Feeling energized? This edition of Olliv the Above looks at a novel new study that closely examines the energy required to mine bitcoin and hashes out the impact of the U.S. Federal Reserve's June 2023 meeting.
Bitcoin (BTC) prices took a hit following the U.S. Federal Reserve’s June meeting. No rate hike was announced this month, so why were BTC prices down? Even though the Fed skipped a rate hike to keep borrowing rates in their current 5% – 5.25% range, Fed Chair Jerome Powell signaled that rate cuts were a looong way away. The money faucet will remain switched off until further notice, in other words.
If you flash back to 2021, crypto prices were on their way to historic highs in a bull market. The momentum was helped by a drastic infusion of easy-flowing capital that was born out of the nation’s COVID-19 pandemic response.
But what happens when it gets too expensive to borrow money? Just ask anyone who planned to purchase a home or a new car in 2023. Those big-ticket purchases and investments get sidelined for a while until better borrowing terms are on the table. And bringing it all back to crypto, the lack of easy-flowing money has a cascading effect on markets, so fewer bets are placed on newer (or higher-risk, or more unfamiliar) investments. Still, it must be said that bitcoin’s resilience has been an amazing thing to witness. Last week, the OG cryptocurrency represented a whopping 46% of total market cap dominance.
The energy required to mine bitcoin is a contentious subject on its own. Critics tend to highlight the carbon footprint of the supercomputers that are needed to mine bitcoin, while advocates point to legacy business models that consume energy at a much higher rate – and for increasingly remote audiences (how are those return-to-office plans looking?). No matter which side of the issue you’re on, the best way to see and measure the environmental impact of crypto mining starts with an accepted benchmark of the energy used for mining.
And now might be the time to revisit the leading benchmark for the bitcoin blockchain’s energy consumption. For a number of years, the crypto industry has referred to an energy consumption index created by the Cambridge Centre for Alternative Finance (CCAF) to see where bitcoin was being mined and how much energy was being consumed to do it.
By looking at the signature of unique machines contributing data on the blockchain network, data scientists came up with a more accurate picture of the Bitcoin network’s energy use. The results indicate that the energy used to mine bitcoin could be as much as 16% lower than the numbers contained in the CCAF’s benchmarking index.
While the CCAF index gave crypto watchers key insights into the mining industry’s global footprint, the methodology put forth by the Coin Metrics study is a better approach for two reasons. The first is that it removes bitcoin pricing from the energy equation, because its price is famously volatile. Second, the Coin Metrics approach acknowledges the simple fact that not all mining rigs are created equal when it comes to energy efficiency. Newer machines are going to be more efficient than their older counterparts. And as more computing rigs get updated or swapped out for efficient models, the overall energy efficiency for the network should continue to improve.
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