PLUGGED INTO CRYPTO. A rack of Bitcoin-mining computers at Bitfarms’ Sherbrooke mining facility in Quebec.
PLUGGED INTO CRYPTO. A rack of Bitcoin-mining computers at Bitfarms’ Sherbrooke mining facility in Quebec. PHOTOGRAPH BY GUILLAUME SIMONEAU

PROPONENTS LIKE ELON MUSK DREAM OF A SUSTAINABLE CRYPTOCURRENCY. BUT AS MINERS EXIT CHINA IT’S LOOKING LIKE BITCOIN’S ENVIRONMENTAL FOOTPRINT IS GETTING WORSE, NOT BETTER. - By SHAWN TULLY

ELON MUSK HIMSELF could hardly have dreamed up a more idyllic setting for a Bitcoin miner.

Founded in 2017, Bitfarms is a Canadian company with five highly specialized computing centers located near the raging Yamaska and Magog rivers of Quebec, east of Montreal. The facilities are electricity guzzling server farms filled with machines running algorithms 24/7 to solve mathematical puzzles and unlock new units of the cryptocurrency Bitcoin—in a process known as “mining.” But because they run entirely on hydropower, these server farms in the Canadian countryside might just represent the greenest crypto mining operation on the planet.

And it’s not just Bitfarms’ environmental footprint that is exemplary. So too are the Nasdaq-listed company’s profit margins—especially as the price of Bitcoin has soared over the past year.

Consider the company’s amazing ascent in daily profits. Back in March of 2020, Bitfarms was booking $35,000 in profit every 24 hours. At the time, one Bitcoin was worth about $6,300. Then, last fall, the price of Bitcoin started to surge. By January, with the price of Bitcoin above $30,000, the miner’s daily profits jumped to $163,000. And in March, when the price of Bitcoin topped $60,000, Bitfarms was earning some $330,000 per day and making 85¢ in gross profit for every dollar’s worth of Bitcoin it mined. Since electricity is by far the biggest expense for its mining, the company’s operating costs are almost entirely fixed. Through late July, Bitfarms’ stock had multiplied sevenfold since December, giving it a market value of close to $550 million.

The price of Bitcoin has plunged since early May, settling just under $35,000 for most of July. But, incredibly, Bitfarms is pocketing just as much profit as it did at the summit—because it’s grabbing around twice as many coins. From the start of 2021, its winnings have doubled from seven to 14 coins per day. And by Fortune’s estimate, its expense per Bitcoin has dropped from $8,500 to around $4,500. “Our revenue for the same operating cost just doubled,” Bitfarms’ chief mining officer Ben Gagnon tells Fortune.

What’s the explanation for this stunning increase in operational efficiency and profitability? The answer to that question ties directly to a gamechanging development in the world of Bitcoin mining—one that will have enormous implications for the growing debate over the environmental impact of cryptocurrency.

PUT SIMPLY, BITFARMS is one of the biggest beneficiaries of the Chinese government’s decision in mid-June to essentially ban the mining of Bitcoin. On June 19, the Sichuan and Yunnan provinces ordered all miners to depart. A few days later, the central government imposed what amounted to a nationwide ban by commanding Chinese banks to end all dealings with Bitcoin producers. According to Alex de Vries, an economist whose Digiconomist website tracks Bitcoin’s energy usage, Chinese miners shuttered around 90% of their production before the end of June and started scouting for promising places to relocate, from Kazakhstan to Texas.

For most of the 12 years of Bitcoin’s existence, China has been easily the biggest force in the business of mining coins. De Vries reckons that as recently as September 2019, China accounted for 75% of the entire Bitcoin mining network. That said, even before the crackdown, China’s dominance has been waning in recent years as some Chinese miners ventured abroad, perhaps fearing government intervention. In less than two years, the U.S. share of Bitcoin mining rose from 4% to 17%, Iraq’s from 2% to 6%, and Kazakhstan’s from 1% to 5%.

The sudden shutdown of mining in China, however, means that companies such as Bitfarms have much less competition for unlocking new coins—at least for now. From its peak on April 19, the global computational power devoted to mining Bitcoin had fallen by approximately half at the end of June, according to de Vries.

China’s decision to ban Bitcoin mining was driven primarily by Beijing’s desire to curb cryptocurrency transactions outside the banking system. But the move could result in global Bitcoin production becoming much less sustainable, at least in the near term.

Clean hydropower accounted for a big portion of China’s Bitcoin mining output, predominantly in Sichuan and Yunnan. From May to October each year, the heavy rains in the two provinces yield a rich surplus of electricity produced by their hydroelectric plants. “The miners in Xinjiang would literally transport their hardware to those southern provinces to take advantage of six months of supercheap power,” says de Vries, describing the now-ending annual migration of China’s Bitcoin operations. In the fall, the gear would travel back north as far as 3,000 miles to Xinjiang, where, for the next six months, miners would switch from electricity produced by cascading water to power generated by dirty coal.

Now those miners will be searching globally for new sources of cheap, available electricity—and the probability is that the energy mix, on balance, will be less sustainable.

THIS RADICAL CHANGE in Bitcoin’s sustainability dynamic is occurring at a moment when the climate impact of cryptocurrency is in the spotlight—and as the surge in cryptocurrency prices over the past year has drawn the likes of Elon Musk into the debate about the ethics of Bitcoin.

The Tesla CEO famously bought $1.5 billion in the signature cryptocurrency early this year, igniting a giant rally, then backtracked in May by tweeting that Tesla would no longer accept Bitcoin as payment for its electric vehicles owing to its extensive carbon footprint—sparking a crypto selloff. It seemed that Musk might be abandoning Bitcoin in early June, when he issued a meme about a couple breaking up. Two weeks later, the auto industry’s premier showman tweeted that Tesla would resume accepting Bitcoin if the situation improved: “When there’s confirmation of reasonable [around 50%] clean energy usage by miners.”

In July, Musk participated in a much-anticipated discussion about the issue of sustainable cryptocurrency at a virtual event (called “The B Word”) with two Bitcoin bulls: Twitter cofounder Jack Dorsey and ARK Invest CEO Cathie Wood. (For more on Wood’s crypto strategy, see “Hitting Crypto’s Next Curveball” in this issue.) Musk noted “a positive trend” toward clean energy mining.

TWO QUESTIONS WILL largely determine whether or not Musk is correct about that positive trend: Where will the Chinese Bitcoin miners go now? And what source of electricity will they use to power their machines?

Gagnon of Bitfarms, who has worked extensively in China, predicts that it will take more than two years for the Chinese miners to build new factories abroad. And the degree of difficulty in arranging logistics will be much higher. In China, says Gagnon, miners could show up at a coal plant or hydroelectric dam and get up and running almost right away: “They’ll have a couple of drinks with the plant’s owners, then dinner, and do a handshake deal. The next day, they’ll arrive with their equipment.”

The electrical contractors and other workers will toil 18 hours a day, seven days a week, erecting the plant holding the computers. “They’ll sleep on-site,” says Gagnon. “That doesn’t happen in the rest of the world.” In the U.S. or Europe, the Chinese miners would need to secure permits, negotiate agreements with utilities, and hire contractors who work at a much slower pace.

Securing cheap, clean hydropower as in Yunnan or Quebec won’t be easy either. Yes, miners could flock to places that offer excess energy furnished by renewables, as hydro-rich Washington State. Still, they would need to obtain separate permits from individual counties and the federal government to tap the grids. Another option is an overlooked source that doesn’t emit CO2 but isn’t regarded as “green.” Mining specialist Standard Power, for example, just signed a five-year deal in Ohio to produce Bitcoin using nuclear power.

But the biggest mining deal of all so far points in the opposite direction on the sustainability scale. On July 15, a small, Nevada-based energy company called Black Rock Petroleum announced a deal that, if it actually happens, would relocate the lion’s share of the China Bitcoin miners to Canada’s petroleumrich Alberta province, where the miners would tap into natural gas power.

“I’ve been studying this industry for five years, and few announcements shocked me more than this one,” says de Vries. “That’s first because of the sheer size of the deal. And second, because even if only part of it happens, the miners moving from China to Alberta would increase the industry’s dependence on fossil fuels.”

The Black Rock press release states that the company reached an agreement with Optimum Mining Host Ltd. to supply electricity for as many as 1 million specialized computers that generate Bitcoin from three natural gas–producing sites in Alberta. The first 200,000 units would run on energy from wells at the Quirk Creek fields in Millarville, a hamlet just south of Calgary. It’s operated by Caledonian Midstream, a company that Black Rock reached an agreement to purchase just 11 days before it notched the deal with Optimum. In later phases, Black Rock would furnish electricity for an additional 300,000 computers at a second location, and 500,000 at a third site, with locales yet to be determined.

Given the planned volumes, Optimum appears to be an umbrella enterprise representing a number of Chinese miners. The press release cites that the million machines are those previously used in China that are now mothballed in storage. The computers “will be relocated from locations in China and exported to Canada to be deployed by Black Rock.”

Right now, the only way to ensure that Bitcoin’s footprint shrinks, barring more government bans, is for the price to dive further. Miners follow the money. So when profits tail off, mining does too. But in the meantime, being green and embracing Bitcoin at the same time is a tough balancing act. Just ask Elon Musk.

 

ETHEREUM’S BIG ECO-BET

The second-largest cryptocurrency aims to clean up the industry’s dirty image.

SOMETIME EARLY next year, if all goes as planned, the blockchain world will experience a long awaited Second Coming, as Ethereum—the blockchain behind the world’s second-largest cryptocurrency, with a market capitalization of $262 billion—makes a major shift in the way it operates. The goal is to drastically reduce the planet-crushing impact of crypto “mining,” which consumes power on the scale of a large country with emissions to match: Ether production alone consumes about as much power as the entire nation of Uzbekistan, with a population of 34 million.

Ethereum 2.0 aims to fix this by changing its system for validating transactions. Similar to Bitcoin, Ethereum currently uses a “proof of work” model, in which miners compete to solve complex mathematical puzzles to verify blocks of transactions that become part of the official Ethereum ledger, receiving units of Ethereum currency, Ether, as a reward. Solving these puzzles requires running highpower computers constantly. And rising crypto prices have triggered an arms race, with massive mining operations setting up where power is cheap, mainly in China, which recently began cracking down on crypto mining.

Ethereum’s new ”proof of stake” model will eliminate miners. Instead, an algorithm will semi-randomly assign block-forging rights (and rewards) across a network of thousands of validators, who stake at least 32 Ether tokens (about $72,000 as of press time) as skin in the game. Ethereum says the change can cut its energy use by more than 99%. Ethereum isn’t the first to adopt this model—upstart competitors like Cardano, Flow, Solana, and Avalanche already employ it successfully—but Ethereum is exponentially larger than any of them. “An upgrade of this scale is extremely risky,” says CoinDesk analyst Christine Kim.

But if the update is successful, many analysts expect the price of Ether to rise in the short term, as more circulating supply gets locked up in staking. And Ethereum will have bragging rights as the biggest “green” blockchain in the world.

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