Cryptomining is hurting local economies around the world

Setting aside multibillion fraud and the large black market economy, cryptomining inflicts pain to society in quieter ways as well, research found. In a nutshell, cryptocurrencies contribute more negative externalities that impact individual wallets and global warming, stemming from the intensive electricity requirements to complete each unregulated transaction.

Taking a single cryptocurrency as an example, the annual global electricity consumption of Bitcoin mining was approximately 95.58 terawatt-hours in May 2023, according to Techopedia. Energy-sage reports that as of February 2023, the US national average electricity rate is 23 cents per kilowatt-hours, which (using an energy calculator) would translate to bitcoin mining using an average of $21.9 billion in energy every year. Not all those energy costs are borne by Bitcoin, the research revealed.

A column by Vox EU aimed to find the impact of this technology processing on local economies, as this reality has not only led to a race among firms who run large cryptomines but has also resulted in externalities foisting extra costs onto the surrounding economies. The column noted that most cryptocurrencies turn data centers into cryptomines; warehouses full of specialized computers crunching numbers, worldwide. The cost is that these cryptomines need lots of electricity while employing very few people. The authors also found that households and small businesses paid an extra $204 million and $92 million annually, respectively, in Upstate New York due to increased electricity consumption by cryptominers. 

The authors pointed out two negative consequences of this intense electricity consumption. First, carbon emissions increase because of the increased electricity use. The authors referenced Digiconomist, which estimates that the global CO2 emissions from Bitcoin mining alone are equivalent to those of the entire country of Libya. The second consequence is the negative effect of cryptomines on the local economy.

In their first case study, the authors compared electricity consumption between two towns in Upstate New York: Plattsburg and Peru. Plattsburg was the experimental area, and Peru was the control variable, without a cryptomine. The authors found that when Bitcoin prices increase, the expectation for returns is higher, leading to an increase in demand for electricity. Higher demand led the average household and small business to pay an extra $88 and $168 in their electricity bills per year, respectively. On average, Upstate NY households and small businesses paid $204 million and $92 million more annually, respectively. Figure 1 below compares how the changes in Bitcoin value affected the cost of electricity in these towns.

Figure 1: Graph showing how the changes in Bitcoin value affected the cost of electricity in Plattsburg and Peru in New York state. ( Printed with the permission of the authors Matteo Benetton, Giovanni Compiani, and  Adair Morse) and The Centre for Economic Policy Research).

 VoxEU turned to statistics on electricity use in China to explore the second consequence. The country had employed a quantity rationing system for electricity, hosting 65–82% of the world’s cryptomining during the last decade before a ban in 2021. In its quantity rationing system, when total demand increased, prices did not adjust; rather, the electricity supply was rationed among locations to align with physical infrastructure. Based on results from 52 inland city areas in China, VoxEU found that after cryptomining enters a city, local fixed asset investments decline annually by 19%, and wage levels decline by 10%, suggesting that cryptomining tends to crowd out other businesses’ use of electricity.

These results also suggest that the crowded-out industrial use of electricity would have led to larger investments in the local economy’s physical and human capital in the years following. Thus, cryptomining entry is associated with a statistically significant drop in local GDP of 8.2%.

The authors noted that though it would likely be tempting for some local policymakers, the optimal response would not be to ban cryptomining on the local level. This response would only shift the problem to a more permissive jurisdiction and restrict any possible tax revenue gains. Rather, a better response would be to introduce electricity pricing schemes or dynamic quotas that minimize the adverse impact on the local community and the global environment.