Bitcoin and sustainable energy

Recently there have been a lot of headlines in the press about the energy consumption of Bitcoin and the negative impact this is having on the environment. This topic is very concerning especially if bitcoin adoption continues to grow at the current pace. Bitcoin adoption is exploding globally, not only from retail investors but also companies are adding bitcoin to their balance sheets and countries are adopting it as legal tender.

In this article, I will explore some of the details behind the energy consumption of the bitcoin network and share my views on where this might lead in the future.

What is bitcoin?

Bitcoin is the worlds first, and the largest cryptocurrency (by market capitalisation). The bitcoin token is transacted on the bitcoin network which is a cryptographically secured distributed ledger.

Bitcoin is currently the most secure financial transaction system in the world and is fast becoming a critical store of value globally. Bitcoin and cryptocurrency market capitalisation is in the trillions of USD.

What do bitcoin and energy consumption have to do with each other?

The bitcoin network is secured through a technology called proof-of-work. The distributed network of computers which run the bitcoin code, record and verify all the transactions, and secure the network, do so through a lottery to create new blocks in the Bitcoin blockchain. The systems running this network are paid bitcoin as a reward for this service which is known as “Bitcoin Mining“.

The energy consumption of all the computers on the network mining bitcoin is not precisely known but recent estimates put it at around 150TWh. This is comparable to the electricity consumption of a country like Egypt. 150TWh represents ~0.6% of global electricity production, and is seemly an incredibly high consumption to simply run a financial transaction system.

Comparing Bitcoin to countries is not really a fair comparison though and should rather be assessed against rival assets such as the fiat currencies issued by central banks or as a store of value, with gold, a precious metal that is mined on an industrial scale every year.

To put this consumption level into context. Below is a graph from a Galaxy digital report which compares current bitcoin consumption with the banking system (~250+TWh) and gold (~240TWh). Youtube is forecasted to consume ~600TWh of power annually and idle home electronic devices in the USA alone use 225TWh. This shows that although bitcoin is using large quantities of electricity it is compatible with other similar “services” both financial and digital. One analysis suggests that gold-mining is 50 times more expensive than mining bitcoins and running the bitcoin network. Producing gold for the wedding band on your finger alone generates 20 tons of waste.

How green is bitcoin?

Proof-of-work cryptocurrencies are as “green” as the electricity supply which they consume. This means that as the global electricity supply moves to renewable energy it will get greener over time. This is in contrast to other industries which do not use electricity.

There was a high profile report published in 2018 which forecast that emissions from Bitcoin could push global warming above 2celcius. This article has since been disproven as many of the assumptions they used in their modelling were incorrect and did not represent the way the bitcoin network changes when it grows. Unfortunately, these kinds of news headlines tend to stick in the minds of the public and has certainly slowed down bitcoin adoption to some degree.

The Bitcoin Mining council which represents ~32% of the network, conducted a Bitcoin mining survey of all miners to estimate the hash rate and the sustainability of their energy consumption. Wind, solar, hydro, nuclear, geothermal were counted as sustainable energy sources for the survey. The survey concluded that Bitcoin mining uses a negligible amount of energy, accounting for only 0.0117% of global energy (not electricity) consumption and that it is rapidly becoming greener and is powered by a higher mix of sustainable energy than most major countries or industries. Furthermore, the network efficiency is increasing (15% network efficiency increase in Hash/MW in 1Q 2021)

The survey found that between 55-70% of the electricity was generated from sustainable sources. This can be compared to 14.4% for China, 49% for the EU, Iron at 2.2% and the US at 30%.

Interestingly the bitcoin miners are strongly incentivised to utilise renewable energy sources as they are most often the cheapest forms of power available on the grid, which therefore improves the economic returns for the miners.

Future bitcoin consumption

The figures presented above represent the current state of the Bitcoin network but this technology is rapidly growing in user adoption. In 2021, 20 million new bitcoin wallets were created which is around a 30% annual growth. So what will happen in the future?

Bitcoin energy consumption increases with Hash-rate on the network and not with the number of transactions in each block. Therefore transaction growth does not necessarily lead to increased energy consumption. Furthermore, the hash efficiency is improving exponentially with technology improvement. Market forces push the bitcoin miners to stop using inefficient hardware as the electricity cost quickly becomes higher than the mining payments. An argument can even be made that the economic incentives inherent to Bitcoin mining are helping drive sustainable energy innovation, as miners constantly seek to increase profits by lowering their electricity costs in a world where renewable energy is the cheapest option.

There are some other key points which should be considered when looking at the future consumption of this technology. Fundamentally, Bitcoin cannot handle high transaction volumes, it is designed to be a long term store of value. This means that high-frequency transactions and trading will take place in other systems, many of which work on proof-of-stake blockchains which consume a fraction of the power of Bitcoin. Bitcoin should therefore be considered more like a replacement for gold than Visa or Mastercard.

Bitcoin as a solution to drive renewable energy growth

One interesting property of Bitcoin proof-of-work is that it can be easily used at the point of power generation and potentially used to consume excess power from “behind-the-meter” i.e. before it is dispatched to the grid. Electricity is inherently hard and expensive to store on a large scale or over a long period of time. One solution to this is for the grid to use demand control and switch on / off the consumption as the power supply from renewable energy fluctuates.

Bitcoin mining systems have the property that they can be switched on and off very rapidly without significant impacts on the life of the system. Therefore there are a number of companies investigating the implementation of cryptocurrency mining to be attached to power plants. This would then allow the power plant owners to decide at any given time to dispatch power to the grid or to self-consume and generate bitcoin.

I believe this alternate revenue stream can be highly valuable for renewable energy projects in the future. In Europe, we are seeing times when there is too much renewable power on the grid and the power prices fall sometimes even becoming negative. This phenomenon is known as market cannibalisation. In these scenarios rather than dispatching the power the mining rigs can be activated to support the bitcoin network and will act as an alternative to energy storage.

Conclusion

The energy which is consumed by the Bitcoin network is what secures the currency and ensures that external parties control or impact it. This is the fundamental value of Bitcoin and it is argued that the energy consumption is a small price to pay for a censorship-resistant digital asset, one that lets people escape a centralized monetary system that is often manipulated for the benefit of governments or corporations at the expense of the citizens themselves.

There is one other significant environmental benefit to Bitcoin which is caused by its inherently deflationary properties that encourage people to hold the asset as it becomes more scarce and valuable over time. This is in contrast to the inflationary properties of fiat currency which encourages you to spend it before it devalues. Governments and central banks around the world are actively printing trillions of $ of new currency in order to drive spending, which also devalues the currency due to increasing supply. This constant consumerism and push to spend is probably the single biggest negative environmental impact driven by humankind.

This consumer-driven economic philosophy that has gripped us for the past 200 years is totally unsustainable and perhaps moving to a cryptocurrency and a bitcoin-backed economic model can start to change these dynamics for the better.

What do you think?

If you want to know more you should check out my favourite crypto YouTube channel (https://www.coinbureau.com/). If you are interested in dabbling in this space check out Coinbase.