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Earlier this month, I was on the phone with Amazon support about a recent shipment, and we got to talking about the GTX 1080ti I had ordered. He told me how he recently purchased a GPU to build a crypto miner and he was looking to buy another one soon. He said his electricity was paid by his landlord, and when I inquired about him using his Bitcoin at Newegg (who accepts Bitcoin as payment), he informed me Newegg doesn’t deliver to his country.
Listening to this outsourced, Tier 1 Amazon support representative instructing me in cryptocurrency investments, I couldn’t help but be reminded of the old story Joe Kennedy used to tell, probably apocryphal, about how he exited the market in 1929 right before the crash because his shoeshine boy was giving him stock tips. He reasoned that when the market was popular enough that shoeshine boys were investing in it, it was too popular for its own good.
I don’t know if we’re approaching a crash in the cryptocurrency markets. I’m no expert, and delving into speculation on the future of crypto, citing market analysis or complex mathematical formulas, would be irresponsible. Nor am I going to go too deep into what cryptocurrencies are. There are plenty of resources out there if you’re curious.
Rather, I want to look at what could happen if Bitcoin, valued at $11,078 USD at the time of this article, suddenly tanked as one Wall Street veteran has predicted. Here are four immediate repercussions of a Bitcoin crash that help explain how a simple technology is having a real global impact.
The Planet Breathes a Sigh of Relief
I know I promised not to get too technical, but to understand why cryptocurrencies are an ecological disaster, you have to understand a little about how they are mined. All cryptocurrencies are based on blockchain technology. A blockchain is basically a big ledger that holds every transaction ever performed since the currency’s inception. When someone performs a new transaction, say sending $10 to his family in another country, a miner takes that transaction along with several others, bundles them up, tosses in a random number, and does some math on the whole thing. If the result “fits” what the blockchain is expecting, that miner is rewarded with 12.5 Bitcoins and the bundle of transactions is added to the blockchain as confirmed.
The reason why mining is so bad for the environment is that the system is designed so that it is hard to guess what the next random number that works will be. The target time for solving a block is ten minutes. That’s ten minutes regardless of how many people are trying to solve it. The system automatically adjusts complexity every two weeks to keep this solve time at ten minutes.
And so, it becomes an arms race. No more than 12.5 Bitcoins can be mined every ten minutes, so to increase your chances of being the one to solve the math problem and “win” the reward for that block, you have to throw more resources at it. More computing power means more electricity consumed. How much electricity?
The current electrical usage of Bitcoin could power over 4 million US homes and generates approximately 21,568 kilotons of CO2 per year. Every single Bitcoin transaction requires enough energy to power over 13 US homes for an entire day. (For comparison, a single Visa transaction requires the same energy as running a microwave for 4.6 seconds.) Some estimates are that Bitcoin mining will equal the current global energy usage by 2020. This is unsustainable and threatens to negate recent progress renewable energy has made in reducing climate change.
As the difficulty of solving these complicated math problems increases, different types of hardware are required for mining to remain profitable. In the very first days of Bitcoin, you could set up a mining program that used your computer’s CPU, earn enough Bitcoin to offset the electricity the CPU used, and still make a little profit. As time went by, CPUs were no longer powerful enough, and people began using their GPU (graphics card), first singly, then bundled together. Today, not even a custom case full of GPUs is powerful enough to make Bitcoin mining profitable, and giant farms of ASICs (application-specific integrated circuits) have taken over the mining tasks.
However, Bitcoin is not the only player in the market. To date, there are over 1300 different cryptocurrencies, and as many of them are still in their infancies, GPU mining remains profitable. Ethereum is the currently hot cryptocurrency, and its miners have become the bane of PC gamers, scooping up every available GPU on the market to add to their mining rigs. The $800 GTX 1080ti I purchased for my son before Christmas is now going for over $1300 (assuming you can find one). Even mid and lower tier GPUs are becoming scarce. Two years ago, I purchased a GTX 960 for my own PC for $225. That same card is selling for $400 today.
Even if you were lucky enough to get your hardware before the boom, you may still be affected. If people can’t upgrade their systems, they are unlikely to purchase the latest high-performance games. Fewer game purchases could drive developers to try to make up lost revenue either by adding more in-game purchases or by simply delaying updates or DLC.
Also, while a cryptocurrency crash would mean a glut of used GPUs hitting the market, before the crash happens it could severely affect the companies building the GPUs. While it seems like these companies would welcome the recent increase in sales, it is not as if they can magically double their production to meet demand. New factories have to be built and there is a risk that they will end up with millions of unsold units collecting dust in warehouses if the mining economy crashes. Finally, if PC gaming continues to be unaffordable, gamers could migrate to consoles instead, many never to return, affecting GPU manufacturers’ future business as well. In fact, NVIDIA, maker of the most popular gaming GPUs, recently sent communications to their resellers asking them to only sell to gamers and not miners.
People Go Broke
There are some great resources on the internet to instruct people who want to get into cryptocurrency mining. They explain how to get started building rigs, how to figure profitability, and how to continue to grow your mining operation in iterations so that you are never at too great a risk of losing money when the price goes down. One popular formula is to build a small rig, mine some coins, and only use the profits (after electricity costs are calculated) to add more hardware. Using this model, the most you are ever at risk of losing is your initial small investment.
Unfortunately, human nature being what it is, there are going to be those who have no interest in a conservative strategy. They see the last six-month growth as eminently sustainable and have gone “all-in” on crypto mining. I’ve heard stories of people maxing out credit cards, taking second and third mortgages on their homes, or raiding their kids’ college funds to buy more and more mining hardware. If Bitcoin and other currencies tank tomorrow, these people will be holding massive amounts of debt. How they handle such a devastating loss will, of course, depend on the person, but it’s worth noting that one of the top threads on the most popular Reddit cryptocurrency subreddit recently was in reference to the suicide hotline.
The Blockchain Goes On
On the bright side, regardless of the future of cryptocurrencies, the technology they are founded on will remain. Some analysts have touted the blockchain as the greatest technological advancement since the internet itself, and new uses for it are being developed every day from tracking diamonds to managing health care to insuring fine art. Any problem that requires an immutable public ledger, the blockchain can solve. The decentralization of authoritative information sources, whether it be financial or other data, may be the first step towards the vision of a global community sci-fi has been promising us for decades.
Disclosure: I purchased an insignificant amount of Bitcoin when it was under $800 and still hold most of it.
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4 thoughts on “After the Crash: A View of a Post Bitcoin World”
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