Building a new bitcoin mine in the middle of Texas, where summer temperatures often reach 50 degrees Celsius, seems a terrible PR move in a world increasingly preoccupied by global warming.
Yet that’s what Peter Thiel, a prominent Silicon Valley billionaire, has just agreed to do.
Earlier this week Layer 1, a San Francisco-based start-up, said it had raised $50m from Thiel and a group of venture capitalists to help finance the construction of a new mining operation in the southern US state.
Thiel founded PayPal and was an early investor in Facebook and a string of other tech giants, including Airbnb, LinkedIn and Spotify.
Bitcoin mining has been accused of causing environmental damage because of the electrical energy it consumes. The bitcoin network now accounts for 0.3 percent of all global energy usage, equivalent to the consumption of the whole of Austria.
“The future of bitcoin mining lies in Texas”
According to a report in the Block, Layer 1 says it has developed a special cooling technology for its new plant. Alexander Liegl, Layer 1’s chief executive, says the cooling technology adds only 3 percent to the power consumption of the bitcoin mining machines.
Liegl also cited geopolitical reasons for his company’s decision to locate in the US. Layer 1 says 60 percent of the world’s bitcoin mining currently takes place in China, while Chinese firms like Bitmain produce 100 percent of bitcoin mining hardware.
“The future of bitcoin mining lies in Texas. This is where world-class electricity prices, friendly regulation, and an abundance of renewable energy sources meet,” said Liegl.
Layer 1 says it will be designing all its own infrastructure, including the special computer chips used to solve bitcoin’s mining algorithm.
The excess energy problem
Yet there’s a counterplot to the story.
Bitcoin, say the cryptocurrency’s supporters, offers a clever solution to a problem that’s increasingly dogging the global energy industry—oversupply.
In the case of Texas, the shale gas boom has left exploration companies with hydrocarbon assets they cannot pay consumers to accept.
“There are negative gas prices in an area of Texas the size of a European country,” John Dizard, a Financial Times columnist, wrote earlier this summer.
“The producers will pay you to take away their pipeline-grade gas. If that ploy fails, they flare it in fires so large they can be seen from space. These are not always legal,” Dizard said.
“The real problem with renewables will not be shortfalls, but regular excesses”
Elsewhere in the world, the growing availability of cheap renewable energy is also causing a fundamental rethink of supply chains.
“The real problem with renewables will not be shortfalls, but regular excesses,” David Elliott, a professor of technology policy at the UK’s Open University, wrote last year.
Using the UK as an example, Elliott says the problem of surplus generation capacity is likely to increase over the next two decades.
“UK power demand has a typical summer daytime peak of around 30 gigawatts (GW), but at night can fall to 17 GW,” says Elliott.
“At present there is around 42 GW of renewable capacity installed, supplying nearly 32% of UK electricity, and more is on the way; by 2020 there should be 46 GW and by around 2027 maybe 60 GW.”
Another factor may be causing the excess renewables problem to worsen, says the Open University’s Elliott: the expansion of nuclear generating capacity worldwide. Around 50 new reactors are currently in construction around the world.
Since nuclear power plants can’t be turned off, their production threatens to squeeze out energy supplied by wind, solar, geothermal or hydroelectric power.
In the UK, says Elliott, there may be 16 GW of fixed inflexible nuclear capacity by the mid-2030s, enough to run the whole energy system on a summer night. This could leave 65 GW of energy from renewable sources unused.
As a result, governments often subsidise renewable energy production, even paying firms to produce energy when it’s uneconomic to do so.
“Often the energy in excess is simply lost, and (depending on the legislation of the Country) producers can be paid in any case (maybe 30-50% of the market value) for energy not dispatched,” said Alberto Moro, a researcher at the European Commission.
Monetising the surplus
There are some ways of storing the excess energy produced at power plants. These include converting it to hydrogen gas through electrolysis, storing it in flywheels, compressing air or, where the local geography allows, using it to pump water to a higher location.
But since the invention of bitcoin, there’s now another way to make use of surplus energy—cryptocurrency mining. Some energy producers are already researching the topic.
“Cryptocurrency could become a cheap form of storage and transfer of value from highly productive wind farms to sustainable projects anywhere in the world”
“We have looked into the technical feasibility of using excess wind power from curtailed wind farms to mine a set of cryptocurrencies, converting surplus power otherwise wasted into monetary value,” E.ON, a large European electric utility, says on its website.
“Cryptocurrency could then become a cheap form of storage and transfer of value from highly productive wind farms to sustainable projects anywhere in the world,” E.ON predicts.
According to Chris Bendiksen, head of research at CoinShares, cryptocurrency mining is already driven largely by renewable sources, primarily by hydro, wind and solar energy.
“Renewable power generation in the bitcoin mining energy mix stands at 74.1 percent, more than four times more renewable usage than the global average energy mix,” Bendiksen wrote in June.
“Layer1 and Thiel aren’t just getting into bitcoin mining, they’re also getting into the energy industry,” Dhruv Bansal, co-founder of Unchained Capital, told New Money Review.
“Expect to see more people innovating at the intersection of bitcoin mining and energy production,” said Bansal.
The news about Thiel “is radically bullish [for bitcoin],” says Matt d’Souza, co-founder of the Blockchain Opportunity fund. “He wants to own all sides of the bitcoin market.”
Siting a new bitcoin mining plant in Texas is not just a contrarian bet from the point of view of geopolitics and public opinion. Thiel’s new bitcoin mining venture also represents a radical shift in his own investment policy.
When Thiel sold PayPal to eBay in 2002, he used some of the proceeds to launch hedge fund Clarium Capital Management.
Clarium’s first big bet was that global energy sources were running out.
“The big, macroeconomic idea that we had at Clarium—the idée fixe—was the peak-oil theory, which was basically that the world was running out of oil, and that there were no easy alternatives,” Thiel told Fortune magazine in 2014.
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