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What happened
Cryptocurrency miners are under pressure today. Three of the largest crypto miners, Marathon Digital Holdings (NASDAQ:MARA), Riot Blockchain (NASDAQ:RIOT), and Hive Blockchain (NASDAQ:HIVE) are all down more than 8% as of 2 p.m. ET.
Today’s marked decline in the crypto mining sector appears to be a direct result of strong regulatory headwinds. Up to now, most of these have come out of China and India. However, it appears U.S. regulators are increasingly looking at crypto mining, from an environmental and sustainability perspective.
Putting investors on edge today are reports that Sen. Elizabeth Warren sent a letter to Greenidge Generation Holdings CEO Jeff Kirt asking for information on the climate change impact of crypto mining.
Image source: Getty Images.
So what
Crypto mining is extremely energy intensive. Many of the major cryptocurrency blockchain networks require what’s known as a proof-of-work consensus mechanism to validate blocks on the blockchain and secure the network. These require heavy computing power to solve difficult mathematical problems. Some of the largest crypto networks, including those of Bitcoin, Ethereum, and Litecoin, use proof-of-work protocols.
Just how much energy is used to mine crypto?
Well, Bitcoin mining alone accounts for more than 0.5% of the world’s electricity usage, much larger than many small countries. Given the fact that crypto mining requires large amounts of electricity, crypto miners have come under pressure, in countries like China specifically, for using the cheapest electricity possible (usually derived from coal-powered plants). The U.S. appears to be coming to a similar conclusion on the topic, questioning the viability of crypto mining from an environmental standpoint.
Now what
Many alt coins and “newer” blockchain networks are being built with proof-of-stake consensus mechanisms. These allow for blocks to be verified via token holders staking their tokens to become validators and secure the blockchain. Essentially, this cuts down on the energy usage needed to run networks, providing a more sustainable alternative to the existing validation models. Notably, Ethereum is making a move toward proof of stake with its Ethereum 2.0 update.
However, in its current state, the crypto mining sector is one that’s a power-guzzler. This is one of the key reasons why the crypto sector has caught the attention of regulators once again.
This current U.S. administration has already shown an affinity toward regulating the crypto sector, from a taxation standpoint, to support infrastructure spending. That said, additional regulations related to reducing the environmental impact of crypto mining could be the next step for this largely unregulated sector. Accordingly, investors in crypto miners are on watch today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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