close
close

Electricity used to mine Bitcoin crashes as crypto crisis spreads | cryptocurrencies

The amount of electricity consumed by the largest cryptocurrency networks has dropped by as much as 50% as “crypto winter” continues to eat away at “miners” incomes and financial contagion continues to spread across the sector.

Electricity consumption on the Bitcoin network has fallen by a third to an annualized 131 terawatt-hours per year since its peak on June 11, according to estimates by crypto analyst Digiconomist. That’s still equivalent to Argentina’s annual consumption, with a single conventional bitcoin transaction consuming the same amount of electricity that a typical US household would use over 50 days.

The drop in electricity consumption for Ethereum, the “programmable money” that underpins much of the recent explosion in crypto projects, has been even more dramatic, from a peak of 94 TWh per year to 46 TWh per year – Qatar’s annual consumption.

However, the underlying reason for the decline is the same for both currencies. The power consumption of a cryptocurrency network comes from “mining,” where people use purpose-built computers to generate digital lottery tickets that can reward cryptocurrency payouts. The process underpins the security of the networks, but creates an incentive for the network as a whole to waste extraordinary amounts of energy.

As the price of cryptocurrency has fallen – bitcoin peaked at $69,000 (£56,000) earlier this year and is now hovering around $20,000 – the value of miner rewards has fallen by the same proportion, leaving them in areas with expensive Electricity or consumption is left behind by older, inefficient mining rigs that cannot turn a profit.

“It literally puts them out of business, starting with those working with sub-optimal equipment or under sub-optimal circumstances (e.g. inefficient cooling),” said Alex de Vries, the Dutch economist behind Digiconomist.

“This is a big problem for bitcoin mining equipment because these machines cannot be repurposed for something else. If they are unprofitable, they are useless machines. You can keep them in hopes the price recovers or sell them for junk.”

Sign up for First Edition, our free daily newsletter – every weekday morning at 7am BST

Ethereum, on the other hand, can be mined with a normal computer. But it’s most profitable to do this with a very powerful graphics card, which has led to widespread card supply shortages and turned many gamers against the industry. The slump in mining revenue has prompted a flood of graphics cards onto the used market as insolvent miners try to recoup their investments, but De Vries warns that buying one is a lottery.

“These machines typically run 24/7 and the components get hot. heat [especially for prolonged periods of time] is notorious for electronics to wear out, reducing longevity and reliability.

“Right now it will mostly be older GPUs [graphics processing unit] unprofitable, so it is not unlikely that these devices have been used for mining for a long time.” Fortunately for gamers, the falling demand has also led to large price drops for new components.

Although the bitcoin price decline has stabilized over the past week, the broader cryptocurrency sector continues to stumble on the huge price drop. The latest shock was caused by the failure of backup cryptobank Celsius, which announced on June 12 that it was halting withdrawals as it faced a liquidity crunch.

The collapse of Celsius triggered a domino effect across the sector: Three Arrows Capital (3AC), a multibillion-dollar hedge fund, experienced its own liquidity squeeze as a result, while several companies with significant outstanding loans to 3AC now had to resort to emergency measures in turn.

Two other companies offering banking-like services announced major commitments to 3AC. Last week, Finblox said the hedge fund’s actions were having a “liquidity impact” and severely limited user withdrawals, lowering the daily limit to $500 from $50,000 while halting interest payments on deposits.

On Wednesday, Voyager, which offers 12% on crypto deposits, announced it has an outstanding loan to 3AC of $650 million, more than four times its available cash. Voyager added that if the hedge fund repaid the loan in full by Monday morning, it would consider 3AC insolvent. The company also reportedly froze user withdrawals.

Bancor, a decentralized finance protocol that acts as an exchange, also lost to “the recent bankruptcy of two large centralized entities” believed to be Celsius and 3AC and had to impose withdrawal limits. On Thursday, another crypto exchange, CoinFLEX, announced that it was pausing withdrawals due to “extreme market conditions.”

Amid the collapses, a major cryptocurrency company has emerged as a potential savior of the sector. Alameda Ventures, crypto entrepreneur Sam Bankman-Fried’s investment arm focused on his exchange FTX, has bailed out both Voyager and embattled exchange BlockFi, offering multimillion-dollar loans to both companies. The loans have earned him comparisons to JP Morgan, the US banker who stepped in during a 1907 financial crisis, buying up the stocks of struggling companies to stem the collapse.

Leave a Comment