Is mining the Achilles heel of Bitcoin?

The consequences of the great Chinese disengagement

It all starts in 2021… After China’s decision to first ban the mining of cryptocurrencies in May, then the total ban on its use in November, miners historically located mainly in the Middle Kingdom had to to relocate. A revolution for the mining industry, since until May 2021, 75.5% of the mining came from China! This Chinese withdrawal brought with it a first explosion for the course of bitcoin. Indeed, the immediate consequence of the Beijing authorities’ decision was a sharp drop in the price of bitcoin to 34,707 dollars on May 24 and then 29,790 on July 21, 2021 after the record reached in mid-April 2021 at 63,500 dollars, the mining industry being disrupted by this authoritarian decision.

The cryptocurrency market then discovered how vital mining activity was to its good health, despite Bitcoin’s internal regulatory mechanisms. Indeed, in order to ensure a minimum participation in the network and therefore the security of transactions, there is an inverse relationship between the number of participants in the network and the difficulty of the mathematical problems to be solved within the framework of the “proof of work” protocol. validation of transactions. In theory, this mechanism should not affect the value of the BTC since it guarantees the security of the network. However, this is not what investors worried about the sudden disorganization of production seem to be thinking about.

The other interesting lesson was that miners adapt relatively quickly to their environment. Indeed, as soon as the Chinese ban took effect, supercomputers were relocated to countries offering cheap electricity and easy access, such as the United States, Kazakhstan and Russia, but also Sweden and Norway, which have of green energy. In the wake of this movement, the “hashrate“Measuring the participation rate in the network returned to 90% of its average level in August 2021, i.e. only 3 months after the Chinese ban. A return to normal as fast as it is rich in unsuspected consequences in the very short term…

Bitcoin mining: additional pressure on energy demand in Kazakhstan

Indeed, this relocation very quickly had an impact on Kazakhstan’s energy consumption, starting in October. In a country where until now the demand for electricity increased by 1 to 2% per year, the latter increased by 8%, generating blackouts in certain regions. Nothing could be more logical when we know that according to the data collected by the FinancialTimesat least 87,849 energy-intensive mining machines were brought to Kazakhstan“. Especially since not all of them are legal. Indeed, according to the Ministry of Energy, 1,200 MW of electricity are siphoned off by illegal miners, called “grey miners”, i.e. twice as many as “white miners”. “registered.

Of course, this unexpected increased demand puts significant pressure on Kazakhstan’s electricity grid. And to alleviate this pressure, since January 2022, officially registered miners must pay a tax of $0.0023 per kWh. At the same time, to meet rising demand, Kazakhstan negotiated the purchase of more electricity from Russia. With 18.2% of the market share, Kazakhstan is now the second country for bitcoin mining. A position as a major player in the market, which implies that any problem in this country has significant consequences for the price of bitcoin. Mining activity now has an indisputable political or even geopolitical dimension.

The North’s outcry against the energy footprint of mining

Unfortunately, this is only the beginning of the problems for mining and proof of work in particular. Indeed, in parallel, growing opposition against mining activity is developing in northern European countries such as Sweden and Norway. At the end of the Paris conference last November, the directors general of the Swedish Financial Supervisory Authority and the Swedish Environmental Protection Agency called on the EU, among other things, to ban evidence mining. work, very energy-consuming. The reason: it threatens to unravel the region’s efforts to transition to cleaner energy. In other words, they don’t want to see green energy production being consumed by one activity – cryptocurrency mining – on the grounds that the social benefits of cryptocurrencies are questionable. The argument about the ecological footprint of cryptocurrencies is not new. Many studies have already highlighted the high power consumption of mining activity. Even though, over the past few years, miners have dramatically greened the electricity they use, even though the majority of the activity was still in China. According to a BMC study (Bitcoin Mining Council), the share of renewable energy in the global mining industry reached around 56% at the end of the second quarter of 2021.

Today, cryptocurrency opponents are pushing the argument further questioning the legitimacy of the cryptocurrency industry’s use of green energy on the grounds that it adds no positive value to the economy since t is essentially intended for speculation. Obviously, this goes against the argument once defended by Jack Dorsey and Elon Musk that cryptocurrencies are an opportunity to make green energy production profitable allowing excess production to be easily absorbed.

Given that today climate change is at the top of the political agenda of major countries, the big challenge for the cryptocurrency industry is undoubtedly to win the battle of its energy consumption versus its profit. social. But let’s keep in mind that the cryptocurrency industry has demonstrated its agility over the past 13 years and its resilience in the face of crises. If mining becomes a strong stake for its survival, developers will find ways to adapt. Whether through the use of second-layer protocols or less power-hungry mining machines (or both), the only truth is that the human mind has no limits when it comes to creativity!

When the “Kazakhstani model” shatters