Analyst Claims 98% of Mining Rigs Fail to Verify Transactions

Alex de Vries, the founder of the Digiconomist, has given a damning assessment of the electricity consumed by Bitcoin (BTC) mining in an interview with British media outlet, The Telegraph.

According to de Vries, a single Bitcoin transaction expends the same quantity of electricity needed to power a British household for 59 days, 780,650 Visa transactions, or 52,043 hours of video streaming on Youtube.

The article asserts that the annual returns generated from Bitcoin mining are nearly $5.9 billion — with approximately 4 billion mining units competing for a share of the bounty worldwide. At the end of August 2019, Bitcoin miners were estimated to have generated $14 billion in profits since the technology’s inception.

De Vries asserts that 98% of mining rigs will never verify a transaction, resulting in an enormous and unproductive electricity expenditure. “They are sort of participating in a massive lottery and every 10 minutes one gets lucky and gets to produce the next block,” he states.

“The shocking thing is the average lifetime of a bitcoin mining machine is one and a half years, because we have a new generation of machines which are better at doing these calculations. That means it’s impossible for 98 percent of the devices during their lifetime to make the calculation that actually results in a reward. So the rest are just running pointlessly for a few years, using up energy, and producing heat, and then they will just get trashed because they can’t be repurposed. It’s insane.”

There are a number of factual issues with de Vries’ statements. He fails to substantiate his claim that there are 4 billion active mining rigs on the Bitcoin network. Cointelegraph’s internal calculations indicate this number is closer to 2.5 million. De Vries also asserts that miners who do not succeed in releasing new blocks are pointlessly wasting energy. However, this does not consider the dynamics of mining pools, and ignores the benefits that a large hash power affords to the security of the Bitcoin network.

Criticisms of Digitconomist’s estimated power consumption of mining

De Vries’ calculations are derived from Digiconomist’s Bitcoin Electricity Consumption Index (BECI) — which shows Bitcoin’s power consumption has recently broken into record highs.

According to BECI, Bitcoin mining currently consumes roughly 77.78 terawatt-hours per year — roughly equal to that of the entire country of Chile, and exceeding that of the Czech Republic by 13.9%. However, the index also provides a minimum estimate of roughly 50 terawatt-hours annually — equal to that of Romania.

BECI estimates that BTC mining results in e-waste generation comparable to Luxembourg and a carbon footprint on par with New Zealand.

During 2018, crypto investment company Coinshares published a report contradicting the figures produced by BECI — with the firm’s data estimating the electricity consumed by miners to be roughly half of Digiconomist’s.

Coinshares asserted that its findings “strictly contradict” BECI’s estimates, accusing the index of being predicated on “incorrect assumption resulting from inadequate research.”

Bitcoin mining and renewable energy

Coinshares’ 2018 report found that bitcoin mining is largely powered by cheap renewable energy, particularly hydro, with fossil fuels representing the minority share of the network’s total electricity demand.

The firm’s December 2019 report estimates that 73% of the electricity used to power the Bitcoin network comes from renewable sources — two-thirds of which is located in China.

Further, BECI fails to consider the nuances of the electricity markets in which Bitcoin miners seek to operate — with cryptocurrency author and advocate Andreas Antonopolous arguing that cryptocurrency facilitates a new form of arbitrage that takes advantage of excess renewable energy that would otherwise be wasted. 

“What happens when you build a 50-megawatt plant in a place where they only have 15 megawatts of demand? In some cases, if it’s alternative energy, like wind, solar, or hydro, you can’t turn it off or turn it down. You’ve built it, and it will produce, and then what? You’re basically wasting energy. Now, what if, in that environment, you can find a way to turn that energy into an alternative store of value […] by using electricity that would be otherwise wasted. Now, Bitcoin is an environmental subsidy to alternative energy all around the world.”

Miners move flagship facilities from Sichuan to Texas

Many top mining companies have recently made moves to establish flagship facilities in Texas, United States, shifting their focus from the abundant hydropower offered by China’s Sichuan province. Texas would be the world’s fifth-largest producer of wind power worldwide if it were an independent nation, with the state regularly generating large excesses in electricity.

Bitmain’s Texas-based facility is currently believed to be the largest in the world with a capacity of 100 megawatts. This may not be the case for long, however. Frankfurt-based Northern Bitcoin plans to launch a facility boasting three times as much capacity in Texas before the end of the year.

Alex Liegl, the CEO of Layer1 Technologies, recently stated that Texas offers large-scale miners “the cheapest power in the world.” Layer1 Technologies is a US-based mining company that launched operations at its Texas facility in January.

Layer1 powers its operations using a privately owned substation, and deploys shipping containers filled with mining hardware suspended in non-conductive liquid for cooling.

With the technology and geography of the crypto mining industry perpetually shifting, appraisals such as de Vries’ are often viewed as reductionist. Commentary on the Bitcoin network’s electricity consumption seldom articulates the nuanced dynamics of the market. While the sheer quantity of electricity used in BTC mining may appear large, three-quarters of the power consumed by the network comes from a renewable source — much of which may not have otherwise found use.

Article First Published here