How wind could benefit from bitcoin boom

The surge of cryptocurrencies could open up new opportunities for wind companies.

Last week, a research note from Morgan Stanley said that miners of cryptocurrencies including bitcoin would require up to 140TWh of electricity this year, which represents around 0.6% of the world’s total electricity consumption. That's more than Argentina.

So why would cryptocurrency miners consume all this energy?

Here's the crash course. Cryptocurrencies are digital currencies that allow people to pay each other without having to rely on third parties like governments or banks. Bitcoin is so far the most used cryptocurrency, representing around 62% of the market. Bitcoins are created when computers solve mathematical problems set by the currency’s founder, and each bitcoin is assigned a unique number so only one person can own it at a time.

All bitcoin transactions are recorded in the so-called blockchain, which is a list of all deals since the cryptocurrency was launched in 2009. Miners now compete to solve those maths problems – which get exponentially harder – so they can unlock new bitcoins, and also secure the fees tied to the bitcoin transactions.

It is also worth noting that, until the last month, bitcoin prices have been skyrocketing. Partly this is because of speculators, and partly because supply of bitcoins is set to be capped at 21million. As a result, its value rose more than 60-fold in the last three years to reach $19,000 per bitcoin in December. Incredible! It is now back at $11,500 per bitcoin, but it's tough to see where it'll go next.

The key point, though, is competition among miners is fierce and that is set to drive growth in electricity demand. Morgan Stanley says that the more bitcoin’s value increases, the more the mining increases. All this mining requires a large amount of computational energy use, which would drive up power demand, and represent important growth for companies developing or investing in wind and solar, especially if combined with energy storage.

We have been already seeing an interest from renewables firms. For example, a representative of Canada’s biggest hydropower producer Hydro-Quebec said last week that the company is in talks with over 30 miners and that it could announce power purchase agreements with them this year.

We see the potential of such a growing market, but we remain sceptical about whether it is wise for wind farm owners to make plans based on the future growth of the cryptocurrency.

Our main concern is that this is such a volatile market. For example, in the last four weeks bitcoin has lost over 40% of its value, trading now at around $11,500, and it is pretty much impossible to know where the price will head next.

This is crucial as an increase of energy consumption is strictly related to an increase in mining activity, and hence of the value of the cryptocurrency. If prices fall, some miners could go out of business – hardly a strong covenant that would help wind farm owners to sleep more soundly at night.

In addition, China has also moved to shut down Bitcoin mining operations to cut the risks associated with the currency, and we would expect others to follow suit.

And it is hard to predict how mining processes will evolve and what this means for the electricity needed to mine cryptocurrencies.

Finally, on top of all this, we can see why a number of analysts and investors think that bitcoin a bubble ready to burst. Maybe, as cryptocurrency enthusiasts would tell us, we simply don’t understand how revolutionary this market could be. Maybe we don't, but we think wind companies should exercise caution.