El Salvador made news last week with its passage of a bill to make bitcoin legal tender in the country.
This announcement was quickly followed by another, that they’d be looking into using their volcano power plant to host mining facilities.
Here’s the tweet from the president of El Salvador saying as much.
This is going to evolve fast!
It’s also, unfortunately, likely to erode the value of “home” mining rigs.
Let me explain.
Electricity Markets
Historically, electricity market is divided into two “types” of customers: commercial and residential.
Commercial users tend to be big buyers who are using the electricity to power large industrial machines, like the aluminum smelts in Iceland. The energy draw of a commercial project is largely related to their work schedule and what type of machines they’re powering — a large grocery store only needs to keep their lights on when there are customers in the building; an aluminum smelt has to keep the metal hot 24/7 so that it doesn’t turn into an immovable block of metal. Typically the contracts for commercial energy are pre-negotiated.
Residential electricity is households. Household energy usage ebbs and flows with people’s routines and the weather — the summer A/C load ramps up when people start arriving home in the evening from work; evenings tend to be the most-used electricity times. Residential energy contracts vary from state to state depending on the regulations. Texas is deregulated which means there’s an entire industry of middle men that buy electric contracts in bulk from suppliers and then sign contracts with households individually to manage that. Cheap residential energy exists at nights when the usecases all drop off.
Bitcoin introduces a third ‘electricity market’ — digital currency mining. This lets you turn your electricity directly into dollars at a known rate. Typically, bitcoin mining has happened either via small scale players (on the residential grid) or commercial contracts on the larger grid. The volcano news, however, points towards the coming development of the promised 3rd market however, for stranded energy.
Limitations on Electrical Supply
In order to understand what “stranded energy” is, it’s important to know that electricity isn’t as *fungible* as we imagine it.
Specifically, the distance between the point the electricity is generated and the point that it is consumed matters. And it matters a lot.
Energy decays over long distances — electrical substations are one way of re-charging electricity as it moves across long distances. Getting electricity to move a long distance *requires more energy and infrastructure* than supplying energy to collocated or local uses.
In other words, using energy immediately at its source is cheaper than sending the energy elsewhere to be consumed.
Sometimes it’s really cheap to produce energy in one place, say next to a volcano using a geothermal power plant. But the cost to get that energy from the place where it’s generated out to where a commercial or residential use exists that can afford to pay for it doesn’t always exist for every potential energy source.
This is “stranded energy”.
Stranded Energy and Bitcoin
This is the third market of energy that bitcoin mining is uniquely poised to capitalize. Miners are hot and loud and do well far away from residences. They don’t require a lot of maintenance once you’ve got them up and running. In fact, the most infrastructure they require is a power source and an Internet connection.
Satellite communication has been supplying the Internet connection; abundant energy that’s uneconomical to move to other places has increasingly been tapped for the energy.
And here’s the thing about stranded energy — it’s really goddamn cheap. I’m not sure how cheap a “volcano plant” is to run, but it can more than supply enough power for bitcoin miners to more than provide a large return. Much larger than you can get with any other use for it.
Bitcoin miners let you *immediately* convert your electricity into globally exportable and transmissible value. Bitcoin is a global network, it’s cheaper than wiring money. You can set up a bitcoin mine next to a volcano and start exporting that decentralized, secure store of value to anywhere in the world that wants it, no additional infrastructure required.
Yeah, it’s exactly as revolutionary as it sounds.
Death Knell for Residential Mining
When you’re mining at home, you’re (most likely) using the residential electric grid. Residential energy is expensive — typically the energy supply for a residential community is figured out after the fact rather than before it. The power plants had to be added and scoped around an already existing userbase, at whatever cost it takes to get them energy.
Bitcoin mining profitability follows the lowest cost energy it can find, and unfortunately residential energy is not, and rarely will be, as cheap as what’s available in the stranded energy market. Eventually, residential mining will be wholly unprofitable — the power cost will prove unsustainable as it cannot compete with stranded energy pricing.
I think this future is probably a lot closer than we like to admit.
If you want a piece of future bitcoin mining, my advice would be to invest in a company or project that’s building out projects that capture stranded energy rather than getting into bitcoin mining at home. *
Or forget mining bitcoin at home. No time like the present to diversify into that shitcoin miner you’ve been eyeing!!
*If you know of any projects like this, send it my way and I’ll do a write up about it!