Several headlines recently described abitcoin-hashrate-drop-texas-miner-curtail-grid/”> 25% drop in bitcoin network difficulty during winter storm Finn in January. Most attributed this drop to restriction activity in Texas. While Texas accounts for 17% of the global bitcoin hashrate, ERCOT data shows that some of the reduction activity was a combination of higher prices and “good network citizenship.” At ERCOT, and to a lesser extent at other ISOs, prices are the best indicator of stress on the grid. There are other indicators such as PRC (physical responsiveness), but prices are a better measure for most situations. For that reason, to avoid price swings and create more challenging adjustment conditions, an optimal environment is one in which the price does not swing sharply up and down. However, price volatility is a common occurrence at ERCOT, as demonstrated by Winter Storm Elliot in December 2022 (see chart below).
bitcoin miners are the economically perfect consumers of electricity. This is not to say that bitcoin miners will altruistically consume electricity, but rather that bitcoin miners' margins are exceptionally sensitive to the price of energy, so they are economically incentivized to reduce consumption when electricity prices rise. energy exceed its equilibrium threshold (current equilibrium). for most miners it ranges between 100 and 200 dollars per MWh). That means they will consume electricity when prices are below their equilibrium price and turn off when prices are above it. There are some operational and practical exceptions to this, for example if miners have data center colocation agreements that stipulate or guarantee uptime.
Texans should want bitcoin miners on whenever there is enough power because their constant consumption incentivizes the creation of additional generation. And less counterintuitively, we naturally want bitcoin miners to reduce their activities when prices are high and the network is under stress.
That brings us to the January 2024 Winter event for the week of January 15. The headlines would make you think that the Texas network was once again stressed and that bitcoin miners were reduced as a result. The truth has many more nuances. The average settlement price in the ERCOT wholesale power market during the worst three days of the storm was $100.76 per MWh, and prices never exceeded $600 per MWh. For context, prices top out at $5,000 per MWh. As wholesale prices indicate, the network weathered the storm quite well with ample reserves everywhere.
In fact, ERCOT issued a conservation alert, but it was more of a cautionary message for energy consumers who don't monitor the price of energy every second of every day like bitcoin miners do.
We saw some economic curtailment, meaning reducing energy use based on price signals, from miners for long periods and some shorter periods when prices exceeded 200 MWh. However, this activity was less pronounced than in previous winter events or summer heat waves because generation reserves were more abundant across the grid. It is likely that some bitcoin miners reduce their activity for longer periods as a gesture of good “network citizenship” and to show their commitment to a stable network, but that is difficult to quantify.
All of this evidence indicates that the difficulty drop last week requires a more nuanced explanation. Much of this was a result of the reduction in Texas, but after evaluating the ERCOT pricing data, it leads me to believe that a significant portion of that reduction also came from other ISOs in North America. In short, anyone with an opinion on the reduction of bitcoin mining would do well to watch the ERCOT sell-off and LMP prices. Data and economics should form the backbone of all future analysis.
This is a guest post by Lee Bratcher. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
