In early March, the US Treasury announced plans to levy a 30% tax on crypto mining operations in the US. Additionally, the U.S. Treasury Department signaled that all crypto mining companies will be required to submit a detailed report on their electricity consumption going forward, with the aim of making these crypto miners as energy efficient as possible. As you might expect, this was widely acknowledged as bad news for Bitcoin (BTC 10.47%) miners everywhere.
But what impact will the new crypto mining taxes have on Bitcoin’s future value? After all, the US is now the leading country in the world for bitcoin mining, so any negative impact on US-based miners will affect the entire bitcoin ecosystem in a big way. Here’s a closer look at three different scenarios and how they might play out.
Scenario 1: The good
The good news, if you want to call it that, is that the tax on bitcoin mining operations will not take effect immediately. It would be phased in over three years at an additional rate of 10% per year. This would theoretically give crypto miners a chance to adapt to the new reality. You would have two basic choices: move to a new crypto-friendly jurisdiction abroad, or bet on clean energy sources that use a minimum of electricity.
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This scenario has happened before and has not had a lasting effect on the value of Bitcoin. For example, China’s crypto mining ban, which first went into effect in 2019, was intended to boost the value of Bitcoin, but that never happened. Back then, China accounted for more than half of the world’s crypto mining activity. Bitcoin miners simply took off and moved to other countries with abundant energy resources, including Canada, Kazakhstan, and the United States. Additionally, some of the largest bitcoin mining operations now claim to be relatively eco-friendly in terms of their energy use. Instead of relying on fossil fuels, they already use solar, wind and geothermal heat.
So, in this scenario, there would not be much impact on Bitcoin’s value. The long-term growth story for Bitcoin remains, and the world’s most popular crypto would be relatively unhindered on its long march back to previous all-time highs.
Scenario 2: Evil
The bad news is that the new crypto tax is a “consumption tax” — the type of tax that is typically levied on products like alcohol or cigarettes that a government doesn’t want you to consume. As the US government hinted back in September 2022, it fears the perceived negative environmental impact of crypto mining.
As a result, miners are not taxed based on their profitability, but on how much energy they use. There is no escaping this tax, and the inevitable result could be a disturbing pattern of high-profile Bitcoin miner defaults. Bitcoin miners are already having a tough time, and this new 30% tax could be a death knell for all but the largest and most profitable mining operations.
If the bitcoin mining industry becomes too centralized and only a handful of major players remain, it could have a real impact on how bitcoin is used on a global basis. Finally, bitcoin miners are used to validate new transactions and add new blocks to the bitcoin blockchain. In the absence of real competition, this process can take longer or become prohibitively expensive for many transactions.
In this scenario, the price of Bitcoin could face quite a bit of resistance. Most likely, investors would start to completely turn away from cryptos like Bitcoin that require mining. Instead, they would use proof-of-stake cryptos such as ether that do not require mining. In fact, this could be the trigger for the mythical “Flippening” – the moment Ethereum’s market cap overtakes Bitcoin’s market cap.
Scenario 3: The ugly
This last scenario is just too painful for many Bitcoin bulls to acknowledge. Suppose the centralization of bitcoin mining gets too high and one bitcoin miner eventually finds a way to control more than 51% of all bitcoin mining activity. In this case, Bitcoin could face an existential crisis. As detailed in the crypto textbooks, this could lead to the dreaded “51% attack,” which is one of the worst things that could ever happen to a blockchain. In this scenario, the Bitcoin blockchain could stop working, which would have catastrophic consequences for the price of Bitcoin.
Invest souvenirs
Right now, it looks like the only crypto mining stocks worth buying are the greenest, cleanest, and most eco-friendly. Let’s say you’re considering buying a crypto mining stock. In this case, it’s time to stop focusing solely on profitability and revenue and also consider energy consumption, because only the most environmentally friendly bitcoin miners will make it. So the story for bitcoin miners is pretty much settled.
Bitcoin’s prospects are more complex as it has come a long way in its 14-year history. At each new turning point, it has found a path to innovate thanks to its incredibly decentralized network and passionate user community. While there is no doubt that the Bitcoin mining industry is becoming more and more consolidated, the “bad” and “ugly” scenarios outlined above would likely take years, if not decades, to play out.
So I’m still optimistic about Bitcoin’s long-term future. But I’m also hedging my bets by taking a closer look at clean, energy-efficient proof-of-stake cryptos that could oust bitcoin as the preferred crypto payment option globally.
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