A License to Print Money - June 5,  2022

An interesting thing happened late Thursday night. The New York State Senate imposed a two year moratorium on new large scale Bitcoin mining operations that are powered by fossil fuel sources. New York is the first state to recognize it must reflect on how to manage the cryptocurrency industry without mismanaging its resources.

This comes on the heels of the first moratorium of its kind in Plattsburgh, New York, four years earlier that afforded me some time to formulate new policies that ensure Bitcoin mining does not squander our city's valuable electricity quota. It required some common sense measures to protect against noise and other nuisances and ensure our firefighters fight any mining farm fires with the correct tools. The kicker, though, was a requirement that a share of the vast amounts of heat generated from mining is recycled on cold winter nights. 

New York State will now be afforded time to work out ways to live in harmony with this industry. We can no longer afford to squander our resources to meet the unsatiable needs of a crypto industry that can easily operate without the massive amounts of energy currently consumed in just one type of digital coin mining, Bitcoin. 

Millions of dollars of lobbying money and campaign donations flowed into New York State in recent months in an effort to dissuade lawmakers from taking a closer look at Bitcoin mining. These donations are designed to preserve a cryptocurrency mining model that across the entire state employs less than a typical Walmart store, and probably contributes less in combined local taxes from its operations and employees. 

Once China curtailed Bitcoin mining in an effort to better manage its carbon footprint, the United States has emerged as the world’s largest Bitcoin mining nation. More energy is consumed mining Bitcoin than the entire electricity demand of some major nations. And New York has emerged as the epicenter of Bitcoin mining in the U.S., at least until recently. 

The Senate vote, and a previous Assembly vote, now rest in the lap of our Governor. If she follows the science, and understands that any energy diverted to this industry is energy we must then find somewhere else, typically from carbon sources, then she knows we need to find solutions that do not further frustrate our state’s carbon footprint targets. 

The millions of dollars that flowed into the state from outside to lobby politicians are just a drop in the bucket of the profits made in this industry. Last year the industry was generating more than two million dollars of mining revenue every hour. This huge revenue went to purchase electricity, new mining machines, and profits. Almost none of it went to employees or taxing authorities. In an industry this profitable, you can imagine the lengths some will go to preserve the gravy train. 

In fact, this can best be described as a license to print money, quite literally. 

You see, that is what mining does. Let’s go back to the earliest days of Bitcoin mining. This phenomenon started about thirteen years ago with some software developed by a mysterious person with the pseudonym Satoshi Nakamoto. For the first year or so, Satoshi’s own basic personal computer churned away generating about a million Bitcoin. This Bitcoin remains unspent to this day, but its valuation would place Satoshi as one of the world’s richest billionaires by last year, with a wealth equal to Mark Zuckerberg. 

Satoshi was printing money. At first, only Satoshi had that license, and hence earned every penny for every Bitcoin created. But, Satoshi was altruistic, if perhaps a bit naive. Satoshi believed that the coin must be affordable and accessible to the masses so that people will transact with it and avoid the banks Satoshi felt were undermining the economy on the precipice of the Great Recession. 

So, Satoshi allowed anybody to print Bitcoin. A Hunger Games was created in which miners would compete for the right to release a new tranche of coins every ten minutes. While one single machine can easily take care of the necessary mining, soon tens and then tens of millions of mining machines were at work competing, with each having an open license to print money. 

Only one mining machine can win that competition every ten minutes, though. It is a lottery, with electricity the lottery ticket. And, just like a lottery, people spend as much in total to try to win as the prize itself. 

As the price of Bitcoin rises well above what Satoshi would have ever imagined, it has also set up a Bitcoin mining arms race, with millions of new mining machines manufactured every year the artillery, and electricity the ammunition. 

The net result of this open license to print money is the huge amount of electricity diverted to this industry. In New York State alone, that means we must rely more on quick and expensive sources of electricity to replace this energy diverted to mining. We are now seeing the effect on our rising electricity bills. Take a look for yourself at the change in kilowatt-hour costs now compared to just a year ago. I estimate this cost to New York ratepayers is in the order of a billion dollars annually now, just to support a highly profitable industry that creates fewer permanent jobs statewide than a Walmart store. 

I know of no industry that has the same license to print money and that returns so little to the communities that allow these profits to quickly flow out of state. I hope a moratorium will afford the State some time to reflect and figure out how to preserve the potential of cryptocurrency without the incredibly high cost on us all from but one form of mining used primarily by but one digital currency. 

If this is a subject that interests you, watch for my book coming out in late summer called “The Bitcoin Dilemma - Economic Benefits and Environmental Costs."