How much Bitcoin comes from dirty coal? A flooded mine in China just spotlighted the issue

The recent accident showed just how fragile, and how environmentally damaging, the Bitcoin supply chain can be.

One of the great Bitcoin unknowns has long been the amounts being produced, or “mined,” in what’s believed to be the top locale for mining the signature cryptocurrency: China’s remote Xinjiang region. We got the answer when an immense coal mine in Xinjiang flooded and shut down over the weekend of April 17–18.

The blackout halted no less than one-third of all of Bitcoin’s global computing power. “We’d seen estimates that high, but this shutdown confirms them,” says Alex de Vries, an economist who runs the website Digiconomist, which tracks Bitcoin’s energy consumption. “We also learned that the area in Xinjiang where all that mining happens is much smaller than previously believed. It underscores China’s dominance in Bitcoin mining, and that dominance raises big security concerns.”

The Xinjiang accident highlights that Bitcoin is a creature of fossil fuels—principally coal, the dirtiest of them all. Its rise is even providing a lifeline for the fading natural-gas industry. In the U.S., miners from New York State to Kentucky are repurposing obsolete facilities to supply the cheap power they cherish. That Bitcoin spreads a carbon footprint bigger than Australia’s, and that the run-up in its price could triple the carbon dioxide it spews, so far doesn’t seem to bother the famous otherwise-green enthusiasts feeding the craze, from Elon Musk to Gwyneth Paltrow.

On April 11, the first news reports emerged that the Xinjiang mine had flooded, trapping 21 workers underground. The miners were rescued, but over the following weekend, authorities reportedly halted production while conducting a safety check, stopping shipments to power plants and causing a blackout. By de Vries’s estimates, the “hash rate,” the pace at which miners run algorithms to compete for fresh releases of Bitcoin, plummeted around 35%. Some in the Bitcoin community blamed the upheaval for hammering the price of the cryptocurrency by 14%, from a record $64,000 on Friday, April 16, to $55,000 on Sunday the 18th.

It’s by no means certain that reports of the accident pounded the wildly volatile coin. But the loss of computing power did trigger a sharp drop in the network’s capacity for handling transactions. Over the weekend, the cost of making a payment with the cryptocurrency or receiving a transfer of Bitcoin jumped from around $16 to $52, according to de Vries.

The incident raises the issue of just how much Bitcoin is being mined in China, and what proportion is produced with electricity that’s generated using coal and other fossil fuels. But a major revelation is the extreme concentration of production in a tiny area. Xinjiang is a vast region of mountains and deserts in China’s far northwest corner that’s one-third larger than the nation of Colombia. The ancient Silk Road linking China to the Middle East wound through these remote lands. The Fengyuan mine is situated in Hutubi (population: 210,000), one of the smaller of Xinjiang’s 61 counties. Aerial pictures show what appears to be a sprawling modern facility cradled in a deep mountain valley. The photos show rail lines for transporting coal to a power station apparently serving Hutubi and nearby counties, but the plant’s name and location aren’t disclosed in news reports.

Prior to the flood, most experts thought that Bitcoin miners operated in many parts of Xinjiang. But the shutdown exposed that almost all, if not 100% of production in the region, is flowing from Hutubi and three neighboring counties powered by coal from the Fengyuan mine.

De Vries notes that more than a dozen other Chinese provinces host Bitcoin miners. It’s impossible to say how much of that additional power outside of Hutubi is created by fossil fuels, he adds. Inner Mongolia has been a popular destination for its cheap coal-fired electricity, accounting for 4% of the world’s Bitcoin production, according to research by Cambridge University. But the province is imposing a ban starting in May in an effort to reach clean-air goals. It’s not clear where the displaced miners will relocate, but it’s probable they’ll be looking for venues that burn fossil fuels and hence charge bargain rates.

In the southern provinces of Hunan and Sichuan, miners link to hydro power. But de Vries estimates that green sources account for a tiny share of the Chinese energy being used to churn out algorithms to capture the next release. “The miners usually dislike renewables because they don’t generate electricity all the time,” he says. “They want to run 24 hours a day. The number of machines is constantly going up. The more machines that are running, the greater the decline in the proportion of Bitcoin a miner can capture.” That means miners tend to earn less Bitcoin over time—so they don’t want to miss grabbing all the tokens they can while the grabbing is good at these fantastic prices. Plus, their machines become obsolete quickly. To get the full benefit, miners need to run their banks of computers around the clock. “Green energy is a terrible match for Bitcoin,” says de Vries.

Overall, de Vries reckons that fossil fuels power around 70% of all Bitcoin mines worldwide, and that coal provides the vast majority of that share. “We now know for sure that one-third of all production runs on pure coal from a tiny place in China,” he says. The quintupling of Bitcoin’s price since last fall, he predicts, is bound to multiply both the overall energy deployed, and the use of oil, natural gas, and especially coal. The annual revenue from mining has swelled from around $5 billion last fall to $23 billion. Right now, operators whose equipment churns 24/7 are feasting, since it’s tough for rivals to butt in. Among the factors blocking new entrants is a severe shortage of semiconductors, limiting production of the ASIC computers that run the network.

Still, that logjam is easing. Rising prices have lifted Bitcoin energy consumption by one-third from a year ago. De Vries predicts that at the current price of around $60,000, annual electricity output needed from mining will almost triple from 102 terawatt hours annually to 284 terawatt hours annually over the next couple of years. Even at current rates, Bitcoin devours the equivalent of 2% as much energy as the U.S. uses, 10% of Russia’s consumption, and 31% of the electricity generated in the U.K. If Bitcoin’s usage jumps as de Vries forecasts, the coin would use three times as much power as his native Netherlands.

Miners are going to unusual places in search of the cheapest power that’s also reliable—and that’s almost always fossil fuels. Since sanctions constrain Iran from exporting oil, Tehran is developing a new market inside the nation’s borders by luring Bitcoin miners with super-low energy costs. By some reports, Iran now accounts for 8% of the world’s Bitcoin production. Kentucky’s rural coal fields are becoming a magnet for miners. Lawmakers in the Bluegrass State are proposing two sets of tax incentives: one for buying and upgrading existing power plants, and another break on electricity purchased from the grid, much of it produced from coal. In February and March, two Bitcoin operators in New York, one in the Finger Lakes and another in Buffalo, announced they were buying old plants to generate electricity in-house.

That authorities in both states favor giving new life to fossil fuels speaks to Bitcoin’s new status. But it will be interesting to see whether the CEOs and celebrity backers who’ve done so much to elevate Bitcoin begin to sour when its carbon footprint multiplies in size. De Vries points to another potential peril. It’s now clear that one-third of all the world’s Bitcoin-mining power masses in a single hotbed of our archrival, China. He fears that if tensions between the U.S. and China escalate, Beijing could use the equipment in Hutubi and the rest of China to paralyze the network, halting all transactions. That shutdown would wreak havoc with the hedge funds that hold Bitcoin and the corporations piling the coins into their treasuries.

Joining the rocks-to-riches Bitcoin journey as a miner or investor has long been the most daring of adventures. Now the flood in Xinjiang is highlighting the phenom’s weakness as a big-time polluter and China’s control over what’s touted as a new bulwark of the U.S. financial system. The Bitcoin journey winds through the jagged landscape of Xinjiang, and recalls the dangers of traveling the old Silk Road.

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