Wolf in Sheep's Clothing: Cryptocurrency's Effect on Energy, Society

Cryptocurrencies are not real currencies. They are figments of the imagination that have bad effects on the real world—fake money with government blessing but without government backing, the laundering of real money, erosion of governments’ revenue collection and, ironically, causing damage to the electric grid upon which these imaginary assets rely. 

Real currencies have three characteristics: They are a store of value, a unit of account and a medium of exchange, that is, legal tender.

Cryptocurrencies have none of those characteristics. They are not backed by any assets, making cryptocurrencies worse than Bernie Madoff’s scheme. After the collapse of Madoff’s empire, billions were recovered. With the collapse of Samuel Bankman-Fried’s empire, there is no money to recover. His pedestrian fraud was not secured by blockchain technology. It was a made-up Excel spreadsheet that fooled real banks and real people.   

Cryptocurrencies are also claiming another victim, one that may be less sympathetic than the retiree who invested their pension in crypto, but which has far broader stakes from a societal and economic standpoint.

Cryptocurrency miners and their ravenous appetite for electricity are creating widespread problems for electricity grids that are already short of capacity; so far miners are at work in 38 states. The proof-of-waste algorithm Bitcoin miners use to prove transactions and to create more Bitcoin increases exponentially in difficulty, requiring more and more computing power. As a result, the cryptocurrency miners require more and more electricity.

Daily, cryptocurrency miners in Texas use more electricity than the city of Austin. In its most recent disclosure, the Electric Reliability Council of Texas reported pending applications for 33,000 megawatts (MW) of demand by cryptocurrency miners. For perspective, summer peak demand in 2023—the state’s second hottest on record—was just more than 80,000 MW.

The payoff

Clearly, this is paying off for the crypto miners. The primary profits reported by publicly traded cryptocurrency miners, at least those in Texas, are generated by an arbitrage of the Texas electricity market. They buy electricity at 2.5 cents per kilowatt-hour (kWh), below the price necessary to generate a return on investment for new power plants. They then receive credits at market rates of up to $5/kWh when they shut down during high demand days. Texas consumers are directly subsidizing the cryptocurrency industry, even as it is driving up their electricity prices and undermining grid reliability. 

Cryptocurrency promoters and miners know there is nothing socially redeeming about cryptocurrencies. They only keep score in dollars. And from a dollar perspective, cryptocurrencies are attractive to society’s radicals because the transactions are virtually undetectable. Anonymous. And untaxed.

The latter is troublesome. If more of our neighbors turn to crypto, tax collections will decline. Cities, states and federal leadership will be forced to raise tax rates for law-abiding citizens to maintain revenues for schools, roads, law enforcement, retirements, healthcare and the military. 

The most pernicious use of cryptocurrencies is to move money across borders, making money laundering easy. Human traffickers, sex criminals and drug traffickers can sell their goods and deposit the cash in the cryptocurrency ATM at the corner store. Text the receipt to the cartel’s assistant treasurer. And, presto chango, the cartel can have real currency.  

Wager on top of a bet

The Securities and Exchange Commission approved applications by major investment managers BlackRock, Franklin Templeton and others to offer ETFs, exchange traded funds, to investors for Bitcoin. ETFs themselves merit critical scrutiny. These funds purchase underlying assets to meet the demand of small investors who are unable to participate in the primary market for stocks, bonds, commodities and now Bitcoin.

The oil patch knows full well that the dynamics of managing the ETF can diverge from the underlying market. The negative WTI price in 2020 was caused by the U.S. Oil ETF frantically unloading contracts when there was no storage to accommodate the pending oil deliveries.

In contrast, the value of a Bitcoin can never be negative. The Bitcoin ETFs will be a wager on top of a bet, in which the buyers rely upon the greater fool buyer in both a primary and secondary market.   

The SEC stated that its approval of the Bitcoin ETFs does not represent an endorsement or approval of the ETFs or the underlying cryptocurrencies. But it is a fact the SEC has approved a financial instrument that is backed by nothing. Brokers will tell their retail investors: “The Bitcoin ETFs are safe because the SEC allows them. The SEC would never allow you to buy something that is worthless.” A house of cards is more substantial.