There’s no denying that the world is currently facing an unprecedented energy crisis, one that has compounded severely in the aftermath of the COVID-1
There’s no denying that the world is currently facing an unprecedented energy crisis, one that has compounded severely in the aftermath of the COVID-19 pandemic so much so that countries across the globe — especially across Europe and North America — are witnessing severe shortages and steep spikes in the price of oil, gas and electricity.
Limited gas supplies, in particular, stemming from the ongoing Russia-Ukraine conflict, have caused the price of essential commodities like fertilizer to shoot up dramatically. Not only that, but it has also resulted in the heightened use of coal and other natural resources. Coal consumption within Europe alone surged by 14% last year and is expected to rise by another 17% by the end of 2022.
To expound on the matter further, it is worth noting that European gas prices are now about 10 times higher than their average level over the past decade, reaching a record high of approximately $335 per megawatt-hour during late August.
Similarly, the United States Energy Information Administration’s recently published winter fuel outlook for 2022 suggests that the average cost of fuel for Americans will increase by a whopping 28% as compared to last year, rising up to a staggering $931.
With such eye-opening data out in the open, it is worth delving into the question of how this ongoing energy shortage can potentially affect the crypto sector and whether its adverse effects will recede anytime soon.
The experts weigh in on the matter
Matthijs de Vries, founder and chief technical officer for AllianceBlock — a blockchain firm bridging the gap between decentralized finance (DeFi) and traditional finance — told Cointelegraph that the global economy is in bad shape thanks to a multitude of factors including the power crisis, looming recession, surging inflation and rising geopolitical tensions. He added:
“These issues are interlinked, primarily in the way that capital flows in and out of impactful industries. The worse the macroeconomic climate, the lower the capital (liquidity) that flows in and out of the digital asset industry. This liquidity is what enables the incentivization mechanisms of blockchain to continue working. So, for miners, if there is a shortage of liquidity, this means fewer transactions for them to confirm, lesser fees and decreased incentives.”
Moreover, de Vries believes that rising energy costs could provide additional incentives for miners to move toward the validator ecosystem of Ethereum 2.0 that relies on a far more energy-efficient proof-of-stake (PoS) mechanism.
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A somewhat similar sentiment is echoed by Yuriy Snigur, CEO of Extrachain — an infrastructure provider for distributed applications, blockchains and decentralized autonomous organization (DAO) platforms — who believes that the ongoing energy price surge will impact proof-of-work (PoW) blockchains the most.
“They are the most dependent on the energy sector. In my opinion, the value of a blockchain should not come from the meaningless burning of energy, which is why PoW is doomed eventually,” he noted.
Worsening macroeconomic climate will hurt crypto in near term
Nero Jay, founder of the crypto YouTube channel Dapp Centre, told Cointelegraph that the challenges being witnessed will continue to have an overall negative impact on the crypto market, as a result of which most investors will continue to look at this yet nascent sector as being speculative and risky, at least for the foreseeable future.
However, as a silver lining, he noted that the aforementioned challenges could serve as an opportunity for increased crypto adoption, especially as many countries like Venezuela, Turkey, Argentina, Zimbabwe and Sudan continue to be ravaged by hyperinflation and sanctions, which may give crypto assets more utility and use cases.
Lastly, Jay believes that the worsening energy situation could result in increased scrutiny of the mining sector, especially since proponents of the zero carbon emission campaign will now have more fuel to criticize the space.
“Many are questioning the impact that crypto mining may have on the environment. The great news is we are already seeing many cryptocurrency projects, including Ethereum, that are making their blockchain platforms very efficient and low carbon emission based,” he said.
Bitcoin’s price and its relationship with the energy market
From the outside looking in, increased energy prices will raise costs for miners, which in turn could force them to sell their held Bitcoin (BTC), thereby pushing down prices. Furthermore, heightened production can result in miners demanding higher prices to cover their daily operational costs and, in some cases, even forcing them to shut down their operations entirely or sell their equipment.
Also, even if miners continue to go out of business, the total volume of BTC being mined will remain the same. However, the block rewards will be distributed among…
cointelegraph.com