Bitcoin Mining Craze
by Mike Rogoway
Oregon's power prices are cheap, by national standards, because of regional
hydroelectric projects largely run by the Bonneville Power Administration.
One penny. Or, if you prefer, 0.000001 bitcoin.
That tiny amount is the reason a cryptocurrency "mining" craze that upended small communities in Washington state has passed over Oregon.
Oregon's electric rates are cheap by national standards but not compared to Washington's best prices, which are typically lower by 1 cent per kilowatt hour. That doesn't sound like a lot of money but it is in the world of bitcoin, a digital currency generated by power-hungry computers.
A boom in bitcoin prices last year sent opportunists rushing into central Washington, capitalizing on the region's rock-bottom power prices to produce the novel electronic currency that has become a cult-like rage in the past five years. The small-time entrepreneurs hooked up computers in sheds, shacks, vacant apartments and pretty much anywhere else they could find an electrical outlet.
The result was power surges, wrecked electrical gear, localized energy shortages and at least one small fire. The influx sent regulators scrambling, with one small Washington public utility district slapping a moratorium on new mining hookups earlier this year. That sent cryptocurrency miners scurrying and looking everywhere for new options.
Everywhere, it seems, but just across the Columbia River in Oregon. To bitcoin miners, a 1-cent hike in power prices represents a 40 percent increase in the cost of their key raw material.
"Oregon, it's not the next most competitive place. There are all kinds of other options," said Ted Valkov, who runs one of just a handful of sizable Oregon bitcoin mining operations, a business he started at his home in The Dalles.
While Oregon has dodged the mining craze so far, small utilities are keeping a close eye on bitcoin prices, watching customers' power meters and preparing for the possibility of an influx if bitcoin prices surge again.
Power is everything for bitcoin miners, who generate monthly power bills in the tens of hundreds of thousands of dollars. They typically employ only a handful of workers and care little about things like tax incentives or transportation routes that are vital to other industries.
And with bitcoin prices down sharply, the mad rush for power has waned.
"The pace of build has slowed down to a large extent," Valkov said. "There's a little bit more thought and economic analysis."
Bitcoin is the most prominent of a number of cryptocurrencies that exist only electronically. Cryptographic tools authenticate and record each digital transaction, and bitcoin is essentially an electronic record in a giant online ledger known as the blockchain.
Bitcoin owners store their stash in online wallets and spend their coins electronically, bartering for goods with other enthusiasts or buying directly from retailers who accept the electronic currency.
Crypto miners earn additional coins with computers that perform mathematical tasks underlying the transactions, and those tasks are what require so much power.
That is why bitcoin miners put their computers in low-cost places, from China to Wenatchee. Bitmain, a major Chinese miner, appears to be contemplating a massive mining installation on up to 40 acres in Walla Walla.
Enthusiasts hail cryptocurrencies as decentralized alternatives to the dollar and other government-issued currencies. They tout them as a secure, anonymous technology that eliminates transactional barriers and costs.
Bitcoin trading is anonymous, so skeptics worry criminals will exploit it to deal in narcotics, human trafficking and child pornography. And they question the currencies' underlying value, which depends entirely on adherents accepting that the digital coins are precious.
Once a fringe technology, cryptocurrency has begun intriguing mainstream financial institutions and has gained an avid following among technologists and libertarians. The price of bitcoin has soared, from under $100 per unit five years ago to nearly $20,000 last fall amid brief, manic speculation.
That steep rise sparked a frenzy of bitcoin mining around the world. Chelan County, in central Washington, was very nearly overwhelmed. The local public utility district received 200 megawatts in service requests between November and June - equivalent to the district's entire power load.
"We were not structured to be able to deal with that," Steve Wright, general manager of the Chelan County Public Utility District, told an online conference last month.
Power in central Washington costs as little as 2.7 cents per kilowatt hour, 20 percent of the national average. Chelan is in an especially good spot, owning three hydroelectric dams with the capacity to produce enough power annually for a city of 900,000.
Prospective miners came to the county of 76,000 residents from around the world in hopes of sucking up some of that power. Wright said some of them stepped right off a plane, bought a passel of computers and showed up in town asking for power.
Sometimes they wouldn't even ask. Prospective miners rewired residential homes, industrial buildings - even shacks by the side of the road - to run mining rigs. The utility district said a slipshod mining hookup started a grass fire that, fortuitously, was quickly extinguished because a fire station was just a block away.
"At first the utilities didn't really know what was hitting them. No one did," said Fred Heutte, senior policy associate with the NW Energy Coalition, which advocates for renewable energy, conservation and consumer protection.
Chelan responded in March by instituting a moratorium on new crypto mining power deals and adopting penalties of up to $8,000 for those who set up unauthorized operations.
Bitcoin miners reacted by fanning out across the Northwest, looking for alternatives.
"I would suggest to those of you who don't have rates this low that bitcoin miners are going to be coming toward you, too," Wright said last month.
That hasn't happened in Oregon, at least not yet. The state's industrial districts and electric utilities in Oregon say they got a lot of tire kicking but not much more than that.
Power costs are the big reason why, but there are others. Chelan's moratorium coincided with a collapse in bitcoin's price. Frenzied buying in the fall pushed the currency's value above $19,000 in December, but it's lost nearly two-thirds of its value since, now trading around $6,700 per bitcoin.
"A lot of people are worried after the price decline," said Valkov, the miner in The Dalles. He said the price crash scared off a lot of small-time miners and created a sense of uncertainty across the industry. He said large-scale operations are taking their time to think through their options.
Originally from Bulgaria, Valkov, 50, studied engineering in Quebec and at MIT before settling with his family in The Dalles - away from the frenzy of the big city. He read about bitcoin in engineering journals and became intrigued, so began mining from his home in 2013 when bitcoin traded between $200 and $500.
To date, Valkov said he's invested $500,000 in hardware to run his homespun bitcoin mine. He's spending another $10,000 a month on power. Sure, it would be cheaper elsewhere, but Valkov imagines a cluster of local businesses springing up around crypto mining, building computer hardware and offering other services that could make a big difference in The Dalles.
"Unlike most miners I'm here to stay," he said.
For many crypto miners, digital currency is more than a way to turn a quick buck on cheap power - it's something like a crusade. They earnestly believe in the technology and its potential to replace established, inefficient, highly regulated monetary systems.
"I just think that's the future of money," Valkov said. "To me, this is very much building infrastructure for the next generation."
There are no shortage of enthusiasts who agree with Valkov, buying and mining bitcoin in anticipation of an all-digital future. And there are plenty of doubters who see nothing but a bubble.
"I think it's just a flash in the pan," said Massoud Jourabchi, manager of economic analysis for the Northwest Power and Conservation Council, which studies the region's energy needs. He doesn't see a fundamental economic rationale for cryptocurrency and doubts it pencils out in the long run.
The disruption in Chelan County was highly localized, straining distribution around the small community. On a broader scale, Jourabchi said crypto mining barely registers - perhaps one third of 1 percent of Northwest power use.
"My expectation is it is not going to be a tremendous amount of resources going to this," Jourabchi said.
That doesn't mean crypto mining won't grow, or that it won't pop up somewhere else - maybe even in Oregon, if bitcoin prices rebound and miners exhaust cheaper sources of power supply elsewhere. Despite all the volatility of the last year, bitcoin prices are still more than double what they were a year ago.
"It's completely correlated with the price of bitcoin. So if it spikes again everyone's going to come out of the woodwork," said Conan Lee, managing director with the commercial real estate firm JLL in Seattle.
Oregon's power prices are cheap, by national standards, because of regional hydroelectric projects largely run by the Bonneville Power Administration. That will keep the state on miners' radar, especially if bitcoin prices take off again and crypto enthusiasts want a quick place to start mining.
OregonMines in The Dalles, which leases computers to miners around the world, plans to double its capacity soon with a new 4-megawatt facility in Cascade Locks. And a new, unnamed miner is negotiating for up to 10 megawatts in The Dalles, according to the local utility.
That sounds like a lot of power. But Roger Kline, general manager of the Northern Wasco County People's Utility District, said crypto mining uses a tiny fraction of the electricity a big data center like Google's facility in The Dalles.
And while the utility occasionally spots home-based crypto miners while reading power meters, he said the experience has been nothing like what power managers encountered in Chelan.
"We haven't had that sense of bombardment or people coming in and doing things that are unsafe," Kline said.
Oregon utilities appear to have learned from Chelan County's painful experience. They have a legal obligation to serve any customer but are working to insulate residents and businesses from any influx in mining and ensure every customer pays its own way.
One option is special pricing for "high-density loads," a utility term that describes the heavy power use from mining operations. Kyle Roadman, power resources manager for the Emerald People's Utility District in Eugene, said he and other Oregon utilities are contemplating a higher rate for such heavy loads to ensure that every new customer pays its own way.
That rate would cover the cost of additional spending to increase a local electric system's capacity and to protect against the possibility that a transitory miner might skip town in search of cheaper power elsewhere.
"Our main priority is to protect our existing customers first," Roadman said.
Bitcoin Miners Are Flocking to Oregon for Cheap Electricity. Should We Give Them a Boost? by Katie Shepherd, Willamette Week, 2/21/18
This Is What Happens When Bitcoin Miners Take Over Your Town by Paul Roberts, Politico, 4/18
Bitcoins and Hydropower: What's the Big Deal? by Elizabeth Ingram, HydroWorld, 1/17/18
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