Those new to Bitcoin and mining Bitcoin may not realize how controversial energy consumption is within the financial community. Many media have falsely compared the amount of electricity needed to process a single VISA credit card transaction to Bitcoin transactions. The reasoning behind this is that every industry should do what it can to protect the environment and conserve energy.
Bitcoin has been criticized because of its proof of work algorithm, which provides the backbone of its mining, the block building process. Although it consumes a lot of electricity, the two types of transactions differ enough that they do not compare well, and very few have examined the difference between the source of electrical power or where the financial institution is located.
The Fallacy Debunked
Critics like Alex de Vries often compare the carbon footprint of a single Bitcoin transaction to VISA transactions. While the initial comparison started between Bitcoin and VISA, the comparison has come to skew Bitcoin against the banking industry as a whole. It is worth noting that comparing BTC to VISA when it comes to electricity per transaction does not make sense. The two types of transaction are very different. A VISA transaction occurs using long-established communication methods in the formal banking industry. It uses credit card processing, merchant accounts and banks combined. The whole process is centralized, streamlined and easy to manage. In contrast, Bitcoin provides decentralized transactions that cannot be manipulated. Rather than relying on the established banking community, Bitcoin serves the unbanked.
Additionally, most Bitcoin mining does not take place in the United States. This is important because countries like Iceland, where many mining operations are located, use renewable energies such as hydropower. Although it still consumes a lot of electricity, it doesn’t pollute as much, which is the underlying reason for the discussion about energy costs and consumption. Bitcoin transactions receive confirmation from a plethora of independent miners. Each of them is its own business. Bitcoin offers superior efficiency compared to any centralized system. Additionally, while VISA simply provides a payment network that requires the banking system, Bitcoin provides a stand-alone currency.
Even though the total network hash can be easily calculated, it is impossible to say what this means in terms of power consumption as there is no central register with all active machines and their exact power consumption. In the past, power consumption estimates usually included an assumption about which machines were still running and how they were distributed, to arrive at a certain number of watts consumed per Gigahash/s (GH/s).
Framing the Issue as the Big Picture
While banks use their local electricity supplier to meet their energy needs, the process of adding Bitcoin transactions to a block takes place at sites decentralized by private companies. These businesses, whether a sole proprietorship or a corporation, maximize their return on investment by locating in areas where cheap energy comes from renewable energy sources. There are many other variables to consider when comparing cryptocurrency with other forms of financial transactions, as well as the fact that many Bitcoin miners use renewable energy.
According to estimates based on data provided by the ATM Industry Association, the total consumption of banks for one year only on these three metrics is around 26 TWh on servers, 58 TWh on branches and 13 TWh on ATMs. . for a total of nearly 100 TWh per year. Even if only 30% of banks’ electricity consumption was the bitcoin-like part, it would still make Bitcoin more efficient. As a final comment, I believe that bitcoin will become more efficient in terms of electricity consumption in the future (although it may continue to increase its electricity consumption in absolute value, energy consumption also increases in the world).
It should also be noted that the Bitcoin protocol itself is being upgraded to improve its efficiency. We recently saw the activation of SegWit, and in the coming months, we will see the adoption of the Lightning Network, which effectively moves micropayments off the blockchain. Once done, Bitcoin will start to look more like a clearing network with reduced fees, and orders of magnitude will reduce electricity consumption per transaction.
Bitcoin’s energy consumption is compared to that of countries like Nigeria, Iceland, Denmark or Ecuador. While no one can argue that Bitcoin mining consumes a lot of electricity in absolute numbers, the correct way to look at this issue is not total consumption, but to compare the efficiency of Bitcoin with traditional centralized alternatives, that we mainly use today and that one day, Bitcoin could replace. When you look at a comparison in terms of energy costs per transaction, Bitcoin comes out on top. This can be explained by a much smaller number of users creating a smaller number of transactions, which means that even if a single Bitcoin transaction uses more electricity, the total cost of Bitcoin transactions in a year is much lower than the total energy-cost of VISA. The amount of energy needed to secure the Bitcoin Blockchain is in no way related to the number of transactions, so as more and more transactions are processed on the Bitcoin network, the amount of energy required for a transaction will decrease.