Bitcoin consumes more energy than ever. Rising crypto prices are not good.

Bitcoin miners are at the heart of a process called “proof of work,” which keeps the cryptocurrency network running. These miners use computers – often warehouses of them – to solve complex puzzles in a process that facilitates securing the network and processing transactions; the incentive to do so is payment in Bitcoin.

This process requires enormous amounts of energy, and the difficulty of these puzzles, which affects how much energy must be used, is largely determined by how many miners participate in the process.

With Bitcoin prices up around 70% so far this year – as the digital asset has benefited from a broad boost in risk sentiment among investors – crypto mining is quickly becoming a more attractive business after a brutal 2022.

Skyrocketing energy prices, increasing competition and months of low Bitcoin prices — the biggest digital asset to fall by two-thirds in 2022 — wreaked havoc on miners and put intense pressure on their balance sheets. Shares plunged in listed miners such as Riot Platforms (ticker: RIOT), Marathon Digital (MARA), Argo Blockchain (ARB.UK) and Core Scientific (CORZQ). Argo warned that they might have to file for bankruptcy; Core Scientific ended up doing it.

Despite Bitcoin retracing in 2023 and being on a bullish streak, the picture for miners has not completely improved.

“Miners are not out of the woods yet. Inflated power costs will remain a stubborn thorn in the side of the industry, and could quickly worsen if governments succeed in slapping miners with an additional energy tax, analysts at crypto intelligence firm Coin Metrics wrote in a Tuesday note.

With every 1-cent increase in energy prices – per kilowatt hour – it makes the business case worse, adding an additional 78 cents in power costs per day for the most popular rig for mining companies, the Antminer S19, according to Coin Metrics.

“Even with the recent rise in Bitcoin price, daily earnings for S19 have barely hit $7, making every penny count. Without a sustained uptrend, mining margins may soon return to the cold depths of winter 2022, when the average S19 briefly operated with a loss of more than $1.22 per day, the analysts said.

The regulatory picture is also big, amid increasing American scrutiny of crypto companies in recent months. Although much of the crackdown has been driven by financial regulators, with enforcement actions from the Commodity Futures Trading Commission and the Securities and Exchange Commission, miners are not in the clear.

As Bitcoin uses more electricity – with the Cambridge index trending strongly upwards – the benefits to the climate from policies such as those promoting electric vehicles will increasingly look like nothing. It can stimulate political action.

The Biden White House has previously pushed for a ban on digital asset mining, and the Treasury Department recently released a budget framework on March 9 that included a 30% tax on electricity used by crypto miners.

“With most miners already squeezed by tight margins, a 30% increase in their primary operating costs would be a devastating blow to US facilities,” said the analysts at Coin Metrics. “The passing of this tax will have an immediate chilling effect on any further investment in mining within US borders.”

Write to Jack Denton at [email protected]