Kentucky’s digital gold rush. What’s behind the crypto mining boom in coal country?
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Kentucky’s digital gold rush
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Kentucky’s digital gold rush. What’s behind the crypto mining boom in coal country?
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Kentucky is in the midst of a digital gold rush.
In the last year or so, companies have moved thousands of specialized computers into the state to “mine” for bitcoin, a cryptocurrency — or virtual currency — sometimes referred to as digital gold.
The computers, about the size of a shoe box, search for a number generated by the system, with the network issuing new bitcoins to the owner of the machine that finds it first.
That noisy process is called mining, and with the price of a bitcoin running around $40,000 in recent days, it can be lucrative.
Companies have set up racks of mining rigs on shelves in industrial buildings in the western end of the state, at sites left empty when coal mines shut down in Eastern Kentucky, even in shipping containers to get up and running as quickly as possible.
Kentucky had 18.7 percent of the collective computing power in the U.S devoted to bitcoin mining as of last October, according to Foundry, a company that operates a large bitcoin mining pool, CNBC said in a story.
That was second only to New York, with 19.9 percent of the computing power. Georgia was next at 17.3 percent and Texas was home to 14 percent of the computing power, called hashrate.
That calculation didn’t account for all the bitcoin computing power in the country — and a more recent story said Kentucky’s share of the overall computing power had fallen as Georgia’s rose — but it’s clear Kentucky has seen a significant increase in cryptocurrency mining, most of it for bitcoin, state and local officials said.
Electricity is one of the key reasons.
Kentucky has relatively cheap electricity to industrial users, and that’s important in bitcoin mining because the process requires an enormous amount of power.
Some facilities under development in Kentucky plan to use as much electricity as thousands of homes; one project in Harlan County will use as much power as eight Walmart supercenters, according to a local official.
“These projects have an incredible thirst for power,” Adam Edelen, a former state auditor who is developing a solar project in Eastern Kentucky, said of bitcoin mining operations.
The U.S. Energy Information Administration reported that in December 2021, the the average retail price of electricity in the industrial sector in Kentucky was 10.2 percent lower than the national average.
The agency also reported that in 2020, Kentucky had the ninth-lowest average retail electricity price in the U.S., and second-lowest east of the Mississippi River. Utilities also can seek rate reductions for large customers.
Kentucky also has well-developed electricity infrastructure, excess capacity in some places, and relatively cheap land prices.
“Everything that a miner needs is right here,” said Patrick Ulrich, a partner with attorney Dan Carman in Lexington Bitcoin Consulting, which advises individuals and companies.
Interest in opening bitcoin mining operations in Kentucky and the U.S. spiked after China banned crypto mining last year.
The Chinese government cited bitcoin’s price volatility as a potential threat to the country’s financial stability and citizens’ assets, though China is experimenting with developing its own government-issued virtual currency.
China was home to about two-thirds of the bitcoin mining in the world before the crackdown, and that capacity scrambled to find new homes.
“Our phone kind of started ringing off the hook,” said Amanda Clark, head of economic development for Kentucky Power, which serves 20 counties in Eastern Kentucky.
Clark said American Electric Power, Kentucky Power’s parent company, received more than 100 calls from cryptocurrency miners looking for sites in Kentucky and other states.
The companies wanted to know “where can I get cheap power and get going the fastest,” she said.
One place that fits the bill is coal counties in Eastern Kentucky. The region has extensive electric infrastructure that was put in place to serve coal mines, and excess capacity because of the steep downturn in coal production.
There are about half a dozen cryptocurrency mining operations either up and running or getting ready to start in Kentucky Power’s area, which includes all or parts of 20 counties, and another five are working to open facilities, Clark said.
In Pike County, a company called Blockware Solutions renovated buildings at a defunct coal mine and is mining bitcoin, said Warren Rogers, the chief financial officer.
Rogers said the facility has several thousand mining machines running and hopes to put 24,000 online by the end of the year. That number of machines alone would cost about $230 million, plus millions to renovate the facilities, Rogers said.
“We wouldn’t be here if it wasn’t a competitive environment,” Rogers said.
Western Kentucky also has seen a growth in cryptocurrency mining.
One company, Core Scientific, created a data center that hosts cryptocurrency mining in an abandoned steel mill in Calvert City.
And in Paducah, a company called Blockware Mining is building a large facility to mine bitcoin. The company has put more than 6,000 machines online to mine bitcoin even as workers put finishing touches on one end of the building, and plans to add thousands more computers.
Clark said the volume of calls to Kentucky Power from cryptocurrency companies has slowed in recent months, but some are still looking for sites in Eastern Kentucky. That’s likely to continue until there are no more good sites, she said.
Jeremy Witten, executive vice-president of engineering at Blockware Mining in Paducah, said the capacity for bitcoin mining hasn’t been tapped out in Kentucky.
“The potential for further growth is huge,” Witten said.
Economic incentives also have been a factor in attracting bitcoin mining operations to Kentucky.
State lawmakers approved two measures in the 2021 legislative session, Senate Bill 255 and House Bill 230, creating tax breaks to cryptocurrency mining operations.
One bill created tax exemptions totaling 9 percent on electricity consumed at larger cryptocurrency mining operations, and the other allows sales-tax refunds on mining equipment, as well as potential incentives on income taxes and wage assessments.
The measures “combine for a very comprehensive, and attractive, statutory incentive package for the booming cryptocurrency mining industry” to invest and expand in Kentucky, Daniel Mudd, and attorney with the Frost Brown Todd firm, said in one analysis. “Kentucky believes it can be not only a national, but global leader in this emerging market through these legislative efforts.”
Michael Stoltzner, president and chief executive officer of Blockware Mining, said open arms from the legislature and local officials were a key factor in the company’s decision to build in Paducah.
“Kentucky has been very welcoming to miners,” Stoltzner said.
Mining companies have provided work for construction companies, electrical contractors and others as they set up facilities, but once a mining operation is up and running, it provides only a few permanent jobs.
For instance, the Blockware Solutions facility in Pike County has seven employees, said Rogers, the chief financial officer.
The relatively low employment has been a source of criticism.
“These are highly speculative and likely unsustainable ventures that use tremendous amounts of energy and employ very few people,” said Jason Bailey, executive director of the Kentucky Center for Economic Policy.
Some people don’t like the idea of forgoing tax revenue from cryptocurrency miners — or other companies, for that matter — while other needs in Kentucky aren’t well-funded; others see echoes of coal mining in cryptocurrency mining, with the profits going to out-of-state corporations.
But in Harlan County, which lost thousands of coal jobs, Judge-Executive Dan Mosley said cryptocurrency mining jobs are welcome even if they are not plentiful.
“Every job that we can get in our community is important,” Mosley said.
Exponential Digital, a San Francisco company, set up several metal structures in the county just outside Cumberland and started mining cryptocurrency in March. It has hired 10 people at a minimum of $20 a hour, Mosley said.
“They’re tickled to death,” Mosley said of the people who got hired.
Others argue that the growth in cryptocurrency mining makes Kentucky a key player in the industry as interest in bitcoin grows, and holds potential for growth in technology-related jobs.
“I see an opportunity to repair these machines, provide trained certified technicians and help our region take advantage of this technology,” said state Sen. Brandon Smith, a Republican from Hazard who sponsored one of the crypto mining incentive bills in 2021 and was briefly part of a mining company before pulling out earlier this year.
Executives with mining companies said the companies are paying upfront for expensive upgrades to electrical facilities needed for their operations, so that homeowners and other businesses won’t get stuck with those costs if the companies fail.
In one example, the contract with the company operating the cryptocurrency mining facility in Harlan County, Exponential Digital, said the company would be liable up front for the costs of any upgrades Cumberland Valley Electric had to make to serve the facility.
The deal required Exponential Digital to pay $345,000 before the utility started work to upgrade a substation.
Wilcox, the economic-development director in Paducah, and others said that having new, large customers buying electricity will help utilities avoid rate increases and add to the local property-tax base.
“It’s bigger than the jobs,” Wilcox said of the benefits of having cryptocurrency mining in the state.
Another key criticism of bitcoin mining is that it is bad for the environment.
One reason is that it creates electronic waste, but the bigger concern among critics is the enormous need for electricity, which they say undermines efforts to reduce carbon-dioxide emissions that drive climate change and its resulting intense storms, flooding, drought and rising sea levels.
By some calculations, mining for bitcoin burns as much energy as entire developed countries such as Sweden.
“The impact in terms of carbon emissions can be very significant” if crypto miners are not using renewable energy sources, said Ashley Wilmes, executive director of the Kentucky Resources Council.
Mining companies say they would like to use renewable energy, such as solar power or hydropower, when possible in order to improve their carbon footprint and because renewable energy can be cheaper.
“This industry offers basically an olive branch to all renewable energy,” said Witten, with Blockware Mining in Paducah.
One reason bitcoin mining flowed to New York was widely available hydropower, and Georgia has reportedly made gains because of solar power and nuclear power, which doesn’t emit carbon.
In Kentucky, however, 69 percent of the state’s electricity generated in 2020 came from burning coal, the fourth-highest total in the country, according to the U.S. Energy Information Administration.
Alex de Vries, a researcher who founded a site that tracks cryptocurrency energy use, calculated in a paper published in February that Kentucky was the highest-emitting state in the Bitcoin network.
“It’s just this huge, huge energy cost,” said Patrick Drupp, a deputy director with the Sierra Club.
Bitcoin mining interests respond that the industry uses less power than many other industries, including the larger, traditional financial system — though that system serves far more people — and that mining operations often use what would otherwise be excess power.
“Much of this energy is energy that would have been wasted or is excess energy from the grid,” said Joe Burnett, mining analyst for Blockware Solutions.
The Bitcoin Mining Council estimated that in the last three months of 2021, the global mining industry’s sustainable electricity mix was 58.5 percent.
Michael Saylor, a member of the council, said in a presentation that that bitcoin mining uses only a negligible amount of total global energy production.
“This is the cleanest, most efficient major industrial use of energy that we can find in the world,” Saylor said in the January presentation.
Bitcoin mining uses a lot of electricity because it involves a process called “proof of work,” which involves many computers validating the transactions.
The Kentucky Conservation Committee recently took part with national environmental groups in announcing a campaign called “Change the Code, Not the Climate,” urging Bitcoin and other cryptocurrency platforms to move to another process that uses far less energy.
“You could do it in a more responsible way,” said Lane Boldman, executive director of the committee.
Edelen, the former state official developing a large solar project in Eastern Kentucky, said about two dozen cryptocurrency mining companies approached him about getting power from the facility.
He hasn’t signed deals with any. With cryptocurrencies considered speculative, none of the mining firms that contacted him could demonstrate the long-term financial stability the solar project needs in a customer, Edelen said.
But the industry needs to keep trying to reduce its carbon footprint, Edelen said.
“It has to be cleaner, like every other industry,” he said.
This story was originally published April 21, 2022 at 11:13 AM.
