The Breakdown - What Happened at Congress’ Bitcoin Energy Hearing?

Episode Date: January 22, 2022

This episode is sponsored by Nexo, Abra and FTX US.    This week on the “Weekly Recap,” NLW breaks down the House hearing on energy in the crypto industry. He looks at problems with the advance memo and provides refutations of some of the misunderstandings.  - Nexo is a powerful, all-in-one crypto platform where you can securely store your crypto. Invest, borrow, exchange and earn up to 17% APR on Bitcoin and 20+ other top coins. Insured for $375M. Audited in real-time by Armanino. Rated excellent on Trustpilot. Get started today at nexo.io. - Abra is proud to sponsor The Breakdown. Join 1M+ users and Conquer Crypto with Abra, a simple and secure app where you can trade 110+ cryptocurrencies, get 0% interest loans using crypto as collateral, and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin. Visit Abra.com to get started. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Time” by OBOY. Image credit: Nuthawut Somsuk/iStock/Getty Images Plus, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, January 22nd, and that means it's time for the weekly recap. And this week, we are getting into the House Energy and Commerce Committee's hearing on cleaning up cryptocurrency, the energy impacts of blockchains. Before that, however, if you're enjoying the breakdown, go subscribe to it, give it five stars, leave a review, or join the Discord to get into the conversation. We've got a ton of smart people over there. You can find it at the link in the show notes or by going

to bit.ly slash breakdown pod. Finally, standard disclosure, in addition to them being a sponsor, I also work with FTX. So today we are talking about the House Energy and Commerce Committee's cleaning up cryptocurrency energy hearing, and we're going to separate it into two parts. What we were preparing for, based on the House memo that was released and the prepared testimony of witnesses, and then what happened? I'm going to be pointing to Nick Carter a lot. He was not one of the witnesses, but I think he was the voice of the Bitcoin community on this. A couple days ago, he tweeted, based on the witnesses selected in the published testimony, I won't be tuning into the hearing. There's an important debate to be had on these issues, but it won't be happening in

Congress tomorrow. None of the sizable U.S.-based mining forms, core science, riot, marathon, Alice, Stronghold, Galaxy Foundry were invited to participate. They would have happily taken part, telling that the committee specifically avoided them. Let's host a hearing on U.S. mining and publicly attack miners by name in our memo, but not allow any of these U.S.-based miners to defend themselves. Nick went further on the memo, pointing out some very dubious decisions in terms of citations of data. Nick writes, the House memo on Bitcoin mining cites oreck suggests.com. Dig Economist, paid opposition research, Dutch central bank affiliated many times. Cambridge Alternative Fiance Center, neutral academic source, zero times. Bitcoin mining council, largest sample of

industry data, zero times. They cite zero mining relevant academia, zero industry white papers, but tons of news articles, including from meritless publications. The citations really tell the whole story. It's entirely news and hype-driven. No engagement with the abundant resources the industry and academics have produced. Aside from the fact that it's a hatchet job, the quality of writing in the report is just extremely poor. It's just a collection of anecdotes with references to news articles, totally non-academic. I would have been ashamed to publish something like this. Luckily for us, Nick did publish something different. He published a piece in Newsweek called Bitcoin Mining is America's most misunderstood industry, and you'll hear a bit of that quoted for me today.

So, let's talk about what some of the big fights seem to be going into this thing. Category 1, Bitcoin as being a particularly dirty industry. I often think that we don't discuss how this is actually two critiques in one. First, that Bitcoin is bad for the environment, but second, implicitly that the Bitcoin industry is worse than other industries for the environment. This is a really, really important note. We talk constantly about which country or state or city or whatever Bitcoin consumes as much energy as, but we don't talk about how it compares to other industries that we value and

that we don't have the same critiques for. Part of the issue is that Bitcoin is transparent and so it's easier to calculate than other industries, but being more transparent and easier to calculate doesn't mean it should have the highest burden. You see a little bit of this in the House memo and mainstream media around this. Bitcoin Network uses the same energy as Argentina. However, that's much less shocking if we put that in terms of other industries, where gold mining uses about 2.5 Argentina's. U.S. household appliances nearly 15 Argentina's, and U.S. air conditioning, boy, oh boy, 30 Argentina's. Nick writes in his Newsweek piece, why worry about an industry that consumes approximately 0.55% of global electricity production? After all, energy associated with Bitcoin

mining is roughly equivalent to the energy consumption of zinc mining and refinery, and less than the energy associated with the extraction of either copper or gold. It consumes the rough equivalent of the energy associated with running domestic tumble dryers in the U.S. alone, and one, and fifth the energy used for domestic refrigeration. Brian Brooks, in his prepared testimony, makes an even more direct comparison saying even more stark is the contrast with the banking system. The market capitalization of Bitcoin over the past six months has fluctuated between about $800 billion and $1.2 trillion. The market cap of the global banking system is approximately $8.6 trillion. The banking system consumed just over 4,900 terawatt hours to produce that market

capitalization. Bitcoin mining consumed 188 terawatt hours to produce its market cap. Put differently, the banking system requires 573 terawatt hours of power to produce one trillion of value. That is about 2.5 times the amount of power required to produce the same amount of value in Bitcoin. Nexto is a trusted and easy-to-use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 17% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries trust Nexo with their digital assets.

So whether you're just getting started or you're a season pro, get the most of your crypto today with Nexo at NXO.io. Today's episode is sponsored by Abra. Join over 1 million users and conquer crypto with Abra, an all-in-one, simple and secure app, where you can trade over 110 cryptocurrencies. Get 0% interest loans using your crypto as collateral and earn interest with up to 14% APY on stable coins and 8.15% APY on Bitcoin. Visit Abra.com or download the app from the Google Play or Apple App Store today.

Abra, Conquer Crypto. The breakdown is sponsored by FTX. FTX is the safe, regulated way to buy and sell Bitcoin and other digital assets. Trade crypto with up to 85% lower fees than top competitors. FTXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. You can trade NFTs with no gas on FTXUS, and gas is subsidized when you withdraw off the platform. Help support the breakdown and visit FtX.us today. That's FTX.us. Category 2, government interference in markets.

There is another underlying assumption in many of the critiques of Bitcoin mining that governments get to determine how private markets use. energy. Something I've said frequently on this show, often around NFTs just based on where the crypto conversation is right now, is some version of the idea that just because you think a thing is stupid doesn't mean it's not a thing. I think you could apply something similar to Bitcoin when it comes to policymakers and critics. Just because it's not valuable to you doesn't mean it's not valuable. Not to trot out the old tired example of Christmas lights, but there are huge parts of the country and world who don't celebrate Christmas, and so who definitionally don't care at all, but you don't see them calling for a banning. I really like what Brian Brooks had to say about this

in his testimony. Quote, from a public policy perspective, the most relevant question should be energy production rather than energy consumption. If the people's representatives decide we should eliminate or reduce a particular source of energy such as coal or oil, you were elected to do that. But once the energy mix has been established, in a market economy like the United States, markets, meaning the aggregate decisions of American consumers and businesses, should decide the most productive use of the energy that is produced. There is another important discussion to pair this with, which is an acknowledgement of the role that Bitcoin has potentially to play in the maturation of renewable energy markets. In a report from last May, Galaxy Digital

writes, critics often assume that the energy expended by miners is either stolen for more productive use cases or results in increased energy consumption. But because of inefficiencies in the energy market, Bitcoin miners are incentivized to utilize non-rival energy that may otherwise be wasted or underutilized as this electricity tends to be the cheapest. Though the revenue associated with mining varies, miners have the luxury of flexibility, with the option to switch their equipment on or off any time. This makes Bitcoin mining the ideal energy sink. Anyone anywhere can monetize excess energy by plugging in equipment and switching it off at their convenience. Brian Brooks goes deeper into this problem in his testimony saying that excess production with renewables is often the challenge.

Quote, in 2020 in California alone, 1.5 million megawatt hours of solar production, 5% of the total, was curtailed because production exceeded demand. And this figure understates the true extent of the problem. At certain peak production hours, California solar projects have as much as 15% excess capacity. This is one reason why solar and wind power as a category have generally been unprofitable and have required government subsidies. Nick Carter's Newsweek piece explains this as well, saying the reality is that electricity infrastructure is geographically constrained,

and pockets of free, negatively priced energy routinely emerge on the grid. Over the last decade, negative prices a signal of energy over abundance, have become much more common, particularly in the windy vertical corridor stretching from Texas to the Dakotas. It's these stranded islands of energy growing in size every year, as solar and wind account for more generation while transmission lags, that are particularly ripe for Bitcoin miners. And far from driving up prices, if a miner is buying energy that no one else wants, he is actually fortifying the grid, making energy available if other industrial consumers move in.

or if transmission lines are built to transport it elsewhere. This is due to the remarkable properties of mining itself. Each individual computation is statistically independent of the last one, meaning that the process of mining can be stopped at any moment without a loss of progress. This allows miners to dial down their usage on short notice if necessary. Grid operators love this as they reckon with increasingly unstable grids due to an influx of wind and solar. Normally, grid operators have to keep fast-reacting natural gas power plants and reserve in order to backstop unreliable wind and solar, but, with the energy energy,

flexible load coming in the form of Bitcoin mining, these operators have a new tool. They can simply ask miners to reduce their consumption to offset a loss of supply, and miners gladly do within seconds. Today, the vast majority of Bitcoin miners in North America participate in these demand response programs. So the point of all of this is that the memo was kind of saying all of these issues, which we've seen trotted out over and over again, and some of the testimony as well as other sources like Nick Carter's Newsweek piece have good answers for all of them. But ultimately, the question is what actually happened in the session? And the answer is, honest to God, not much.

The block really nailed it with the title of their summary piece, No Fireworks at House's Bitcoin Mining Hearing. So here's what I noticed personally. First, we saw an actual distinction being made between proof of work and proof of stake. On the one hand, this led to some, why can't Bitcoin just be proof of stake instead type questions? But frankly, I don't think it's a bad thing that Congress is honing in on and judging these technologies on their own merits.

Second and very related, there were a lot of basic questions. Of course, there was a lot of political grandstanding. There always is, but there was a decent bit of digging into real specifics. Basic questions, remember, aren't bad. They're signs of wanting to learn. Now, negatively, there was a bit more partisan footballing than I like, and what I mean by that is representatives on both the left and the right, trying to lump Bitcoin and Bitcoin energy consumption in with whatever their priors are and make everyone else who is a D or an R agree with them a priori just based on that designation. I think this was a little bit to be expected, given that this was discussing energy, but still it's a concern. I think Bitcoin and crypto are both much stronger, the longer they can remain more of a nonpartisan issue. Of course, the biggest controversy wasn't something that happened there. It was who wasn't there, as Nick pointed out, with the complete lack of representation from

the leading North American miners. As he put in an email to the block, the memo calls out Greenridge and Stronghold by name, but they don't get a chance to defend themselves. It's like a hearing on electric vehicles without inviting Tesla. It makes no sense. Still, net net, I have to say that I believe that it's almost impossible for politicians to engage with Bitcoin and crypto with anything even resembling good faith in these types of hearings and not come away in a better position than they were. Honestly, as many hearings as anyone in Congress wants to hold, we should be enthusiastic about. They have the tendency to make things better, not worse. There continues to be a tone shift among members of Congress to actually trying to understand this issue and that's something that I think should be encouraged. Grant McCarthy, the Director of Policy and Public Affairs at Bitcoin Magazine, had five takeaways. They were one. We need more Bitcoin stakeholders involved in conversations about Bitcoin.

This is reiterating Nick's point about who was and wasn't there. Two Democrats and Republicans are attempting to make Bitcoin's energy usage a partisan issue. Kind of what I was saying before. Takeaway three, Bitcoin needs to become more diverse, especially in its public representation. A lot of Bitcoiners got mad at Grant McCarthy for saying this. I think it's absurd. This is an industry that is for everyone. It's a permissionless new money system.

When we're introducing it to the world, it'd be nice if the people introducing it looked a little bit more like the world does as well. Takeaway 4. Congress doesn't hate Bitcoin yet. Quote, this hearing didn't signal malice on the part of Congress had signaled the lack of education. These people just don't know enough about Bitcoin to have that strong of an opinion yet. Which brings us to the next point, takeaway 5. The proof of work fight is not over. I think that ultimately, while there were huge issues with who was and wasn't invited and with the discussion itself, it's better to be having the conversation than not. I'm looking forward to more of these sessions, hopefully with more of industry represented, but I still think you can chalk this up to, if not a full W, certainly not an L. I want to say thanks again to my sponsors, nexo.io, Abra, and FTX, and thanks to you guys for listening.

I hope you're having a great weekend wherever you are. And until tomorrow, be safe and take care of each other. Peace.