Bitcoin – The Hidden Costs

Bitcoin – The Hidden Costs

On 7th September 2021 El Salvador recognised Bitcoin as its legal currency (together with the US$) but what are the real costs of the cryptocurrency?

Bitcoin and similar Blockchain related currencies are virtual monetary solutions.  There is no hoard of gold, precious stones or even glass beads backing up the system.  The value of Bitcoin is based on what someone is prepared to pay for it.  That in turn depends on its utility to transfer funds and the potential gain should the redeemable value of Bitcoin continue to go up.

Considerable processing power is needed to ensure that any transaction in a cryptocurrency is secure and unique.  As the coins do not physically exist the same coin could be spent twice and the whole transaction system needs to ensure that does not happen.  The owners of the machines that work this processing power are rewarded by the chance to earn Bitcoin.  The reward is earned by being the first miner to guess the number or hash involved in a set of 1 MB worth of transactions.  The successful miner will be looking to generate a lot of data very quickly to solve as many transactions as possible and more quickly than the other miners.  This requires a substantial investment in computers, the electricity to power them and the cooling system to ensure they do not overheat.  The miners are paid out of a pool of new Bitcoins.  The reward per transaction and the number of new Bitcoins released are decreasing over time.  In 2009 mining 1 block would earn 50 BTC, by 2020 the rate had dropped to 12.5 BTC.  The rate is due to halve again in 2024.  The miners are relying on a substantial increase in the redeemable value of Bitcoin to offset the seemingly reduced returns.

Any increase in the use of Bitcoin will benefit the miners because there will be more transactions to verify but without a significant increase in mining the system cannot cope.  In 2020 Bitcoin was able to handle 5 transactions a second compared to Visa’s 1,700.  To even begin to match the service offered by Visa would require a considerable expansion of the Bitcoin mining network.  The energy consumption costs would be considerable in 2021 the average energy consumption of a Visa transaction was 148 kw/h, with Bitcoin 1722 kw/h.

The infrastructure to support this needs specialised computers and cheap electricity.  Although it is possible to mine Bitcoin on any computer the processing requirements make the likelihood of earning any new coin very low.  The days of harvesting ‘spare’ processing capacity while the computer is used for other tasks are gone.  Specialised computing rigs are readily available but a viable farm will be using many hundreds or thousands and generating substantial heat.  China had been home to the majority of the Bitcoin miners but in 2021 decreed that they would have to pack up and leave.  The miners will now be looking for new sources of cheap electricity.  These are often in remote places with access to sustainable resources such as hydro-electric dams.  In traditional coal fired power stations the coal was poured in, literally by the trainload, as required.  In some tide, solar or river barrage solutions there may be some power generated that is surplus to local needs and cannot be transferred to distant consumers.  The electricity will not be free as there are costs involved in setting up and maintaining the generating source but will be the cheapest option for the miner.  The server farms need to be based close to these facilities. They will often be in remote areas where the environmental effect of building new infrastructure is greatest.  The other local users may see their electricity costs go up to accomodate the miners’ demands.  In some cases there will be excess power available; a farm in North Wales has used electricity produced from cow manure to power an Ethereum mining plant.  Other communities could see their electricity supply reduced to feed power to the miners who are prepared to pay a premium for it.

Larger mining operations require considerable space and employ only a handful of highly skilled staff. The most efficient server farms will use specialised computing units to harvest cryptocurrencies. The machines need to be always on so need constant attention. Even those machines that do not simply wear out will become obsolete as more efficient models become available. There is only a limited marked for these ‘old miners’. They would not easily convert into other computing uses so any value would be based around the metals used in their production. The majority of their bulk will end up in landfill as another legacy of cryptocurrency waste.

More from Technology

10/07/2024

UK Government 2024– All Change at the Top

The recent (July 2024) General Election in the UK may or may not change the rules and boundaries on software and AI in the …

Read post

05/06/2024

Shadow AI

A 2024 report on AI at work by Microsoft alleges that ‘75% of knowledge workers use AI at work today, and 46% of users …

Read post

15/04/2024

EU AI Legislation

The EU Artificial Intelligence Act became law from 13th March 2024.  In other countries: China has AI laws already in place that prohibit the …

Read post

08/04/2024

AI Washing

Artificial Intelligence systems have become the buzz word in computing developments and product features.  AI washing refers to products taking advantage of the buzz …

Read post

Sign Up

Sign up to our newsletter list here.

    Successful sign up

    Thank you for signing up to our newsletter list.

    Check your inbox for all the latest information from Kindus

    Categories