The dark side of cryptocurrencies

Bitcoin and other cryptocurrencies have set out to revolutionize the (financial) world. It is used in many huge industries like gambling (read more) and you can now even buy a Tesla with BTC (read more). Those who bet on the groundbreaking technology early on have already been able to earn an incredible amount of money with it. But the crypto boom also has its downsides – first and foremost the enormous energy consumption. This is why headwinds are now threatening from China, of all places.

blockchain and BTCThe blockchain technology behind bitcoin and many other cryptocurrencies is revolutionary: they do not require central banks or control authorities, but are completely decentralized. However, the so-called mining, in which Bitcoin transactions are verified and new units of the cryptocurrency are created, is insanely energy-intensive. According to calculations by the University of Cambridge, the operation of the Bitcoin network currently devours around 128.8 terrawatt-hours per year – which exceeds the energy requirements of entire countries such as Argentina and Ukraine.

In the early days, anyone with a standard PC could mine their own coins in their living room, but this has since become a billion-dollar industry. Today, mining takes place in gigantic data centers, where thousands of specialized computers solve cryptographic calculations around the clock. More than 75 percent of these mining pools are located in China, where energy is cheap and access to the necessary hardware is easy. But that is precisely what could now become a problem.

To achieve goals, China would have to crack down

According to a study by researchers from China, the United Kingdom and the United States published this week in the journal Nature Communications, excessive crypto mining could jeopardize the Chinese government’s climate goals. Those, according to President Xi Jinping, call for CO2 emissions to peak in 2030 and for the country to become CO2 neutral by 2060.

The fact that energy consumption by China’s mining farms will rise to nearly 300 terrawatt-hours by 2024, according to the study, and the resulting CO2 emissions to 130 million tons, could torpedo those goals. Without “appropriate intervention” by the government, that would undermine Chinese and global efforts to reduce emissions, the researchers warn.

  1. Indeed, Inner Mongolia is seeing its first mining farms shut down and construction of new projects banned because the region failed to meet energy consumption targets set by Beijing in 2019.
  2. So it’s quite possible that the Chinese government will take action in other regions as well.

Everything half as bad?

However, there is also criticism of the study. Other researchers and industry representatives complain that important data is missing – for example, on the specific energy mix in the regions concerned. Many mining companies are deliberately locating in rain-fed regions of the country, where cheap energy from hydropower and other renewable sources is available in abundance.

Moreover, it is questionable whether the Chinese government actually has an interest in a mining ban. There were already plans to this effect in 2019, but they were quickly overturned. In addition, mining is quite lucrative for Chinese companies.

There are reports and speculations about crypto or mining bans again and again. They cause uncertainty among market participants and contribute to the comparatively high volatility of bitcoin. Even though the energy balance of the cryptocurrency is certainly expandable, we maintain the speculative buy recommendation for the Bitcoin.