After China's crackdown, the UN's green energy drive could take Hong Kong's Bitcoin miners to the cleaners

I fell out with a friend in Hong Kong some eight or so years ago over "investing" in Bitcoin. I said it was a dumb thing to do. She maintained it was the future of all currency transactions and that I was the idiot. It spiralled down. I have no idea how it turned out for her, as she unfriended me on LinkedIn, blocked my mobile phone number and we haven't spoken since.

I admit, though, that I reacted on instinct. It took me a long time to get my head around cryptocurrencies, blockchains, coins, tokens and other terminology, and how it all works together.

When someone said "distributed ledger" my brain would freeze up. I understood the security aspect of it: you can't cook the books several thousand times over, but I didn't realise then that the mass adaptation of the technology depended on a substantial increase in available computing power attached to the internet. So I tucked it away for future use.

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The idea of cryptocurrencies that sit on top of blockchains took a bit longer to land, but when I witnessed the Japanese madly trading on their smartphones on the Tokyo subway soon after China introduced a ban on cryptos, I got it: it was a substitute for gambling.

Restrictions on gambling in Japan are extremely tight, and with limited access to gambling establishments for the public, cryptocurrency trading on smartphones was the equivalent of a bookie in the palm of your hand. And it was fun, like playing Candy Crush.

The various types of coins and "tokens" finally made sense when the Hong Kong Securities and Futures Commission (SFC) were looking at regulating coins issued by start-ups as if they were securities or derivatives of some kind, something like equity warrants. With my background of trading equity derivatives in the early part of my career in the 1980s, I knew the wild-west nature of these instruments that were almost extinct by 1993, having made a few people very rich and many people a bit poorer.

So, a coin is mostly like a share, a token is like a warrant or a future, and a blockchain is like the whole market having a copy of all the trades to review. Perhaps it has some merit.

I still had a problem with Bitcoin, though, and other coins that are backed by nothing and relies on the "bigger fool" theory for a price; there must be a bigger fool than you around to buy it for more than you paid for it. However, my dim view of them has been compounded; they are actually very harmful in a physical sense, as Bitcoins require a huge amount of energy for their creation raising the question, are any cryptocurrencies clean? I have no definitive answer and perhaps it is about time we examine the impact they have on the environment.

Bitcoin was devised by an unknown computer geek, thought to be Japanese, with the intent of being a mainstream currency outside the control of governments, and sustained by a growing collection of computers plugged into the internet. Chances are he never thought of the potential impact back in 2009.

Bitcoins are created by "mining", a process that's essentially a complex problem-solving race conducted by computers wired together 24/7 to solve a puzzle with a 64-digit answer. Once solved, the lucky computer processes one "block" of the blockchain - updating and distributing that ledger - and the miner who owns the computer that solved the puzzle first gets the Bitcoin reward.

There are about 18.75 million bitcoin in existence, and about 144 blockchain blocks processed daily, each containing 6.25 Bitcoins. With a finite number of just under 21 million, there are just 2.25 million yet to be mined.

So, if you aspire to being a miner, go buy banks of computers, hook them up to a power source, load up software, connect to the internet, hit go and put your feet up. But there's a catch. The difficulty of solving the puzzle goes up as the number of Bitcoins remaining to be mined goes down. The depreciating returns suggest that there's about 120 years of mining left and to have a shot at getting Bitcoins mined today already needs a lot of computers: thousands and thousands.

There are plenty of estimates of Bitcoin power consumption, all of them horrific. One I referenced for this article stated global Bitcoin mining uses as much power as Malaysia. Yes, the whole country. Additionally, it has the carbon footprint of Columbia and generates as much e-waste from dead computers as Luxembourg.

To get the energy consumed in perspective, for its total electricity consumption Malaysia's gross domestic product is about US$1 billion per day. The market value of the roughly 900 Bitcoin mined per day is around US$45 million suggesting an unsavoury practice that benefits relatively few people.

Now, whether you recognise the climate crisis - and if you're a New Yorker with a wet basement or a Louisianan surveying your neighbourhood's damage you're less likely to contest it - or whether you're a total cynic no longer matters. In the wake of three United Nations-related studies in the past three weeks from the Intergovernmental Panel on Climate Change, World Meteorological Organization and the UN Office for Disaster Risk Reduction, policymakers will be held accountable if they do nothing to fix global emissions at the next UN climate conference in November - COP26.

I see three scenarios that could play out:

They aim high and rein in the frivolous use of electricity globally; and Bitcoin mining is right up there as a prime candidate. Ban it and don't allow carbon offsets as a work around. Extreme? Yes, but I think it's possible.

Broadly cut emissions across all industries, not discriminating between what's necessary for economic activity and what's not, and allow for carbon offsets but make them more expensive. Fine frivolous emissions in the same way we get stung by our Hong Kong electricity bills when we use too much. At some point this chokes off Bitcoin mining. I suspect this more measured approach will win out.

Kick the can down the road and essentially do nothing. After decades as the most favoured solution, I think the days of doing this have now passed.

While the world's second largest Bitcoin mining business is based in Hong Kong, it's mines are located in China and are fleeing the regulator for Kazakhstan, Russia or Texas where hydroelectric or solar power is cheap and plentiful. But, not all mines source clean energy and those that don't tarnish the business overall. And when cheap electricity from renewable sources can be stored effectively, for example using upcoming green hydrogen, there will be no excuse for the laggards at all.

There is a perfect example of a dirty Bitcoin mining operation in hedge-fund land - upstate New York. Residents around one of the lakes are complaining about a mine containing 8,000 computers, powered by a previously disused coal-fired power plant, now converted to natural gas, that uses water from Lake Seneca for cooling. It is planning to expand this winter and will consume some 45MW of power to mine Bitcoins. I don't know the full economics of it, but if that is baseload power, then it is about the amount needed to power 21,690 US homes.

According to residents, the lake is now like a bathtub. The CEO of the power plant that powers the Bitcoin mine protests that the plant is carbon neutral - they offset by buying carbon credits - and argues the operation created 31 jobs. The 135 million gallons of water at 42 degrees Celsius, twice the normal temperature in the summer, has no impact at all, they argue.

I have never put any money into Bitcoin, and perhaps it makes me a fool but I never will. If "investors" continue to use Bitcoin, or other cryptocurrencies, after the mining has been banned, I suspect there's nothing to stop them from doing that. But there could be carbon taxes hitting single Bitcoin transactions that equate to an estimated 818kg of carbon dioxide per trade which will inject further volatility into the virtual asset. But Bitcoin mining as a business and the funds that invest in it? Steer well clear of them.

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets

This article originally appeared on the South China Morning Post (SCMP).

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