Crypto mining can be a bit of a daunting subject because it sounds like such a complicated thing… but it’s really not. Today we’ll shed some light on this practice and find out what all the hype is about, and look at if it is just that, hype. Let’s start with the basics.
Traditional fiat currency, the money we all use every day (which is not asset based), is created and backed by the government. Essentially, it has worth because the government says it does, and we all agree. While it’s not quite that simple, it also is. We can create money backed by our belief in it, and it doesn’t need to be backed by anything tangible, say gold or silver.
Cryptocurrency, on the other hand, must be created through a process called mining. Mining has nothing to do with a government, anyone’s belief that the coin exists, and the proof that it was created… well, it’s in the pudding, as they say. The mining process for cryptocurrency involves computers doing work where they solve highly complex math problems. Once a computer solves the math problem, this validates transactions already happening on the ledger (blockchain), and “discovers” new coin. That new coin is then added to the ledger… it has been mined.
A great way to think about this is mining for gold. Imagine you are mining for gold, and you find a nugget, you then take that nugget and put it into circulation with the rest of the gold nuggets. You have mined, and this is not that different from what coin miners are doing. And once these miners discover that nugget (solve the math and mine the coin), if they are the first to do so, they are rewarded for that discovery with cryptocurrency. This is how they make money mining; they unlock and earn coins through validations on the blockchain ledger.
Hot Stuff Or Just Hot Air?
People and institutions are looking for income generators and growth opportunities… and it’s hard right now, especially when so many sectors seem to be tapped out. One area has become a glaring light in the darkness for some willing to venture into it: crypto mining. Governments, private industry, and individuals are gravitating toward crypto mining in hopes of lining their pockets fast and somewhat easily (at least compared to other possibilities). What remains to be seen is whether crypto mining holds any promise for the masses or just a lucky few. Ultimately, what we don’t know is if crypto mining will do more harm than good.
Getting these questions answered by actually mining crypto are the residents of small towns across the United States like Paducah, Kentucky. Paducah is the new home to a Blockware Mining data center, where 5,000 powerful computers buzz around the clock mining coins… racing to solve those math problems to attain that coveted digital gold. Blockware Mining is a Bitcoin mining company that has been granted clearing privileges for trading bitcoin futures and options contracts, and they have decided that Paducah, and small, resource-rich towns just like it, are perfect spots for their mining endeavors.
The data center takes up a piece of land a bit larger than a football field, and the company plans to add another warehouse by next year. The total mining machines inside at that point will be 10,000… and with a single bitcoin hovering between 37k and 42k in recent months, all it takes is a single time being the first to mine a nugget and they get that reward of a bitcoin. If you do the math, 10,000 machines working around the clock makes those odds very good.
Proponents will cite the vast opportunities involved in mining crypto, but the question is: for who? In this part of Kentucky, coal mining and farming were once a primary way of life, but that is quickly changing. The argument is that crypto mining will afford opportunities to those looking to pivot away from traditional occupations. But… there are some holes in that argument, especially when you take into account how much of the town’s cheap energy will be syphoned into mining. It takes a lot of energy to mine crypto, and the data center will draw amounts of energy from the power grid that could power tens of thousands of homes.
Also attractive to crypto mining companies are tax breaks and incentives to locate to these little towns. In Kentucky, governments have signed crypto-miner-friendly legislation into law, including an exemption from the Kentucky sales tax for electricity and extra incentives for companies that invest more than $1 million in equipment. Law makers (who subsequently have crypto investments) tout job creation, but the same company we’ve been talking about, Blockware Mining, only employs seven workers full time, and by the end of the expansion into two plants, there will be 20 to 30 full-time employees at most.
Another concern is that these facilities will be built and suck the money and energy out of a location… leaving communities to hold the bag. A Forbs study found that these facilities often end up costing taxpayers through their tax breaks, rather than bringing growth and opportunities to an area. For example, a mining company called Core Scientific set up shop in Marshall County, Tennessee and employs 30 people. In contrast, the steel mill that was once there used to employ 130 people.
None of these concerns even touch issues around crypto mining that involve climate change. The primary concern here is that, with its insatiable appetite for energy, mining could be counterproductive in the move toward green energy. Here, Kentucky may be proving that point, as the state was found to be the highest emitter of carbon emissions from Bitcoin mining of all states. Yes, you read that correctly… the emissions produced by crypto mining there are about equal to those created (per year) by about 650,000 cars.
New Ways To Do It
While current crypto mining mostly involves grids powered by fossil fuels, there are those trying to rethink how it’s done. One such entity is Exxon, which is working on a program to use leftover natural gas to power bitcoin mining. In January 2021, Exxon began a to take leftover natural gas usually burned off from wells in the Bakken shale basin in North Dakota and use it to power bitcoin mining servers on site. A similar program is being conducted by ConocoPhillips, which sells excess natural gas to crypto miners in North Dakota. This is a great idea because companies usually just burn off excess natural gas while drilling for oil… but the gas is still coming from fossil fuels.
What will be the future of crypto mining, and how will it be done in a world with dwindling resources when it requires so much energy? Will crypto mining be the new gold mining? It’s already making some individual miners and companies very wealthy. While the space is teaming with opportunity, it’s still new and there are a lot of unanswered questions. Stick with us in future issues as we bring you the latest insights into crypto mining, we’ll see how it plays out together.