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View: Cryptos, costs, chips, and currencies

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Bitcoin is created by bitcoin miners, who are issued with the cryptocurrency in return for completing massive volumes of computations to verify transactions. This requires high energy input. But miners also require increasingly powerful computer equipment, or rigs, for the process.

View: Cryptos, costs, chips, and currencies
Indian investors have been euphoric about cryptocurrencies for the past many months. While the formal status of crypto—whether it will be legal or treated as currency or asset—is still pending with the government. It also awaits an official stance on how crypto holdings by Indians would be taxed.
India is one of the fastest-growing hubs for cryptocurrency globally and the younger Indians seem to be driving this frenzied development. Data from crypto exchanges show crypto investing in India is spread across its tier two and three cities too. If we move to the supply side of this industry, we need to look at crypto-mining carefully.
Globally large firms like Tesla, and Square have started holding cryptos as part of their treasury operations (as assets). Companies like MasterCard have announced they would enable payments using select cryptocurrencies (as a currency). The interest of institutional investors in cryptocurrencies is a good sign and could bring in trade volumes once they get to mainstream finance. An only official nod would allow Indian corporates to potentially look at cryptos.
Valuation driven mining interests
The last year has seen cryptos like Bitcoin shoot up in their value. The more the crypto pricing shoots up, the more the newer investors would be interested in this asset class. This has led to more attempts to mine the cryptos, which in turn has increased further demand for higher processor power as well as volumes of computers. This has also contributed to an extent to the global shortage of semiconductors.
Bitcoin is created by bitcoin miners, who are issued with the cryptocurrency in return for completing massive volumes of computations to verify transactions. This requires high energy input. But miners also require increasingly powerful computer equipment, or rigs, for the process.
How quickly bitcoins can be mined is directly correlated to how advanced chips inside the rigs are.  Mining is a hardware-intensive process and requires the installation of expensive computing machines, also called ‘mining rigs’.


Costs of mining cryptos include:
  • Purchase of the computer system to mine the cryptos: While a basic cryptocurrency mining system starts at Rs 50,000, the professional systems with high-end processors and graphic cards could cost upwards of Rs 4 lakhs. This high cost is essential because the hardware used in mining is a GPU or an ASIC (application-specific integrated circuit), which are faster at solving compound calculations that are required to settle mining transactions. Normal computers use CPUs that are cheaper and have the less powerful processing power.
  • Software for crypto mining: In addition, to mine cryptos, one would need to set up mining software and link it to a digital Wallet, to store the mined rewards. Apart from the professional paid-for mining software, free software is also available.
  • Cost of electricity to power the computer system: On average, the power consumption for crypto-mining for an individual running mining-ops from home, could be to the tune of Rs 40,000 to Rs 50,000 per month. Some of the serious crypto miners have started using solar panels for their energy utilisation, which brings the costs lower to an extent. The crypto-mining computer hardware consumes high power, and it is the largest proportion of mining operating expense and is a big challenge in crypto-mining until sufficient cryptos are mined.
  • Hash rate: “Difficulty in mining”, is measured in hashes per second of the Bitcoin validation transaction. The difficulty changes as more miners enter the fray because the crypto network is typically designed to produce a certain number of cryptos in given time duration (bitcoin is done every 10 minutes). When more miners enter the market, the difficulty increases and ensures that the production level remains Less computing power means the difficulty level decreases. In the current crypto-mining boom, an individual using a PC for mining crypto may mine-nothing.
  • The past year or so has seen a boom in crypto pricing. It is estimated that it costs between USD 8,000-11,000 to mine a bitcoin. While this estimate can change for individual miners to network-led miners to crypto-mining farms that use cold countries to mine to beat energy costs. For example, at the current bitcoin prices of over USD 50,000, it is extremely profitable to mine bitcoins.


    Crypto mining
    Since cryptos are “mined” using computers to solve complex mathematical problems, they require large amounts of energy. Some have estimated the crypto industry to consume more energy than several countries. With the proportion of fossil fuels being a larger portion of global energy production, crypto critics blame it for climate change.
    However, the United Nations, recently mentioned cryptocurrencies in a positive light: “Because the technology is resistant to tampering and fraud, it can provide a trusted and transparent record of transactions. This is particularly important in regions with weak institutions and high levels of corruption.”


    It would only be fair to mention that stakeholders in the crypto industry are equally responsible for finding ways to reduce energy consumption. For example, Ethereum Foundation is already working on a new way to verify transactions.
    In April 2021, three important entities (the Energy Web Foundation, Rocky Mountain Institute, and the Alliance for Innovative Regulations), formed the Crypto Climate Accord, and its other stakeholders include players from the energy, finance, climate, impact sectors. This accord wants to decarbonise the industry and achieve net-zero emissions in the global crypto industry by 2030.
     
    —Srinath Sridharan is a Corporate Advisor and Independent markets commentator. Views expressed are personal. 
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