Rapid growth in unregulated crypto-mining could contribute to energy markets’ disruptions and divert resources from the electrification of other sectors, particularly in emerging markets, Fitch Ratings says.
The increase in global demand for cryptocurrencies in 2021 and highly profitable crypto mining have created ecosystems that already consume an estimated 0.4%-1% of global electricity.
However, a greater level of crypto market regulatory oversight, including mining methods and related energy consumption, is likely in most jurisdictions in the longer term, limiting risks to energy utilities.
Mining of cryptocurrencies such as Bitcoin is often reliant on makeshift datacentres or “mining farms” that are unregulated, as are most decentralised markets they serve. Electricity represents up to 90% of crypto mining costs, and therefore the sector is sensitive to electricity prices and its farms are often located close to low-cost energy, particularly where electricity prices are state-subsided.
Although mining of many cryptocurrencies has advanced from its initial desktop set-up and now requires specialised equipment worth thousands of dollars per farm, such operations are still fairly quick to establish or relocate.
This was demonstrated by the mining exodus from China after it banned cryptocurrencies in 2021 (the country accounted for two-thirds of global Bitcoin mining in 2020), to places such as Russia, Kazakhstan, Canada and the US. In some locations, new farms have reportedly caused instances of energy networks being overloaded and supply outages.
Bitcoin is still the largest global cryptocurrency, but the digital assets market has experienced rapid growth, particularly in 2021, becoming more diverse with larger energy needs. Bitcoin’s (whose share in crypto assets is about 40%) annualised power demand alone is estimated at 125 terawatt-hour by the Cambridge Centre for Alternative Finance, which is comparable to the electricity consumption of countries such as Norway and Sweden. Information on many other cryptocurrencies’ electricity needs and carbon footprint is sparse.
Unchecked growth of unregulated cryptocurrencies’ energy demand may disrupt the power sector, as the lack of transparency challenges investment planning in energy generation and networks. However, this scenario of prolonged unrestricted expansion is unlikely as regulators are increasing their focus on cryptocurrencies, first and foremost due to their potential impact on financial markets’ stability and their use in illicit activities, but also due to the impact on energy markets and the resulting environmental and social implications.
Some countries, such as China, have chosen to ban cryptocurrencies’ mining and trading. Russia has been discussing similar proposals. Many others plan to implement expansive regulatory frameworks to manage digital assets, including standards, supervision and disclosure requirements.
Digital currency markets should, therefore, become more mainstream and predictable in the long term, with many aspects, including mining methods, coming under regulatory oversight.
For example, the European Securities and Markets Authority calls to ban the most energy-intensive method of mining (“proof-of-work”, used in Bitcoin and many other cryptocurrencies) and pivot towards less energy-intensive “proof-of-stake” mining and validating of blockchain transactions (the Ethereum platform for Ether, the second-largest digital asset, is migrating to it).
Further requirements may include appropriate registration of mining datacentres, require their location to be close to abundant renewable energy sources, and demand response contracts with networks requiring miners to decrease electricity use during peak hours at short notice or to link their energy consumption to periods of low demand.
Read full story on