The Rising Cryptocurrency Prices Aren't All Good, And Bitcoin Consumes More Energy Than Ever

As cryptocurrency prices have risen in recent months, investors have cheered the positive rise. However, the bullish trend is creating more transactions, and a mining boom may be luring more miners into the fray. This comes as signs point to the potential environmental impact of Bitcoin surging to several record-setting levels.

‍

According to the University of Cambridge's Bitcoin Electricity Consumption Index published on Tuesday, the estimated power demand for Bitcoin BTCUSD +3.33% network on Tuesday reached 16.2 gigawatts. There is no doubt that Bitcoin is at a record high, as it reflects how much energy it takes to "mine" it and process transactions in order to keep it running. 

‍

In order to keep the cryptocurrency network running, Bitcoin miners play a crucial role in a process known as "proof of work," which involves a proof of work algorithm. As a reward for their efforts, the miners receive payment in Bitcoin in the form of cryptocurrency, which motivates them to keep solving complex puzzles in order to secure the network and process transactions. They are given an incentive for doing so by the cryptocurrency itself.

‍

During this process, huge amounts of energy are required to complete the puzzles, and the amount of time that is required to complete them, which influences how much energy is required to complete them, is determined to a tremendous extent by the number of miners participating.

‍

After a brutal year of bad news from the world of crypto-currency last year, cryptocurrency mining is quickly becoming a more appealing business after a brutal year of crushing losses for cryptos in 2022, with Bitcoin prices up 70% so far this year.

‍

During the year 2022, miners faced extreme hardships and heavy financial pressure as energy prices skyrocketed, competition was increasing, and Bitcoin prices plummeted by two-thirds, which caused a substantial decrease in the value of their Bitcoins. Riot Platforms RIOT +8.51% (ticker: RIOT), Marathon Digital MARA +6.46% (MARA), Argo Blockchain ARB (+6.25%) (ARB.U.K.), and Core Scientific CORZQ +2.93% (CORZQ) were also experiencing significant losses. There was a warning issued by Argo that Core Scientific might have to file for bankruptcy, and that is what happened.

‍

It is true that Bitcoin has recouped a considerable amount of its value in 2023, and is currently on a bullish streak, however the outlook for miners is still not completely favorable.

‍

There is still a long way to go for miners. In a note published Tuesday by analysts at crypto-intelligence firm Coin Metrics, it was written that “inflated energy costs will continue to be a persistent thorn in the industry’s side, and could quickly worsen if governments succeed in imposing an energy tax on miners.

‍

Using the most popular mining rig, the Antminer S19, Coin Metrics estimates that with each 1-cent increase in energy prices, the business case for mining firms becomes worse.

‍

It's hard for the S19 to generate a profit of more than $7 per day, despite Bitcoin's recent rally. The analysts say that if mining margins do not rise steadily, they may return to the cold depths of winter 2022, when the average S19 suffered a loss of more than $1.22 per day.

‍

Additionally, regulatory scrutiny of crypto companies has increased in recent months in the U.S. Although financial regulators have dominated the crackdown, with enforcement actions from the Securities and Exchange Commission and Commodity Futures Trading Commission, miners remain at risk.

‍

Increasing Bitcoin electricity consumption -- and a rise in the Cambridge index -- could lead to Congressional action.

‍

In the past, the Biden White House has proposed a ban on mining of digital assets, and most recently, Treasury Department released a budget framework on March 9 which included an electric charging tax of 30% on crypto miners who use electricity to power their equipment. 

‍

It is not surprising to hear that coin metrics analysts expressed concern over a 30% increase in their primary operating expenses if they said they had already been squeezed to razor-thin margins. According to Trade Algo, it would be devastating to U.S. mining operations. This tax would have a chilling effect immediately on any additional investment into mining operations within the borders of the United States.