The word “bitcoin” is as likely to garner feverish excitement as it is glaring criticism. The financial community sees speculative promise in the form of trade that currently has little to no regulation. Meanwhile, others argue that it’s a distraction that detracts from the overall longevity of US financial institutions.
Bitcoin’s energy consumption has become a recent talking point in the debate. A Forbes article published May 30 indicates that bitcoin dramatically increases global energy consumption—and that electricity is its “Achilles heel.”
I am a researcher who studies clean energy technology, specifically the transition toward decarbonized energy systems. I think that the conversation around bitcoin and energy has been oversimplified.
New technologies—such as data centers, computers and before them trains, planes and automobiles—are often energy-intensive. Over time, all of these have become more efficient, a natural progression of any technology: Saving energy equates to saving costs.
By talking specifically about just the consumption of energy alone, I believe many fail to understand one of the most basic benefits of renewable energy systems. Electricity production can increase while still maintaining a minimal impact on the environment. Rather than focusing on how much energy bitcoin uses, the discussion should center around who indeed is producing it—and where their power comes from.
Unlocking a bitcoin requires an intense amount of computational power. Think of bitcoin as sort of a hidden currency code, where its value is derived by solving a programmable puzzle. Getting through this puzzle requires computer brainpower.
Electricity is 90% of the cost to mine bitcoin. As such, bitcoin mining uses an exorbitant amount of power: somewhere between an estimated 30 terrawatt hours alone in 2017 alone. That’s as much electricity as it takes to power the entire nation of Ireland in one year.
Indeed, this is a lot, but not exorbitant. Banking consumes an estimated 100 terrawatts of power annually. If bitcoin technology were to mature by more than 100 times its current market size, it would still equal only 2% of all energy consumption.
Bitcoin is certainly consuming an increasing amount of power worldwide, but is it increasing the world’s carbon consumption? Bitcoin miners have traditionally set up shop in China, where coal supplies 60% of the nation’s electricity.
Bitcoin mining in China, with a largely fossil-based electricity source, may indeed be problematic. China is already one of the world’s major contributors of carbon emissions. However, bitcoin mining in Oregon? Not the same thing. Not all types of energy generation are equal in their impact on the environment, nor does the world uniformly rely on the same types of generation across states and markets.
In Europe, for example, Iceland is becoming a popular place for bitcoin mining. That nation relies on nearly 100% renewable energy for its production. An abundant supply of geothermal and hydropower energy makes bitcoiners’ power demand cheap and nearly irrelevant.
Similarly, in the hydropower-driven Pacific Northwest, miners can still expect to turn a profit without contributing heavily to carbon emissions.
The right discussion
Like many other aspects of the energy industry, bitcoin is not necessarily a “bad guy.” It’s simply a new, and vaguely understood, industry.
The discussion about energy consumption and bitcoin is, I believe, unfair without discussing the energy intensity of new technologies overall, specifically in data centers.
Rather than discussing the energy consumption of bitcoin generally, people should be discussing the carbon production of bitcoin, and understanding whether certain mining towns are adding to an already large environmental burden.
Although there has been extensive discussion in the media of bitcoin’s energy consumption, I’m not aware of any studies that actually calculate the comparative carbon footprint of the bitcoin process.
Global electricity consumption is going up overall. The US Energy Information Administration predicts that world use will increase nearly 28% over the next two decades. But increasing energy consumption is bad only if we aren’t shifting toward less carbon-dense power production. So far, it seems that only miners are currently shifting toward cleaner parts of the world.
So perhaps people should quit criticizing bitcoin for its energy intensity and start criticizing states and nations for still providing new industries with dirty power supplies instead.
No. Bitcoin can save far more energy than it uses by making financial systems more efficient.
Those panicking about crypto make three fundamental errors.
- First, they do not understand how Bitcoin works,
- second, they do not understand what mass adoption would look like, and
- third, they do not understand the problem Bitcoin is intended to solve.
Regardless of your opinion on the danger of global warming, Bitcoin does not use nearly as much energy as claimed, will become far more efficient as it grows, and most importantly, solves one of the greatest causes of resource inefficiency, corruption, and human suffering.
Bitcoin mining is a market-based process that taps underutilized energy sources
When Bitcoin critics focus on the raw energy usage of Bitcoin mining, they miss the bigger picture: cryptocurrency production is a competitive market process.
Because the cost of Bitcoin mining comes mostly from electricity consumption, Bitcoin mining is concentrated in places with cheap or surplus energy. Industrial-scale mining facilities are located in far-flung locations with cheap hydro-electric, nuclear, geothermal power, or undeveloped industrial regions with excess production. Energy costs money, and miners will always look for the world’s best sources of cheap and efficient energy. Cryptocurrency mining is a means to tap underutilized energy resources for a valuable purpose—the maintenance of a monetary system. No other industry can rapidly move into an industrial ghost town and create value the way Bitcoin mining firms do.
Furthermore, the total energy usage of Bitcoin is limited by economics: crypto-miners will only keep mining when their profit is higher than the cost of electricity. The Bitcoin network automatically adjusts the difficulty of mining new blocks in response to the “hash rate” or the net mining capacity of the network. This means that Bitcoin has a built-in cap on energy use, and can dynamically adjust in response to energy prices and innovation in computational hardware. Currently, humanity consumes around 17.7 Terawatts per year. The Economist estimates that Bitcoin uses 2.55 gigawatts or .014% of that. Some estimate the total use of cryptocurrencies at 7.7 gigawatts, but it’s likely that a single cryptocurrency will dominate after the current shakeout period.
Mining is a small part of the blockchain economy
Claims that “by February 2020, [Bitcoin] will use as much electricity as the entire world does today” assume that growth energy consumption will be proportional with cryptocurrency adoption. But mining is a small part of the blockchain economy and blockchain adoption doesn’t equate to more people mining Bitcoin.
The purpose of mining cryptocurrency is to provide a market-based and fraud-resistant platform to establish ownership of Bitcoins. Once ownership is secured, a near-infinite number of transactions can be made with Bitcoins without any additional mining.
In late 2017, the Bitcoin network reached the limits of how fast it could process transactions and in response, the cryptocurrency community shifted its focus to technologies that would enable the network to scale (grow) to support the entire global economy. There is active debate and experimentation about the best solution to scaling Bitcoin, but they all share the goal of enabling more transactions to be processed by the network without dramatically increasing computational, hardware, and energy requirements.
Cryptocurrency mining is just the tip of the blockchain iceberg. Second-layer transaction networks like Lightning Network and other off-chain transactions do not involve mining and are far less energy intensive. While Bitcoin’s total energy usage will grow with adoption, it’s quite possible that mining will never grow beyond the .01% of the world’s energy consumption it uses today.
Consider gold—it takes a lot of energy to extract out of the ground. Once extracted and formed into coins, it takes a lot less additional energy to use gold. As a digital entity, Bitcoin transactions themselves need far less energy than gold or fiat (paper money) transactions, for reasons I will explain below.
Bitcoin will free far more resources than it uses
Here is the most important point Bitcoin critics miss: cryptocurrencies are not a zero-sum game, they were created to solve a real problem. By eliminating the need for intermediaries in financial transactions, Bitcoin and other blockchains can liberate billions of people around the world and free a large segment of the economy for more productive purposes.
We have to understand the problem that Satoshi Nakamoto intended to solve when he invented Bitcoin. His vision is a “purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.” What’s wrong with using financial institutions as intermediaries?
If you live in a western country with low inflation, access to a bank account, and credit cards, you might not see the need for Bitcoin. However, 1.7 billion people worldwide lack access to a bank account, and billions more cannot trust paper money due to high inflation. These people need access to a financial system that allows them to accumulate savings and participate in the global economy.
Likewise, 5.3 billion people don’t have a clear title to their property and “remain trapped by the “tragedy of the commons” where their unregistered assets can be stolen by powerful interests, hurting individuals and broader economic development,” according to economist Hernando de Soto. The United Nations Development Program is now trying blockchain-based property deeds in India that will allow people to build permanent structures, connect to utility networks and buy and sell their property for the first time. What is the climate impact of billions of people who burn firewood and coal for heat because they don’t have title to their own land and cannot accumulate savings for infrastructure improvements? What is the human impact on the citizens of Zimbabwe, Venezuela, the Republic of Congo, or the dozens of other countries who have had their savings evaporated because their governments failed to provide a sound monetary system?
Bitcoin was invented to solve the inefficiencies of legacy financial systems. By cutting out both governments and corporations as intermediaries, it can put idle resources to use and eliminate the economic waste and destruction caused by unreliable monetary systems.
The economic inefficiency from unreliable financial intermediaries is not limited to the developing world. The 2008 financial crisis was caused by both unclear property records and the Federal Reserve’s manipulation of interest rates—what was its energy cost? What about the energy consumption of the banking and financial sector, which expanded massively in response to new regulations passed after the financial crises, and is stealing the best and brightest minds from more productive and meaningful pursuits? What about the trillions of dollars spent by the US government waging wars due to its ability to issue virtually unlimited debt by creating new money? The twentieth-century phenomenon of total war could not have been possible without total economic mobilization as a result of controlling the money supply.
Cryptocurrency won’t fix all of the world’s problems, but our financial system is an antiquated and corrupt mess which generates tremendous inefficiencies and waste.
By eliminating intermediaries, cryptocurrencies eliminate the waste caused by the financial sector
The point is this: money is essential for modern society to exist, and Bitcoin is the culmination of thousands of years in the evolution of money. Linking the function of money to our political system has proven enormously wasteful and destructive during the 20th and 21st centuries. Yes, creating a monetary system costs money and energy: however, Bitcoin is far more efficient than the dominant alternatives.
Finally, while Bitcoin is the dominant cryptocurrency, some projects have attempted “proof of stake” approaches which don’t involve mining. They are competing with Bitcoin for market share, and if any one of them manages to create a decentralized, robust, and scalable alternative to Bitcoin, people will adopt.
Yes, Bitcoin mining uses energy and resources, but far less than legacy financial systems. By separating money from politics, Bitcoin enables many more efficiencies than the cost to produce it.
Sourced from my article Will Bitcoin burn the planet to ashes? Not so fast.
CoinDesk columnist Nic Carter is partner at Castle Island Ventures, a public blockchain-focused venture fund based in Cambridge, Mass. He is also the cofounder of Coin Metrics, a blockchain analytics startup.
Much ink has been spilled on the question of Bitcoin’s energy footprint. But amid the clarifying details and the energy mix calculations we have lost sight of the most important questions. Anyone who wades into this muddy debate must consider the fundamentals before making a final assessment.
Energy: a local phenomenon
Let’s start with the basics. Many people, when decrying Bitcoin’s energy footprint, point out its energy consumption and presume that someone, somewhere is being deprived of electricity because of this rapacious asset. Not only is this not the case, but Bitcoin’s presence in many jurisdictions doesn’t affect the price of energy at all because the energy there isn’t actually being used. How could this be?
The first thing to understand is that energy is not globally fungible. Electricity decays as it leaves its point of origin; it’s expensive to transport. Globally, about 8 percent of electricity is lost in transit. Even high-voltage transmission lines suffer “line losses,” making it impractical to transport electricity over very long distances. This is why we talk about an energy grid — you have to produce it virtually everywhere, especially near to population centers.
When you consider Bitcoin’s energy intake, interesting patterns emerge. New data from the Cambridge Center for Alternative Finance has confirmed what we effectively already knew: China is the epicenter of Bitcoin mining, with specific regions like Xinjiang, Sichuan and Inner Mongolia dominating. With the cooperation of mining pools, the Cambridge researchers were able to geolocate the IPs of a sizable fraction of active miners, creating a novel dataset giving us new insight into Bitcoin’s energy mix.
And the results are revealing: Sichuan, second only in the hashpower rankings to Xinjiang, is a province characterized by a massive overbuild of hydroelectric power in the last decade. Sichuan’s installed hydro capacity is double what its power grid can support, leading to lots of “curtailment” (or waste). Dams can only store so much potential energy in the form of water before they must let it out. It’s an open secret that this otherwise-wasted energy has been put to use mining Bitcoin. If your local energy cost is effectively zero but you cannot sell your energy anywhere, the existence of a global buyer for energy is a godsend.
There is historical precedent for this phenomenon. Other commodities have been employed to export energy, effectively smoothing out ripples in the global energy market. Before Bitcoin, aluminium served this purpose. A huge fraction of aluminum’s embodied cost is the cost of electricity involved in smelting bauxite ore. Because Iceland boasts cheap and abundant energy, in particular in the form of hydro and geothermal, smelting bauxite was a natural move. The ore was shipped from Australia or China, smelted in Iceland and shipped back to places like China for construction.
This led to an Icelandic economist famously stating that Iceland “export[s] energy in the form of aluminum.” Today, Iceland is hoping it can replicate this model with the export of energy via data storage. This is why smelters are located in places where electricity is abundant, and where the local consumers may not be able to absorb all that capacity. Today, many of these smelters have been converted into Bitcoin mines – including an old Alcoa plant in upstate New York. The historical parallels are exquisite in their aptness.
So to sum up, part of the reason Bitcoin consumes so much electricity is because China lowered the clearing price of energy by overbuilding hydro capacity due to sloppy central planning. In a non-Bitcoin world, this excess energy would either have been used to smelt aluminum or would simply have been wasted.
My favorite way to think about it is as follows. Imagine a topographic map of the world, but with local electricity costs as the variable determining the peaks and troughs. Adding Bitcoin to the mix is like pouring a glass of water over the 3D map – it settles in the troughs, smoothing them out. As Bitcoin is a global buyer of energy at a fixed price, it makes sense for miners with very cheap energy to sell some to the protocol. This is why so many oil miners (whose business results in the production of lots of waste methane) have developed an enthusiasm for mining Bitcoin. From a climate perspective, this is actually a net positive. Bitcoin thrives on the margins, where energy is lost or curtailed.
It’s about the energy mix
Another common mistake energy detractors make is to naively extrapolate Bitcoin’s energy consumption to the equivalent CO2 emissions. What matters is the type of energy source being used to generate electricity, as they are not homogenous from a carbon footprint perspective. The academic efforts that get breathlessly reported in the press tend to assume either an energy mix which is invariant at the global or country level. Both Mora et al and Krause and Tolaymat generated flashy headlines for their calculations of Bitcoin’s footprint, but rely on naive extrapolations of energy consumption to CO2 emissions.
Even though lots of Bitcoin is mined in China, it’s not appropriate to map China’s generic CO2 footprint to Bitcoin mining. As discussed, Bitcoin seeks out otherwise-curtailed energy, like hydropower in Sichuan, which is relatively green. Any reliable estimate must take this into account.
The prospects look even sunnier when you consider the changing nature of Bitcoin security spend. Eighty-seven percent of Bitcoin’s terminal supply has been issued already. Due to the path Bitcoin’s price took during the heavy-issuance phase, miners will have been collectively rewarded just over $17 billion in exchange for finding those coins (assuming simply that they sold their coins when they mined them), even though the coins are worth $160 billion today. This is because most of those coins were issued at cheaper price points.
If Bitcoin ends up being worth substantially more in the future than it is worth today (say, by an order of magnitude), then the world will actually have received a discount on its issuance. The energy-externality of pulling those Bitcoins out of the mathematical ether will actually have been very low, due to the historical contingency of when, price-wise, those Bitcoins were actually mined. In other words: Bitcoin’s energy expenditure may end up looking rather cheap in the final analysis. Coins only need to be issued once. And it’s better for the planet that they be issued when the coin price was low, and the electricity expended to extract them was commensurately low.
As any Bitcoin observer knows, issuance as a driver of miner revenue will decline with time. Last week’s halving cut the issuance side of miner revenue by half. If I had to make a guess, Bitcoin’s periodic halvings will at least offset its appreciation long term, making runaway growth in security spend unlikely. Fees will necessarily grow to account for a much larger fraction of miner income. Fees have a natural ceiling to them, as transactors must actively pay them on a per-transaction basis. If they become too onerous, users will look elsewhere, or economize on fees with other layers that periodically settle to the base chain.
Thus it’s unlikely that security spend results in the world-eating feedback loop that has been posited in the popular press. In the long term, Bitcoin’s energy consumption is a linear function of its security spend. Like any other utility, the public’s willingness to pay for block-space will determine the resources that are allocated to providing the service in question.
Is it worth it?
Now, despite all the caveats listed above, it’s undeniable that Bitcoin not only consumes a lot of energy but produces externalities in the form of CO2 emissions. This is not under debate. What Bitcoiners are often confronted about is whether Bitcoin has a legitimate claim on any of society’s resources. This question relies on a kind of utilitarian logic about which industries should be entitled to consume energy. In practice, no one actually reasons like this. The Bitcoin-energy supplicants are mum when it comes to the energy used to illuminate Christmas lights, to power the data centers behind Netflix or to distribute untold millions of single-serve meal kits. It’s clear that because Bitcoin’s footprint is so easy to quantify — and an object of revulsion among the chattering classes — it is singled out for special treatment.
Ultimately it’s just a matter of opinion as to whether the existence of a non-state, synthetic monetary commodity is a good idea. The truth is that blockspace is a service which is paid for, and that’s where its resource cost is derived. Something duly purchased cannot, by definition, be a waste. Its buyer derives benefit from its existence, regardless of anyone else’s subjective opinion of the merit of the transaction. These same arguments have been made countless times about perceived “costs” of the gold standard, and rebutted on similar grounds before. Fundamentally, millions of individuals the world over still value physical, bank-independent savings, so it still gets pulled out of the ground with regularity. As long as people value Bitcoin, so, too, will the block-space auction continue in perpetuity.
The Bitcoin-energy worriers need not despair, however. There is a solution. All they must do is persuade Bitcoin fans to use and value an alternative settlement medium. Their best bet will be to devise a system that is even more secure, offers stronger assurances, settles faster, is more privacy preserving and is more censor resistant – all without using Proof-of-Work. Such a system would be miraculous. I’m waiting with bated breath.