Bitcoin’s energy consumption explained

Bitcoin consumes more electricity than the whole of Argentina. Bitcoin requires the same amount of energy it would take to power every kettle in the UK for 27 years. One Bitcoin transaction is equivalent to 500,000 Visa swipes.

You may have heard the old saying, ‘There are three types of lies: Lies. Damn lies. And statistics.’ And in the world of cryptocurrency, there are plenty of statistics.

For Bitcoin to operate, massive amounts of energy is needed. This is undeniable and a serious issue. But given the media’s tendency to paint things a little too simplistically, one should always dig a little deeper before making up their mind on a topic, especially when it comes to new technologies that few people actually understand.

Unfortunately, many people these days (myself included) can be a little too quick to draw conclusions after seeing or even hearing a news story that neatly depicts good vs evil, giving us a good dose of outrage in a single headline or statistic.

However, a bit of research and Googling into the topic of Bitcoin and the environment reveals some pretty eye-opening stuff – some of which will probably change the way you feel about the issue.

Today we’re going to look at some of the environmental claims against Bitcoin to find out which ones are legit and which ones are just plain… statistics.

Key Takeaways

Studies estimate the percentage of Bitcoin mining powered by renewables to be between 39% & 74%.
Bitcoin miners have a strong incentive to move their energy-intensive mining operations to places where there is an excess of cheap, renewable energy.
Bitcoin’s ability to turn ‘stranded’ & excess renewable energy into economic value could have a positive impact on both the financial system & the environment.
Other cryptocurrencies are now using, or switching to, an alternative to mining called ‘Proof of Stake’, which serves the same function but with none of the electricity costs.

Bitcoin Mining

Bitcoin, and Bitcoin mining in particular, have been in the news recently, this time it’s over how much energy Bitcoin consumes and why it is the new public enemy no. 1 for the environment. Bitcoin mining does undoubtedly consume A LOT of electricity, around 110 Terawatt Hours per year (0.55% of total global electricity production) to be exact.

However, many of the environmental claims against Bitcoin crumble under some scrutiny. You should always check your facts and these people obviously didn’t… but in the world of 24hr news cycles, sensationalist media stories and hidden economic agendas, is this really a surprise?

Here I will do my best to address both sides of the story and give as honest a take as I can on this complex issue. Climate change & the environment is a topic that hits close to home for me.

Ensuring we do not sabotage this wonderful thing called humanity by exhausting all the earth’s natural resources is far more important to me than Bitcoin, money or any belief or ideology. Which is why I’ve done some research on the topic and am hoping to add my two cents to this important and often misinformed conversation.

What’s the problem?

Bitcoin mining, the process which both creates new Bitcoin and allows the network & its transactions to be secured without a controlling authority like a bank, requires a ton of electricity.

However, lampooning Bitcoin for this consumption is far too simplistic and rather typical of Bitcoin’s biggest critics who seem to be unwilling to acknowledge any of this technology’s potential for good, despite many never ever having actually engaged with the subject matter themselves. A better question to ask when thinking about Bitcoin, financial systems and energy consumption is: How much energy does monetary system deserve to consume?

Let’s be clear. Humans use energy to live. Whether it’s coal, gas, solar, wind, hydro or electricity (which is also coal FYI) , any industry that adds value to our society needs a certain amount of resources to operate. Where the energy comes from and how much carbon the consumption of this energy omits is another crucial question that needs to be factored into the conversation.

So, before we go over a few of the more outlandish (and quite frankly laughable) claims about Bitcoin’s energy usage, let’s start by examining both sides of where Bitcoin’s energy consumption comes from, what its energy consumption actually is, and how it compares to the value Bitcoin provides the world.

Energy consumption is NOT the same as carbon footprint

First things first. There’s a crucial distinction to be made between how much energy a system consumes and how much carbon it emits. This is a very basic distinction but one that is rarely made when talking about Bitcoin.

Bitcoin’s ‘energy consumption’ is often equated directly to its carbon footprint and impact on the environment, without taking into account where the energy actually comes from. One unit of hydro or solar energy has much less environmental impact than the same unit of coal-powered energy, and as we will see later on, this makes a huge difference for Bitcoin’s actual impact on the planet.

Bitcoin Mining, Electricity & Renewable Energy

Given that Bitcoin uses a lot of energy, and renewable energy is the cheapest source, Bitcoin miners seem to naturally gravitate towards renewables. According to the recent Bitcoin Mining Network report from CoinShares Research, the share of electricity needed for Bitcoin mining that is powered by renewables is estimated to be as high as 74%. However, researchers from Cambridge have put Bitcoin’s renewable energy reliance at closer to around 39%.

To appease the sceptics, let’s pretend that the true figure is at the lower end of 39% (though many crypto-believers would heartily disagree). Even if the lower figure of 39% renewables was true, this is still significantly higher than the 25% global average of electricity generated by renewables (2019). So that’s a start (and just the tip of the iceberg).

Delving into how Bitcoin mining actually works quickly reveals that the most efficient and profitable way to mine Bitcoin is through renewable energy. But first, let’s recap for those who don’t know what Bitcoin mining actually is (if you already know what it is feel free to skip the next section).

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Bitcoin Mining in a nutshell

For decades, decentralised digital currencies that do not require a bank have been impossible for a number of reasons. Primarily this is because ensuring transactions are legitimate and that people aren’t ‘double spending’ their money (spending a unit of currency twice) is incredibly difficult without a centralised bank or payment processing service to verify all transactions and make sure no theft or malicious activity takes place.

However, Bitcoin, and the process of Bitcoin mining (aka the Proof of Work method) changed the game by providing:

A solution to the problem of double spending & a reliable way for a ledger of transactions to be maintained across a group of people who don’t know each other
A banking network that was highly secure & collectively owned & maintained by people all over the world
A way for trust to be built into the network itself, completely removing the need for banks and enabling the many advantages of a decentralised currency

While you can read a more in-depth explanation of the mining process here, in a nutshell, Bitcoin mining involves solving complex mathematical puzzles with powerful computers (that use a heap of electricity). The mining process serves two primary purposes:

To verify the legitimacy of a transaction, helping to avoid fraudulent transactions & the problem of double spending
To create new cryptocurrency by rewarding miners for performing the previous task.

But back to the issue of energy consumption.

How much energy should a monetary system consume?

This question is subjective. And it all depends on what value you think a particular system brings to society. Before you criticise Bitcoin mining’s seemingly ‘pointless’ energy consumption, let’s take a step back. A secure and functioning financial & banking system adds an amount of value to society that is hard to comprehend. And ANY financial system takes A LOT of energy to run.

While research from Cambridge has rightfully shown that Bitcoin annually consumes the same amount of energy as small countries like Malaysia or Sweden, this is a misleading statistic for many reasons, with the main one being that it ignores the value that the Bitcoin system provides when compared with our current financial system.

First let’s consider what kind of energy and labour our current financial system requires – think all the world’s central banks, bank branches, skyscrapers, offices, ATMs, armoured trucks, security guards, tons of paper documents, millions of employees, clerks and over-paid executives, all the digital infrastructure not to mention all the paper and electricity it takes for governments to print our money (which they have been doing plenty of lately).

Bitcoin’s network encapsulates all the energy needed to make this system work, digitising the vast majority of our current monetary system in a way that is actually MORE efficient in terms of security, transaction costs and having true ownership over your assets. Not only can you make cross-border payments fast & cheap, but you don’t have to put all your trust in a central bank that may not have your best interests at heart.

And this is just the tip of the iceberg when it comes to the ways decentralised digital currencies could improve our current financial system. And when you factor the energy costs of our financial system, it’s easy to see why some of the statistics used against Bitcoin can be shown as completely unsubstantiated.

According to research conducted by the popular platform ‘Digiconomist’, the energy consumption for one Bitcoin transaction is the same as 453,000 Visa transactions, or in carbon footprint terms, this means that a Bitcoin transaction is 710,000 times ‘dirtier’ than a single Visa transaction.

This attack on Bitcoin immediately falls down under scrutiny as it completely fails to take into account all the other energy costs associated with a company like Visa, not to mention the fact that Visa is merely a tiny part of a wider financial system which a network like Bitcoin encapsulates most of all on its own.

The Bitcoin network is essentially an entire decentralised monetary system that does not require the need for a central bank. Not just a single credit card company like Visa.

Research by ARK Investment Management found that the Bitcoin ecosystem consumes less than 10% of the energy required for the traditional banking system. While it’s true the banking system serves far more people, crypto is still in its infancy and the early infrastructure stage of any industry is always particularly intensive.

But it must be said: Bitcoin (like everything else that adds value to society) still does consume A LOT of power. If a whole host of other cryptocurrencies were to arise using the same Proof of Work mining system, this could pose a serious problem. However, with a system as strong and secure as Bitcoin’s we would only really need one of this kind of system.

As we speak, many cryptocurrencies are now using, or switching to, an alternative method called ‘Proof of Stake’, which serves the same function as mining but with NONE of the electricity costs of mining. Ethereum, the second largest cryptocurrency, is currently doing this and there is the potential for Bitcoin to do so someday as well. But that being said, there is some compelling evidence to suggest that Bitcoin’s massive energy consumption may not be the problem it’s made out to be. Let’s take a look at renewables and why the media’s portrayal of Bitcoin is hardly the full picture.

Why Bitcoin could actually be good for the environment

With the threat of climate change looming, the push for renewable energy is only getting stronger. As more and more industries switch to cleaner sources of energy, renewables are rapidly becoming far cheaper & more efficient alternatives to fossil fuels like coal and gas. But while renewable energy is cheap and abundant, especially in places where there is an excess of it – there is a serious problem: renewable energy is extremely difficult to store and even harder to transport.

When the sun shines and the wind blows we get massive amounts of cheap, clean energy & electricity. But we don’t control the weather and our inability to store and transport this kind of energy poses a problem for renewables to adequately provide a constant flow of power to our cities, where most of the power is needed. There is plenty of sunlight in the desert but getting the electricity all the way to where we need it has proven to be very difficult.

Now let’s look at how Bitcoin & cryptocurrency mining relates to all this.

It is no secret that Bitcoin miners are driven by profits. The Bitcoin network incentivises them to help maintain the network through the Bitcoin they earn by mining. But electricity costs a lot of money and if profitability is the priority, miners will naturally go to where electricity is cheapest. This is good for two reasons:

Renewable energy is the cheapest source of energy, especially when there is an excess of it going to waste.
Due to the lack of demand and the inability to transport it, the cheapest and most abundant sources of renewable energy are usually located in places nowhere near people. This is also known as ‘stranded energy’.

Thus, Bitcoin miners have a strong incentive to move their high-powered mining facilities to the places where there is already an excess of renewable energy, which is why the biggest Bitcoin mining operations are located in places a normal person would never visit.

EXAMPLE

In the wet season in China’s Sichuan and Yunnan provinces, huge quantities of renewable hydro energy are wasted every year. Production of this hydro energy during the wet season massively outweighs the local demand, and battery technology is not advanced enough for us to store or transport this energy to the cities where it is badly needed.

These Chinese regions are some of the largest stranded energy resources on the planet, and it is no coincidence that these provinces contain some of the largest Bitcoin mining operations in the world. These regions alone are responsible for around 10% of global Bitcoin mining during the dry season and 50% in the wet season, effectively converting energy that would be otherwise wasted into real economic value. In fact, all of the top five Bitcoin mining pools (group organisations for miners to cooperate for more efficient mining) rely heavily on hydropower.

Moving mining to places with cheap, excess renewable energy is great for both the miners and the power grid. It increases miner’s profitability, uses energy that would otherwise not have a use, and much of this energy could be funnelled back into renewable energy technologies, creating a positive feedback loop for both miners and the renewable energy industry.

‘The best way to make cryptocurrency mining more eco-friendly is to support lawmakers that want to encourage mining in regions that already have underutilized energy sources.’ – Leah Cuen, Tech Crunch

If lawmakers were to support Bitcoin mining in the rural regions with excess energy, a lot of real economic value (in the form of a decentralised monetary system AND the highly priced Bitcoin itself) could be created out of something that would otherwise be going to waste.

In other words, Bitcoin is the only tool I’ve heard of that can act as a battery to convert stranded renewable energy into economic value. For more information on why Bitcoin can be used like a battery, do a bit of your own digging (there’s no shortage of info on this) or check out Nick Grossman’s fascinating article on the topic.

‘In our view, the concerns around Bitcoin’s energy consumption are misguided. Contrary to consensus thinking, we believe the impact of Bitcoin mining could become a net positive to the environment … We illustrate that renewables would be able to satisfy only 40% of the grid’s needs in the absence of Bitcoin mining but 99% with the commercial ‘subsidies’ associated with Bitcoin mining.’ – Ark Invest on Bitcoin helping the environment

Make up your own mind

As we have seen, the reality of Bitcoin’s energy consumption is far more complex than many people want it to be. One of the exciting things about cryptocurrency is that its potential seems to be constantly changing and evolving. While no one can tell you with any certainty which coin will make you a millionaire, cryptocurrency’s Blockchain technology is undeniable and we are already seeing it being used in areas beyond finance like digital identity, medical record keeping, online voting, supply chain management and much more.

The research I have done on this controversial topic has led me to believe that the Bitcoin energy issue is far from what it is often depicted by the media and certain notable figures. But I don’t urge you to believe me but rather do your own reading and draw your own conclusions. If you are concerned about climate change then some of the research done on this topic will be of great interest to you.

While I do see incredible potential in what cryptocurrency can bring to the world, I realise that there are still issues which pose a threat to the sustainability of Bitcoin and other mined cryptocurrencies.

For instance, Alex de Vries, a Blockchain specialist at PwC’s Experience Center highlights the issue of electronic waste caused by Bitcoin mining equipment. The mining devices used (known as ASIC miners) are specifically made for mining Bitcoin and tend to become obsolete very quickly, often within 2 years. They aren’t currently being repurposed for anything and there is undoubtedly a carbon footprint attached to this. ‘This is something no amount of ‘green’ energy can fix,’ de Vries writes.

Still, while Bitcoin’s mining does pose a threat to the environment, the issue is far from black and white and most people are unaware of the ways Bitcoin and cryptocurrency could actually help the environment, or simply be worth the energy cost given the value it could add to society and our financial system.

Cryptocurrency is still in its early stages. Given the immense potential it has to disrupt traditional finance and transform our society and notions of money and ownership, there will inevitably be people who will resist change for as long as possible, as well as those who proclaim that it is the only solution to the world’s financial and environmental problems. The truth, I’m sure, lies somewhere in the middle.

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