Crypto Mining, the Energy Crisis and the End of ESG

The tedious and enervating debate regarding bitcoin’s (BTC) purported environmental costs effectively ended last month, with little fanfare. The cause was not the revelation that miners are the most benevolent industrial consumers possible, providing a valuable source of flexible load that will accelerate a green energy transition. Nor was it that the bitcoin mining industry is more transparent, more sustainable, better understood, and more accountable than it has ever been.

CoinDesk columnist Nic Carter is partner at Castle Island Ventures, a public blockchain-focused venture fund based in Cambridge, Mass. He is also the co-founder of Coin Metrics, a blockchain analytics startup. This post is part of Mining Week.

No – the energy “debate” became irrelevant because the world reminded us, sharply and brusquely, that environmentalist fever dreams are completely out of step with reality. Empowered by the European energy serfdom resulting from the Greens gaining power (in Germany and elsewhere), Russia invaded Ukraine. Energy prices, already elevated, skyrocketed. The new commodities crisis is casting the globalized international system into doubt, setting off an every-nation-for-itself stampede. The world was forced to remember that energy sovereignty matters – and the anti-humanist fantasies of the Greens stand directly in opposition to that.

Having politically savaged the oil and gas sector, the Biden administration has now resorted to obsequiously asking the Iranian, Venezuelan and Saudi regimes for accommodation. Anything to avoid admitting the U.S. president made a shocking miscalculation in definancializing our own oil and gas sector and canceling the Keystone Pipeline on day one in office. But even the myopic Biden administration cannot deny reality. Without energy security you have no sovereignty, no industry and ultimately no ability to feed your people. This lesson will be learned in blood if high energy prices persist.

The maniacal focus on “ESG,” or environmental, social and governance, that has characterized western policymaking for decades is being necessarily reconsidered. What will replace it is a more pragmatic approach focused on national security, energy independence in a de-globalizing world, and a more measured and responsible decarbonization. Abandoned are the Green fantasies of power systems subsisting solely on solar, wind and batteries: These ideas have manifestly failed.

Read more: Nic Carter - The Frustrating, Maddening, All-Consuming Bitcoin Energy Debate

Spurning nuclear, Germany attempted such a transition. And the Germans simply ended up increasing their carbon intensity (due to a dependence on load-following conventional generation needed to smooth out intermittent renewables) and becoming completely dependent on Russian gas to boot. These outcomes were completely predictable, yet the anti-humanist Greens insisted on touching the stove to determine if it was hot. Now the house is burning down and with it Europe.

It is evident the United States must reverse course and pursue energy abundance and independence with a maniacal focus. Undoing the anti-progress, neo-Malthusian attitudes that infected the political Left will take work, but it is a necessary transition. The U.S. must once again become an energy exporter, unleashing its bountiful reserves of shale, giving our European allies an alternative to Russian gas. The hounding of the oil and gas sector via the politicization of finance must end, and this industry must be unleashed to push down energy prices. The U.S. should pursue a decarbonized power grid, but one incorporating abundant nuclear, and on a timeline that makes sense.

Miners can help here. Global bitcoin mining uses about 15 gigawatts of power today, around 40% of which is U.S.-based. If the predictions of miners are to be believed, at least 30 GW to 40 GW of expansions are planned in the U.S. over the next two to three years. Many of these installations will be done in direct partnership with energy firms, including the largest renewable asset owners. Adding bitcoin mining as an offtake dramatically improves the economics of new wind and solar installations. Despite what critics say, these partnerships are genuine, and these models work (the critics rarely take “grid firming” into account). The proof is in the pudding, and there will be plenty of pudding made in the coming months and years.

In terms of grid scarcity events, it is well documented that miners represent a unique kind of interruptible load. Virtually all miners engage in voluntary or contractual curtailment when demand outpaces supply and power prices surge. With little fanfare, miners habitually curtail their usage, helping smooth out demand peaks. The growth of this “demand response” or flexible load capacity directly contributes to grid decarbonizationhttps://lancium.com/press/flexible-data-center-whitepaper/, allowing intermittent renewables to penetrate further than they would otherwise. Miners effectively sell insurance to grid operators.

Read more: Nic Carter - The Last Word on Bitcoin's Energy Consumption

As grids incorporate more variable renewables, they will require more active management and operators will need to buy more insurance. The template here is ERCOT, in Texas, already the most renewable electrical grid in the U.S. Texans lead the pack when it comes to procuring these “ancillary services,” which miners are uniquely suited to produce. As the U.S. re-onshores manufacturing and heavy, energy-intensive industry in a deglobalizing world, a capacious grid will be essential. Clean energy campuses built on stranded energy sites by bitcoin miners will become a vital part of our industrial future. Even if bitcoin disappears, these sites will be repurposed for other industries, from clean hydrogen electrolysis to other types of location-agnostic computing.

Recent events also make bitcoin’s utility starkly clear, even as its energy impact rises. In the 1970s, when the U.S. defaulted on its promise to maintain the gold peg and inflation ran rampant as a consequence, the price of gold soared from $35 an ounce to $675, or a factor of nine in real terms. Counterintuitively, the resource costs associated with gold extraction increased when gold lost its official status. The more gold was worth, the greater the bounty available to miners. So production increased dramatically, as did the associated energy and ecological costs.

Does this mean that gold had or has an “ESG problem”? Because gold extraction and refinery maintains a considerable emissions footprint, does this make gold an “ESG-unfriendly” asset to hold, and does it require moral justification on the part of holders? Of course not, no more than any individual relying on any commodity with an instantiated energy cost should feel ashamed of their emissions.

Gold is identical in this respect to steel, concrete, nickel, copper, zinc or any other metal that is costly to produce and produces emissions. Bitcoin, though synthetic, is no different. It is a monetary tool that makes life easier for humans. The externalities of its use should be considered alongside those of every other commodity that makes life worth living on this planet.

Read more: Nic Carter - Bitcoin Mining Is Reshaping the Energy Sector and No One Is Talking About It

Just because you can’t touch and feel it doesn’t make it unreal or an unsound store of value. You can’t touch domain names, or intellectual property or most stocks for that matter, but these clearly hold value. Bitcoin is no more or less deserving of moral opprobrium relative to other commodities simply because it is new or intangible.

The typical response on the Left to this obvious point is that bitcoin and cryptocurrency is useless, and hence all the resources expended to maintain and issue it constitute a waste. But with inflation at 10% in the U.S., interest rates sitting at negative 7%, and wholesale monetary repression underway, the usefulness of hard assets is no longer in doubt. Today, investors are forced to appreciate the difference between liability-impregnated inside money and liability-free outside money. As Bretton Woods II disintegrates, outside money is king.

There is no doubt that censor-resistant, global money offers very tangible usefulness today. The Ukrainian resistance to Russia got a tremendous boost from $50 million in global crypto donations, $12 million of it in bitcoin form. Thanks to bitcoin’s liquidity profile and market access, the Ukrainian government was able to utilize these donations with immediate effect.

Ukraine was also the fourth-highest crypto adopter nation in 2021, according to Chainalysis. Undoubtedly a significant fraction of the millions of refugees fleeing the country will benefit from access to liquid wealth that they can store on their person and cannot be frozen by banks or governments.

Everyday Russians, too, now excluded from global finance through financial institutions employing broad-based sanctions, now find cryptocurrency as their only lifeline. There is no longer a plausible case for bitcoin denialism; the time for that has expired. The empirical reality simply weighs too heavily. Sound, global apolitical money is an absolute necessity for tens if not hundreds of millions of people worldwide – in its current form. It requires no change, development or alteration. Bitcoin works today for anyone who needs it.

Most importantly, the dollar system can no longer plausibly claim to offer sound property rights. Formerly unimpeachable, the FX reserves of all nations holding dollar assets are now on notice. Lest anyone think the U.S. will reserve its financial warfare only for rogue states, recall that it sanctioned the U.K., its ally, as recently as 1956.

India and China, collectively holding $1.4 trillion of U.S. debt, are staunchly agnostic on the matter of the Russian conflict. They will look to further divest their U.S. dollar assets, wary of offending an increasingly erratic U.S. regime. Geopolitics is about interests, not morality. Whether or not you think the seizing of Russia’s reserves was prudent or warranted, it undermines the integrity of the dollar.

It may be that an end to the dollar system was long overdue. If strategists like Luke Gromen are to be believed, ending the post-1971 petrodollar reserve system could restore an American trade surplus and revitalize domestic manufacturing. If that’s true, the U.S. will need a vast, responsibly renewable and high-energy grid to support a modern manufacturing base. So, it’s time to accept reality, abandon neo-Malthusian ideas of de-growth or energy shame and lean into American energy supremacy.

Abandoning Green dreams and accepting the hard realities of physics are vital first steps. Following that, let’s leave these broken ESG ideas, stop the politicization of finance and unleash the bitcoin miners.