Bitcoin was declared dead for the 300th time: its need for electricity is its fatal weakness

Image source: Cointelegraph

Recently, Bitcoin was declared dead for the 300th time on the Bitcoin death list of the foreign website 99bitcoins. The obituary came from a Forbes article on May 30, in which the author Frances Coppola believed that Bitcoin's demand for electricity was its "fatal weakness."

In the early days, Bitcoin could be mined with an ordinary laptop. But when the mining model became a large-scale mining farm, Bitcoin urgently needed a large amount of cheap electricity supply. Without sufficient electricity, Bitcoin mining cannot continue; if mining cannot continue, Bitcoin will "die."

Consuming electricity and upgrading equipment, the cost of Bitcoin mining is getting higher and higher

Bitcoin’s critical need for electricity stems from its proof-of-work (POW) mechanism, which requires Bitcoin miners to solve “complex mathematical puzzles” in order to gain the right to validate a block of transactions and claim a miner reward of (currently) 12.5 new Bitcoins and transaction fees.

According to the POW mechanism, without any clues or logic, Bitcoin miners need to try a large number of calculations to find the correct hash value. The more guesses miners make per second, the more likely they are to succeed.

They don't necessarily need to have analytical and problem-solving skills, they just need a very fast computer and unlimited electrical energy.

Typically, the number of guesses per second required to mine a block is called the "hash rate." The hash rate increases as the difficulty of mining increases. In order to maintain the hash rate as the difficulty increases, miners need faster computing equipment. Therefore, the rise in Bitcoin prices has created an "arms race."

Miners must constantly update their mining equipment or they will fall behind. Currently, mining Bitcoin requires mining equipment equipped with application-specific integrated circuits (ASICs), which are not cheap.

Bitcoins are mined at Bitfarms in Saint-Hyacinthe, Quebec, on March 19, 2018. Credit: LARS HAGBERG/AFP/Getty Images

As with all hardware-intensive businesses, miners with the most money have an advantage. As a result, miners have begun to cooperate to share resources and benefit from economies of scale, thereby gaining market share. Bitcoin mining is now dominated by three major mining pools, which together account for 55% of the total hash power.

The biggest cost for miners is electricity. If the price of Bitcoin rises further, electricity consumption will also increase. Miners will work hard to get rewards, but the "difficulty adjustment" rule will make the hash value longer and more difficult to guess, which will increase electricity consumption and thus increase the cost of Bitcoin mining.

Currently, about 80% of Bitcoin mining is done in China. There has also been growth in Iceland, Japan, Georgia, the Czech Republic, India, parts of the United States, Venezuela, and elsewhere. Really, anywhere with cheap and plentiful electricity will have an advantage.

According to the Bitcoin Energy Consumption Index, global Bitcoin mining consumes almost as much electricity as the Czech Republic. Yet Bitcoin currently processes about 2.5 transactions per second. “Proof of Work” might be better called “Proof of [Electricity] Waste.”

Just pay to buy electricity? It's not that simple

Bitcoin miners seem to believe that as long as they pay, the public grid is obligated to provide the electricity they need, but the reality is not the case.

In fact, some governments have begun restricting Bitcoin miners’ access to public power grids. In January 2018, Reuters reported that China’s central bank asked local governments to curb Bitcoin mining by limiting power supply. China’s Caixin magazine said local regulators would “take action to ensure that Bitcoin miners no longer enjoy preferential policies on electricity prices, taxes or land use.”

In the United States, local authorities are increasingly concerned about the impact of Bitcoin mining on ordinary users. Because Bitcoin mining consumes more electricity than it can supply, Plattsburgh, New York, was forced to buy more expensive electricity, so the city decided in March to ban new commercial cryptocurrency mining operations. Subsequently, Chelan County, Washington, also stopped mining operations.

At the same time, people are increasingly concerned about the environmental costs of Bitcoin mining. In February, Italy's state-owned electricity supplier refused to supply electricity to Bitcoin miners for environmental reasons, arguing that "intensive use of energy for cryptocurrency mining is unsustainable and does not conform to the company's pursuit of a low-carbon and sustainable business model."

Currently, some electricity suppliers such as Hydro-Quebec have adopted a rationed electricity supply model, providing electricity only to miners that meet their screening criteria.

Typically, public energy providers have social and political priorities and are reluctant to support Bitcoin mining operations at the expense of community interests.

Even private electricity suppliers need government permission to supply electricity and are subject to government regulation. They also face pressure from the domestic market to lower electricity prices for ordinary households and businesses and reduce carbon emissions in the electricity production process. For them, providing electricity to Bitcoin miners may not make commercial sense.

Independent development of electric energy? The biggest obstacle is land

As miners become increasingly hungry for cheap electricity, some have even tried to steal it. In April 2018, police in Tianjin, China, seized 600 Bitcoin mining machines and other equipment after receiving reports of abnormal electricity usage from local power grid operators. The South China Morning Post said: "An investigation found that a suspicious user's meter junction box was short-circuited, a typical way to avoid billing."

Additionally, although on a smaller scale, device hijacking has become common, such as when a Bitcoin miner attempted to steal local electricity by "borrowing" Coppola's computer CPU capacity, but was blocked by the computer's firewall.

So why don’t miners choose to develop their own electricity? Some are starting to do so, but it’s not easy: it takes a long time to build new hydroelectric plants, Bitcoin miners need to use electricity as soon as possible, and an even bigger obstacle is land.

Bitcoin mining operations require a lot of electricity, and the coal mines, solar power plants and power plants needed to develop the electricity require large areas of land. However, the right to use land in any place is regulated by the government. Are governments ready to make more land available to cryptocurrency miners for power generation? It seems unlikely.

As Bitcoin’s demand for electricity grows, the supply of cheap electricity available to Bitcoin miners will become increasingly scarce. However, Bitcoin miners seem to underestimate their power consumption and the threat that mining poses to ordinary people, ordinary businesses and the planet.

They said: Websites such as the Bitcoin Energy Consumption Index exaggerate the electricity consumption of mining; Bitcoin mining is not more expensive than traditional financial operations; mining simply uses the surplus electricity of other users. In any case, Bitcoin mining is a profitable activity that can bring prosperity to the local area.

Unfortunately, there is no evidence to support their claims, and the statement that “mining is just using surplus electricity” is factually inaccurate.

But even if the Bitcoin miners are right, Bitcoin is still completely dependent on the government's electricity supply. It is not immune to government power as Bitcoin supporters claim. Bitcoin's need for electricity is its Achilles' heel.