the Netherlands…and the UAE in size1


.


This data is inexact, as it is at least a year and a half old and as we all know. Bitcoin has undergone some big movements in the meantime. Mining is done close to cheap sources of electricity because of the computer power necessary…and the related cooling costs. Now, please don’t think of the main mining activities being small little operations, they are not! They are done in huge ‘pools’ that combine to reduce costs of production. Before I go into these pools, let’s look at the main cost – electricity! One of the cheapest sources of electricity in the world is in China. It is there that we find 65% of all mining operations taking place2


. The cost of electricity


is cheap there compared to other countries, something like USD 0.08 per KWh, based on 2011 number, compared to the USA’s cost of USD 0.12 per KWh, the UK’s USD 0.20 per KWh or Germany’s USD 0.35 per KWh3


. The main reason for the low cost, has


been the extensive growth of hydro-electric dams, many originally built to help the aluminium smelting industry plus the alternate cheap, though polluting coal fired power stations, that have in a number of cases been state subsidised. In 2006, China produced 79% of its electricity by coal, compared to 16% by hydro-electric. It is estimated that in 2030, those numbers will be coal 75% and hydro-electric 13%4


.


1 US EIA data 2019. 2 University of Cambridge, Centre for Alternative Finance.


3 IEA, EIA, National Electricity Boards, OANDA & Shrinkthat footprint.com


4 EIA, International Energy Outlook 2009.


4 | ADMISI - The Ghost In The Machine | Q2 Edition 2021


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