The Bitcoin energy debate continues, seemingly without an end. Given the inability to apply the same scrutiny to other seemingly wasteful applications that consume similar amounts of energy, Bitcoiners are rightly frustrated.
The debate doesn’t come down to the details of mining but the social merit of non-state currency.
False Narrative or Fact?
The energy debate can be described as having both a narrative track and an objective one. The narrative is about whether it is legal to use any society’s energy resources to produce and maintain a non-state money system.
This is the most crucial question and involves weighing the relative costs of energy externalities against sound money’s relative benefits and releasing individuals from tyrannical monetary regimes.
Next, there is the objective debate. This focuses on the energy bitcoin uses, the sources it draws from and the likely future. The problem here is that bitcoiners have to defend the industry’s costs while critics have the freedom to question a specific industry’s energy use. You often hear about the social benefits of Christmas lights, clothes dryers, and game consoles. Yet little about their energy cost.
Sometimes, however, an argument is presented that is so clearly based on incorrect assumptions that it’s worth leaving the narrative behind and returning to the world of facts. These arguments are becoming disturbingly common.
- Bitcoin uses a lot of energy,
- Bitcoin settles~300,000 transactions per day,
- Combining 1. and 2. will result in an incredible “energy cost per transaction.”
Based on that analysis, Bitcoin will soon consume more energy than the Earth contains.
Although this line of reasoning may sound convincing to the uninitiated, it is actually completely flawed in several important ways. We see it every day. Here’s an example from Eric Holthaus, one of America’s most prominent climate journalists and a published author on this topic.
Bitcoin uses 0.5% of the world’s electricity on just 350,000 daily transactions.
At that rate, Bitcoin would require 14x the world's electricity to replace all daily credit card transactions.
Bitcoin is not just inefficient, it's actively anti-efficient.https://t.co/tHrWaC8sW6
— Eric Holthaus (@EricHolthaus) February 18, 2021
Putting Things in Perspective
Texas’s electricity grid was hit hard by a heatwave in June 2021. The infrastructure was still reeling from the winter storm outage and continued to be stretched by the high summer demand. Angela Walch, a law professor, tweeted: “Does anyone know how much of #TexasPowerGrid goes to bitcoin mining?”
According to one estimate, U.S. household dryers consume up to 100 terawatt-hours of energy. This is roughly equal to Bitcoin worldwide. However, dryers have not been criticized with the same passion as Bitcoin. It is easy to see why. People have used dryers for decades.
They know their utility and purpose – They don’t get Bitcoin. This is the problem.
Environmental criticisms of this technology are based on subjective value judgments. The underlying issue is not small or simple, and it isn’t about Bitcoin at all. It is more about the lens we use to view and condemn different energy uses.
We hear a lot about how Bitcoin uses lots of electricity. According to recent studies, it consumes 91 terawatt-hours of electricity per year, which is more than Washington, Finland, and almost as much Pakistan. Consider the electricity consumption of any other activity.
According to one study, our digital economy uses more than 15 times as much energy as Bitcoin per year.
It is a false argument to say an industry or activity uses a lot more electricity than a country. Eight billion people live on this planet. Every activity on the planet uses as much electricity to run as a country. We all take part in many of them.
Like for dryers, we love all of our mainstream electricity-consumption activities and their convenience. We like how our games, streaming services and social media numb and envelop us, so we accept them and their environmental price.
However, Bitcoin has had a bad reputation ever since it was associated with dark web marketplaces that are illegal. It is not tangible in value, and its mechanics can be complicated. Therefore, some feel that it does not have the right to use the same amount of electricity as any other activity.
While some avoid elevators and planes and grow their food, most people aren’t environmental saints. We contribute to practices and industries that use more energy than Bitcoin. All of this is fine, but Bitcoin isn’t?
Correction of a False Narrative
What amount of energy should an industry consume?
Organizations around the globe are under pressure right now to reduce their consumption of non-renewable energies and carbon emissions into the atmosphere. However, determining how much consumption is excessive is a complicated question intertwined in discussions about society’s priorities.
It is a matter of values that determines which goods or services are worth spending your resources on. The question of energy use seems fair on the surface.
According to the Cambridge Center for Alternative Finance, Bitcoin consumes approximately 110 Terawatt hours per year. This is roughly equal to the annual energy consumption of small countries such as Sweden or Malaysia. This sounds like a lot.
But how much energy should a currency system consume?
It all depends on your opinion about Bitcoin. If you think Bitcoin is a scam or a way to launder money, it makes sense that any energy consumed would be wasteful. You are most likely one of the many millions who use Bitcoin to escape capital controls, monetary repression or inflation. It doesn’t matter if you believe Bitcoin has a legitimate claim to society’s resources. It all comes down to the value you believe Bitcoin adds to society.
We need to be clear about how Bitcoin consumes energy if we are going to have this discussion. While understanding Bitcoin’s energy consumption won’t resolve questions about its utility, it will help you understand the environmental impact Bitcoin advocates really want to make. Some fundamental misconceptions should be addressed.
Energy Consumption is not equivalent to carbon emissions
First, it is important to distinguish between the amount of energy a system uses and the amount of carbon it produces. Although it is easy to determine energy consumption, extrapolating carbon emissions is difficult without knowing the exact energy mix, which is the composition of the different energy sources used in Bitcoin mining. One hydropower unit has a smaller environmental impact than one unit of coal-powered electricity.
It is easy to calculate Bitcoin’s energy use: First, you can look at the hash rate, which is the sum of all the computational power required to mine Bitcoins and process transactions. Next, you can make educated guesses about the energy requirements for the hardware used by miners. It is much more difficult to determine its carbon emissions.
Mining is a highly competitive industry, so miners are not always forthcoming about the details of their operations. The Cambridge Centre for Alternative Finance (CCAF)has the best estimates of energy production geolocation (from where an energy mix can be inferred). It has worked with major mining companies to compile an anonymized database of miner locations.
The (CCAF) can make inferences about which energy sources miners used by country and sometimes by province based on these data. Their data doesn’t cover all mining pools and is not up to date, so we are still in the dark about Bitcoin’s energy mix. Many high-profile analyses generalize energy mix at country level. This can lead to inaccurate portrayals of countries like China, with a very diverse energy landscape.
Accordingly, estimates of how much Bitcoin mining uses renewable energy are wildly different. A report in the Harvard Business Review indicated that almost three-fourths of Bitcoin’s energy consumption is fully carbon-neutral. The report suggests this is due to the abundant availability of hydropower in key mining centers like Southwest China, Canada and Scandinavia.
Bitcoin can use energy that other industries cannot
Bitcoin can be mined from anywhere. This is another key reason Bitcoin’s energy consumption differs from that of other industries. Nearly all the energy required worldwide must be produced within a reasonable distance of its end users. But Bitcoin doesn’t have such a limitation and can be mined from power sources that are not available to most other applications.
Hydro is perhaps the best-known example. Every year, huge amounts of renewable hydro energy are lost in the wet seasons in Sichuan or Yunnan. These areas have a huge production capacity that is much greater than the local demand. Battery technology is not advanced enough to allow for the storage and transportation of energy from rural areas to urban centers.
These areas are most likely the largest stranded resource on the planet. It’s no surprise that they are also the core lands of Chinese mining, accounting for nearly 10% of global Bitcoin mining during the dry season and half of it in the wet.
Flammable natural gas is another promising option for carbon-neutral mining. Today, oil extraction produces significant amounts of natural gas byproducts. This is energy that pollutes our environment but never makes it to the grid. Most traditional applications cannot use this energy because the location of remote oil miners constrains it.
Bitcoin miners from North Dakota to Siberia have taken advantage of this opportunity to monetize the otherwise-wasted resource. Some companies even explore ways to reduce carbon emissions by burning the gas more carefully. Although this is a small player in today’s Bitcoin mining industry, back-of-the-envelop calculations indicate that there is enough flared natural gas in North America to power the entire Bitcoin network.
While the monetization and use of excess natural gas by Bitcoin is still a source of emissions, some argue that it acts as a subsidy for the fossil fuel industry, encouraging energy companies to invest more into oil extraction. However, income from Bitcoin miners pales compared to the demand from other industries that depend on fossil fuels. This external demand is likely to continue to grow. It is clear that oil will continue to be mined for the foreseeable future. Therefore, it is beneficial to exploit a natural byproduct and potentially reduce its environmental impact.
The aluminum smelting business offers a surprising parallel. Because turning natural bauxite ore into usable aluminum requires a lot of energy, and transportation costs are often prohibitive, many countries with an excess of energy have built aluminum smelters in order to make use of these resources. Sichuan and Iceland could produce more energy than they could consume locally. Yunnan and Sichuan became net energy exporters by mining aluminum.
Mining Bitcoin takes a lot more energy than using it
One part of the equation is how energy is produced. The other area of confusion is how Bitcoin actually consumes electricity and how it’s likely that will change over time.
Although academics and journalists often talk about Bitcoin’s high per-transaction energy cost, this is misleading. Most of Bitcoin’s energy use is during mining. The energy needed to validate transactions once coins have been issued is very low. It is therefore impossible to simply look at Bitcoin’s energy draw and divide it by the number of transactions. Most of that energy was used for mining Bitcoins, not supporting transactions. The last critical misconception is that Bitcoin mining will continue to increase in energy costs.
Runaway Growth Is Unlikely
People assume Bitcoin will control entire energy grids one day because of its large energy footprint. According to a 2018 study, Bitcoin could raise the temperature of the Earth by 2 degrees Celsius. There are good reasons to doubt this.
Bitcoin’s energy mix is becoming less dependent on carbon each year than in many other industries. The U.S. has seen a rise in publicly traded, ESG-focused miners. China recently banned coal-based mining from Inner Mongolia, which is one of the most coal-intensive regions. Many organizations in the mining industry have also launched initiatives such as the Crypto Climate Accord, which the Paris Climate Agreement inspired. This initiative aims to promote and reduce Bitcoin’s carbon footprint. Bitcoin could be a powerful incentive for miners to develop these technologies as the cost of solar energy becomes more affordable.
Miners won’t be able to expand their mining operations at current rates for an indefinite time. Although the Bitcoin protocol subventions mining, those subsidies also have limits on their growth. Today, miners get small fees for verifying transactions while mining. This accounts for about 10% of miner revenues. They also get whatever margins they can when they sell the bitcoins that they have mined.
The protocol reduces the issuance-driven portion of miner revenues by half every four years. This means that unless Bitcoin’s price doubles every four years in perpetuity, which economics suggests is virtually impossible for any currency, this share of miner income will eventually fall to zero. Transaction fees are also a limitation of Bitcoin’s ability to process more transactions than it can (less than one million per day), and users’ limited tolerance for paying fees limits the potential growth of this revenue source. While we can expect miners to continue to operate regardless of the transaction fees — the network relies on it to function — the financial incentive to invest is naturally decreased if profit margins drop.
Is Bitcoin Worth It?
There are many factors that can affect Bitcoin’s environment. Is Bitcoin worth it? That question at the heart of all these issues and is harder to answer with numbers. Many environmental concerns are exaggerated, based on incorrect assumptions or misunderstandings about the Bitcoin protocol.
This means that the environmental impact of Bitcoin is unlikely to be as severe as you think. There is no doubt that Bitcoin, like almost all other things that add value to our society, does use resources. It’s up to the crypto community, like every other energy-consuming business, to recognize and address these environmental concerns and work together to reduce Bitcoin’s carbon emissions.
This will ultimately prove that the social value Bitcoin brings is worth the effort required to sustain it.
However, the issue is not utility. While online activity is essential to our existence, how much of it is Pornhub, Call of Duty, House of Cards, or Candy Crush? Netflix consumed 451-gigawatt hours in 2019. While it is not as large as Bitcoin, it is one streaming service within one corner of the internet. This is an 84 percent increase from 2018.
Many activities can be done with electricity, but there is little benefit. Bitcoin shouldn’t be required to prove its utility. That has never been the only criterion to determine energy worthiness.
The Bottom Line
The issue is not the source of bitcoin’s power or whether it is green. This examination has not been required for any other activity. The problem is, those who denigrate Bitcoin’s footprint believe that some energy uses, no matter how large or for what purpose, are acceptable and others are not. They feel they are the rightful, infallible judges of where that line should be drawn.
It is important to know Bitcoin’s power source and whether it is environmentally friendly. However, this examination has not been required for any other activity. The problem is, those who denigrate bitcoin’s footprint believe that some energy uses, no matter how large or for what purpose, are acceptable. They feel they can make the decision and are rightful judges. This is where there is some hypocrisy.
Because Bitcoin’s network can be seen publicly, it is possible to point out its energy consumption, unlike other industries and activities. It is difficult to question the environmental impact of Hollywood’s electricity use.
Ethan Lou, a journalist and author of Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West notes:
“A climate question no less important than that of Bitcoin: Is streaming the song Despacito truly an appropriate use of the equivalent of five African countries’ annual electricity consumption? There is a bigger debate here, about how we all, collectively, constantly guzzle electricity without regard for how useful the resulting activities are. Perhaps it is time to apply that Bitcoin energy criticism more widely, to everything we do. In the meantime, let they who are without carbon emissions cast the first stone.”