Cryptocurrency is a digital or virtual currency that uses cryptography for security. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Energy prices are fluid and ever-changing. They are impacted by global events, weather patterns, and many other factors. Despite this volatility, there is a connection between energy prices and cryptocurrency. As the demand for cryptocurrency increases, so does the demand for energy.
How Cryptocurrency Mining Works
Cryptocurrency mining is the process by which transactions are verified and added to the public ledger, known as the blockchain, and also the means through which new crypto coins are created. Individual blocks added by miners should contain a proof-of-work (PoW).
Mining rigs usually consist of a Graphics Processing Unit (GPU) or an Application-Specific Integrated Circuit (ASIC), which can be very expensive. In order to generate new coins and earn a reward, miners must solve complex mathematical problems using computing power in order to discover new blocks. The more miners that are competing to discover new blocks, the harder the mathematical problems become.
The Relationship between Cryptocurrency and Energy Prices
The vast majority of cryptocurrency mining takes place in China due to the country’s cheap electricity, as well as its chilly climate which helps to keep mining rigs cool. However, as China’s crackdown on cryptocurrency continues, miners are looking for alternative locations with cheap energy prices. Let’s take a look at how the price of energy affects cryptocurrency mining.
When energy prices are low, mining is profitable because it requires less investment to earn rewards. This leads to an increase in miners and hence more competition for block discovery. As competition increases and blocks becomes harder to discover, consumers will start to see an impact on their wallets as transaction fees increase. When energy prices are high, mining becomes unprofitable and some miners will likely leave the market leading to less competition. This may lead to a drop in transaction fees as blocks become easier to discover again. In short, when energy prices go up so do transaction fees and vice versa.
Cryptocurrency is here to stay but its future is unclear. What is certain however is that its success depends on access to cheap energy sources. As we have seen time and time again, when energy prices rise so do transaction fees making it difficult for consumers to justify using cryptocurrencies. On the other hand, whenenergy prices drop too low it becomes unprofitable for miners leadingto centralization of power which goes against one of cryptocurrencys key tenets – decentralization. It seems that for now at least, cryptocurrency is at the mercy of volatile energy markets.