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Written by Erik Weijers 6 months ago

Is Bitcoin's energy consumption a problem?

Critics of Bitcoin miss no opportunity to rub it in: Bitcoin uses as much energy as some countries. Bitcoin proponents are quick to counter: cruise ships or tumble dryers worldwide use just as much energy - and which is more important to humanity? To find a way out of these apples-and-oranges battlefields, we must first understand the relationship between money and energy. And how renewable the energy is that Bitcoin uses.

Let's kick off with the question: what is all this energy used for in the Bitcoin network? Simply put: miners (specialized computers) have to work for their Bitcoin and that keeps them honest when adding transactions to the blockchain. That is the game-theoretic foundation of what is called proof-of-work. The higher the energy consumption of all Bitcoin miners combined, the more secure the network.

Proof-of-work makes it extremely costly to misuse a communications network. The consensus mechanism was devised in the 1990s as a way to end spam in email networks without having a central authority determine what is admissible mail and what is not. So how can proof-of-work work here? Well, if sending a mail costs a little bit of computational power/energy (and therefore money), it is no longer profitable for senders of millions of spam mails to flood the network with their garbage.

In early 2009, it was Satoshi and Hal Finney who were mining Bitcoin on their laptops. Back then, anyone with bad intentions and a bunch of graphics cards could have pushed over the network. Today, this requires so much hardware and energy that even governments that would want to eradicate Bitcoin stand no real chance. Energy consumption, in short, is the price we pay for a form of money that cannot be hijacked and is (almost) indestructible in a world where currency wars rage.

Older forms of proof-of-work

Proof-of-work as the basis of money has existed for thousands of years. The reason that gold and silver could and can be money is that they are scarce metals: it takes a lot of work to track them down and mine them. If everyone could pick up gold in their backyard, it wouldn't be money.

Rai stones

A fascinating ancient form of proof-of-work money existed hundreds of years ago in the Yap Islands of Micronesia. There, the islanders constructed circle-shaped objects up to the size of wagon wheels, made of limestone. These were used for important transactions. The limestone had to be imported all the way from Palau, an island more than three hundred kilometers away. After all this hassle, it still cost a lot of effort to make the stone. Again, if making the stone had been easy, it could not have been money.


One of the bigger Rai stones, Micronesia

Proof-of-work, stake or force

There are other forms of money than proof-of-work. But money is always proof of something, as Lyn Alden explains in her long-read What is money, anyway? If I own Bitcoin, it is proof that I or someone else has done work. Proof-of-stake is based on a completely different principle: it is the shareholder model, where a company or crypto project is cut into pieces and distributed to shareholders, who can vote on the future of the project. Our everyday money (fiat money), finally, could be called proof-of-force. It is issued by a government that forces residents to pay taxes in the currency in question. This creates demand for the money and gives it value.

By analyzing money in this way, it quickly becomes clear that the obsession with Bitcoin's energy consumption is myopic. First, there are other forms of proof-of-work money that one rarely hears people complain about, even though they consume more (polluting) energy than Bitcoin: gold in particular.

Second, it becomes clear that other forms of money are not necessarily better because they function differently. Is proof-of-force money better than proof-of-work because it consumes less energy? Proof-of-force is centralized and can basically be considered a power play that favours people who are close to the printing press, namely those who can borrow easily and at low-interest rates (and will be bailed out in case of impending default). And by the way, is it really true that proof-of-force money uses less energy? If we follow the chain of cause and effect, one could argue that all money is backed by energy at some point. Think of it this way: sooner or later, the U.S. military comes knocking when a country stops paying for its oil in dollars. Surely the military uses energy - and not the cleanest form. Or are there already electric tanks?

The irony is that because Bitcoin makes the connection between money and energy so clear, it gets a disproportionate amount of flack.

How much energy does Bitcoin use?

Bitcoin currently (April 2022) uses about 15.8 GigaWatts of energy. That equates to 140 TWh per year. That is indeed comparable to the energy consumption of a country like Argentina. But it is only about one-tenth of one per cent of global energy consumption.

Comparison with gold
Rather than comparing energy consumption with that of countries, it makes more sense to look at other types of industries. After all, Bitcoin produces money just as other industries produce steel, aluminium or bicycles, for which they need electricity and raw materials. But even more aptly, we can compare the production of Bitcoin to the production of gold. Indeed, gold has a similar function, that of being an inflation-resistant savings vehicle. The energy consumption of gold mining and gold recycling is somewhat less easy to determine than that of Bitcoin. But it is estimated at 265 TWh, so roughly double that of Bitcoin.

Energy consumption per transaction, or...?

Critics often come up with figures on the amount of energy per transaction that the Bitcoin network would use and then they come up with high values. This is a tempting but wrong line of thinking. Why is it wrong? Because the energy costs are incurred for mining Bitcoin, not for transactions. To make this clear, the comparison with gold is again useful. No one divides the energy consumption of mining gold by the number of gold transactions that occur per unit of time (if the latter can be determined at all). There is a fixed number of Megabyte in the Bitcoin blockchain, which leads to a fixed number of transactions per block. This is independent of how hard the miners run their machines.

On top of that, not all Bitcoin transactions occur on the Bitcoin blockchain itself. Consider all Lightning transactions, or transactions on other Layer 2s: these can only exist because the Bitcoin blockchain keeps functioning. Those layer 2 transactions far outnumber the few thousand that can fit in each block on the Bitcoin blockchain itself.

Energy consumption as the cost of security

In Bitcoin, as mentioned, energy consumption is not for processing transactions but for securing the network. It is like a wall of energy protecting a database. So think of energy consumption as the security cost or storage cost. Even if I don't do any transactions and just hold my Bitcoin, I know that the miners are working for me to guard the digital vault. So the right question to ask is, what is the percentage that we as Bitcoin owners are paying for that security? That percentage in 2021 was about 2% of the total value of the network: 18 billion security costs (energy, hardware) out of a market value of 850 billion. This percentage was around 5% five years ago and was above 40% in the early years. So the burden of security cost is decreasing over time, just like what you would want from a network that is scaling efficiently.

Year

Market cap BTC ($)

Annual security costs ($)

% security/
market cap

2011

38 million

18 million

47%

2013

2 billion

300 million

14%

2015

4 billion

377 million

9.6%

2017

65 billion

3,4 billion

5,2%

2019

130 billion

5,1 billion

4%

2021 (H1)

850 billion

16,5 billion

1,9%

If we would plot the table (source) data, we would see that the energy consumption of Bitcoin will approach a ceiling. This is because of the Bitcoin halvings every four years. Even if the price continues to rise, this increase, and therefore increase in profitable energy input, is offset by a halving of the issuance every four years: the well-known halving. Energy consumption as a percentage of total energy consumption on earth is expected to rise not much above 0.5%, even if Bitcoin were to rise in price by another factor ten or twenty.

How green is Bitcoin's energy consumption?

Bitcoin mining is very competitive and only profitable for miners if they can buy power cheaply. This is one of the reasons that many Bitcoin miners in China were at the hydroelectric plants: during the rainy season there was a surplus of power generation and hence cheap electricity. This gets a common misconception out of the way, namely that miners are 'stealing' energy from consumers.

But how green on average is the energy mix that miners buy? That is a fierce point of debate between proponents and opponents. The Bitcoin Mining Council (BMC) has come up with an estimate of 58.5% renewable worldwide. They base this on actual figures from 46% of the global network. A much lower estimate comes from Bitcoin critic Alex de Vries, whose estimate comes at a 25% renewable energy mix. The criticism of the latter study is that the authors base their estimates on the average energy mix of the region in which the miner operates - while the miner may use a different power source.

But let's not try to settle the argument. Let's take the average of what proponents and opponents claim. Then we arrive at a renewable energy mix of about 41%. That's a higher percentage of renewable than the global renewable energy consumption worldwide, which is estimated at about 30%.

Is Bitcoins energy consumption getting more renewable?

More important than the exact percentage of green energy is the trend. What developments are taking place in the field of Bitcoins energy consumption? The trend of the last few years is that Bitcoin mining is helping to make the energy grid greener. Miners are in fact being integrated into production facilities and in power generation. Both for making sustainably produced energy more profitable and neutralizing unsustainably produced energy.

Cleaning up wasted energy
There are plenty of places where energy is 'waste'. At oil fields, methane is captured as fuel for the miners. This methane would otherwise be blown into the air.

This example should appeal to activists against Bitcoin (hi, Greenpeace!). Bitcoin as a cleaner of waste energy: how green can one become? The beneficial effect on CO2 emissions cannot be higher than where it captures methane and converts it into CO2, a less potent greenhouse gas than methane. And that's not about small amounts. In the U.S. state of North Dakota, an amount of gas is blown into the air equivalent to tens of TWh of energy. That could power a substantial part of the Bitcoin network.

Bitcoin as a subsidy for solar and wind power construction
So in addition to cleaning up dirty energy, Bitcoin also acts as a kind of subsidy to the construction of solar and wind farms. And we will need these in the coming years if we are to meet our climate targets. How does this work? A Bitcoin mine is placed at new solar or wind parks. At times when the parks produce a surplus of energy, the mines switch on. The wind and solar parks need to have a considerable overcapacity in order to be able to cope with peaks in demand. So they often have overcapacity and are therefore less profitable. Bitcoin miners can absorb this overproduction. This is currently happening on a large scale in west Texas, where many solar and wind farms are being added.

Bitcoin mine (background) solar park in Southern Spain. Photo credits: powcontainers.com

Buffer/battery for the grid
But why should Bitcoin miners fill this role? Surely there are other sorts of data centers that could do this? Unfortunately, no. Bitcoin miners, unlike data centers run by, say, Google, do not have to be running constantly. So they are more flexible and can absorb peaks in the network more easily. On top of that, data centers of Internet companies need to be near densely populated areas (their users). A data center near a remote oil field makes no sense. Bitcoin miners don't have that limitation.

Conclusion

Is Bitcoin's energy consumption a problem? It depends first of all on whether you see Bitcoin as a solution to a problem. Many people think so: just ask the war refugee from Ukraine who was able to get some of his assets across the border in the form of Bitcoin. ATMs could no longer be used and he may never see his home again. There are also less dramatic but important use cases: people in safe countries are protected by loss of purchasing power of their savings. And that loss of purchasing power is substantial. Unfortunately, with today's high inflation and low interest rates, fiat money no longer has the role of a store of value. Some other form of money has to step in.

Assuming Bitcoin has utility, the next question is: can another crypto that consumes less energy also play this part? To some extent, other crypto coins can. The Ukrainian refugee could also have taken, say, Solana across the border on his hardware wallet. But there are substantial differences between proof-of-work and proof-of-stake crypto.

The comparison between proof-of-work and proof-of-stake is a complicated issue and worth a separate article. Most other cryptos are proof-of-stake and that model comes with its own risks. In particular, the risk of centralization that also plagues the traditional financial system. A small group of owners become richer and richer (interest on interest) through their share (stake) and thus gain more and more power over whose transactions are valid and whose are not. This risk of centralization and thus abuse of power is a lot smaller in a money system that is proof-of-work.

So, given all of the above, is Bitcoin's energy consumption, which is around 0.1% of global consumption, a problem? And given the fact that its energy mix is more green than what is consumed by your average Tesla? And given the fact that Bitcoin is helping to push the energy industry toward renewables?

We have our own opinion but will leave it to each to make their own decision. Everyone is free to decide for themselves.

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