Does Bitcoin use too Much Energy?

Renewable Energy
Bitcoin Finances Renewable Energy

Bitcoin Info > Does Bitcoin use too Much Energy

There is a lot of misinformation going around about Bitcoin and a lot of it is coming from liberals and progressives like Ezra Klein and Paul Krugman, with whom I often otherwise agree.  Unfortunately the topic of Bitcoin requires dozens of hours to understand and many progressives haven’t spent the time and instead choose to reflexively oppose something that was started with the support of libertarians and conservatives.

  • Interviewer: Did you know that Libertarians like peaches?
  • Liberal: Oh, that must mean I don’t like peaches?
Peaches
Peaches

Establishment types who are looking to support the corrupt existing financial and military institutions have found potent talking points about Bitcoin’s environmental impact and money laundering that are misleading, but take time to refute.

This article is designed to help people understand the energy use arguments without them having to spend so many hours researching the issue themselves.

Is Bitcoin Worthwhile?

But before we get into the energy arguments we must first recognize that if you mistakenly believe that Bitcoin is largely used for money laundering and has no redeeming value, you are never going to view Bitcon’s energy use as justifiable, no matter how little and well it uses energy.

Bitcoin is still in the early stages

Many of Bitcoin’s benefits are prospective, just like the internet’s benefits were prospective.

Paul Krugman
Paul Krugman

Many people find it hard to envision the potential ways technology can develop.  Here is Paul Krugman writing in 1998 during the dot-com boom:

By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

To be sure, I’ll concede that blindly buying many of the upstart crypto coins will meet the same fate as blindly buying dot-com stock.  But like the dot-com era, which developed companies on the scale of Amazon and Google, there is the potential for large scale growth in Bitcoin. 1

Bitcoin’s Potential Benefits:

Here are a few of the easier to explain potential benefits of Bitcoin.2

 

Read more potential benefits ..

 

On to the Argument about Energy:

You don’t need to believe that all of these benefits will come to pass to see the possibility that Bitcoin has useful potential that makes it worth some amount of energy.  The next step in addressing the anti-Bitcoin Energy FUD involves understanding the size and distribution of electricity on the power grid.

Understanding the Electricity Grid

One of the most effective rhetorical tactics of the Bitcoin critics has been to compare Bitcoin’s energy usage to countries.

This tactic is then amplified by suggesting that Bitcoin’s energy use will increase dramatically as adoption increases.

I assume that a lot of these arguments were made in good faith, but what makes them effective as anti-Bitcoin FUD is that they take their opponents a long time to debunk.

There is a saying, known as Brandolini’s law, also known as the bullshit asymmetry principle:

that emphasizes the difficulty of debunking false, facetious, or otherwise misleading information:[1] “The amount of energy needed to refute bullshit is an order of magnitude larger than to produce it.”[2][3]

I’m about to attempt that  much-more difficult task of debunking misinformation, with the hope that if I do it once, I can refer all subsequent discussions here.

Comparison to Small Countries = 0.1% of the total use

While it may seem like Bitcoin’s energy is large when compared to Norway, this amounts to about a tenth of one percent of the world’s use, which is less than the margin of error in the statistics cited.

A better comparison would be to compare Bitcoin to the current financial system

(It uses less than half of that of the banking system and half of gold).

 

Lyn Alden says:

how can journalists make such large, sensationalized errors? The answer is that it often comes down to them not understanding the scaling process that the network is going through.

And it’s easier to sensationalize things for pageviews or political gain. For example, it’s commonly said that the Bitcoin network uses more energy than some countries. That’s true, but then so does Google, Youtube, Netflix, Facebook, Amazon, the cruise industry, Christmas lights, household drying machines, private jets, the zinc industry, and basically any other sizable platform or industry. From that list, Bitcoin’s energy usage is the closest to that of the cruise industry’s energy usage, but bitcoins are used by more people, and the network scales far better.

The University of Cambridge is the most-cited source for estimating Bitcoin’s energy consumption, and they place its estimated peak annualized rate at under 140 TWh so far.

Since the world uses over 170,000 TWh of energy per year, that means that the entire Bitcoin network, at its peak estimated consumption level, uses less than 0.1% of the world’s energy consumption. That’s for a network with 100+ million estimated users.

Bitcoin Energy Consumption

 

Next, they assume that Bitcoin’s Energy use grows at an exponentially scary rate.

Alarming Predictions: “All the World’s Energy by 2020”:

Here’s a prediction made in a December 2017 Newsweek article called: “Bitcoin Mining on Track to Consume All of the World’s Energy By 2020” :

 

Bitcoin Energy Headline

 

Sensationalized Claim doesn’t come True

To state the obvious, 2020 has come and gone and Bitcoin did not use all the world’s energy.  In fact they estimated that the peak annualized rate was under 140 TWh so far.

 

So how does Bitcoin avoid exponential growth? And what assumption did their sensationalistic prediction rest on?

Understanding the Banking System

Many Bitcoin critics fail to understand the history of Bitcoin and the debates that occurred in 2017 over how Bitcoin would scale (or grow).

Federal Reserve
Federal Reserve

In 2017, there were people within the industry that wanted the entire system to function as a single monolith that would handle everything.  This faction lost the argument to others who argued that Bitcoin should grow in layers like the current banking system.

The Federal Reserve base system only averages 10 transactions per second.  How, you ask, can all of the consumer purchases and business transactions be served by a system that averages only 10 transactions per second?  Well the key is that there are layers built on top of the Fed System composed of banks and the credit card processors are build as a second and third layers using the banks.

VISA - Federal Reserve Diagram

Banks don’t actually settle the transactions immediately.  They batch them up “netting” the difference between what they owe each other, much as roomates don’t pay each other for every transaction, but total up everything and make a single “clearing” payment.

 

Bitcoin Lightning Network
Bitcoin Lightning Network

In the financial system, these payments between banks are huge and the cost of wires is something in the order of $25.  But the wire fees are worth it to the banks because each payment settles thousands or millions of aggregated transactions.  In recent years, Bitcoin has developed a similar layered structure as the Federal Reserve using additional layers, such as using the Lightning network to send small payments (for a fee of less than 1 penny) and leaving the Bitcoin base layer itself for the large transactions that truly need the security that the Bitcoin base layer provides.

Lightning Network vs VISA diagram

Visa perceives a threat to their business model and has worked to make their system interoperable with Bitcoin.  Under an alternate system, some of the clearing transactions that currently go through the Federal Reserve could be processed by Bitcoin instead.

Scaling Costs for more transactions

So under the current system, if VISA makes 100,000 transactions for Amazon.com on Black Friday, Fed Wire (or Bitcoin) only has to process one payment per customer’s bank.  If Amazon sales go up by a factor of 100 to 10 million transactions on Black Friday, the number of Fed Wire transactions is unchanged.  The only thing higher transaction volume does is result in larger payments.  Thus:

  • The Result = same number of clearing transactions, but of larger size

 

Energy Costs Grow Slowly with additional transactions

So back to the original claim: Bitcoin critics assumed that more transactions would cause the Bitcoin base layer to grow congested and require exponentially more energy.

In reality, small Bitcoin payments will be handled by cheaper, less expensive systems like the Lightning layer that aggregate transactions for the cost of less than 1 cent per transaction.

In El Salvador, it is possible to buy Starbucks with Bitcoin using the Lightning network and the transaction fee is less than 1 cent, whereas VISA charges 2.3% plus 23 cents in the US ( in El Salvador the VISA fee is 8%).

Note: Bitcoin’s use for payments will be limited by volatility and people’s desire to hold onto an appreciating asset, but transaction cost and energy use is not a valid critique.

 

How Bitcoin Finances Renewables

Everyone knows that the electricity grid has to handle higher demand for energy on the hottest summer days, when air conditioning demand spikes.  This forces the system to be built with a higher capacity than is typically needed.  This spare capacity comes at an extra cost that is not compensated for by use at other times of the year.

Similarly, weather causes power output from wind farms and solar to vary.  In order to achieve enough output on less windy days, wind farms must be overbuilt as well.  This need to overbuild renewables makes it particularly well-suited for pairing with Bitcoin Mining which provides a way to monetize peak output that would otherwise go unused.

Wind farm
Wind farm

Let’s say our wind farm has  100 windmills which generates adequate supply at 4 mph (hypothetically).  If the wind increases to 12 mph, some of the windmills may have to be shut off because there isn’t enough consumer demand or transmission capacity in the power lines  to reach the whole way from the remote West of Texas to Houston.

Instead of letting the excess wind go to waste because it is too expensive to setup long-distance electrical lines for capacity that will only be used intermittently, Bitcoin miners can move their computers onsite to take advantage of power generated in those extra windy hours.

Moving Electrical Demand to the Supply

Bitcoin is one of the first technologies that can move the electricity demand directly onsite with the power supply, no matter how remote.  In the past we built cities next to rivers or ports because that’s what made transporting the goods the cheapest, even if those cities are far from electricity sources.  Because of satellite-powered internet, it is now possible to use Bitcoin mining to harness power sources that are in remote areas, far from the electrical grid.  The satellite internet is fast enough to handle the data transfer needed to perform the mining and can be done anywhere in the world.

Bitcoin makes wind and solar more competitive

Intermittent Wind Power
Intermittent Wind Power

What this means in practice is not that Bitcoin is competing for power with the hospital and residences.  Rather Bitcoin is sucking up the excess wind power that would otherwise go unused or would have to be supplied with a more constant power source like coal, natural gas, or nuclear.

Bitcoin’s takes advantage of surplus power and then at times of high demand Bitcoin miners are able to shut down, making it an excellent complement for renewable energy sources that are highly variable.

The profits that the onsite Bitcoin miners make in the excessively windy hours allows the wind farm to pay for the excess capacity needed to supply the grid on less windy and bright hours. (solar).  This allows wind and solar to operate at a lower average cost, making it more attractive to build out intermittent renewable energy as an alternative to more constant sources coal, gas, and nuclear.

 

MIT Technology Review: How Texas’s wind boom has spawned a Bitcoin mining rush:

  • Texas’s wind-powered digital gold rush might redraw the global map of the Bitcoin mining network.

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  1. My guess is that Bitcoin will be one of those surviving crypto assets.  The odds of the others surviving is not so high.

  2. One of the biggest thing about Bitcoin is that it is the first open network for money.  If you are a techie you will understand that open networks like the internet frequently beat closed networks like AOL and Compuserve. Bitcoin threatens to out-compete Western Union, VISA, and Mastercard unless they can offer some extra value.