BITCOIN AS AN ENVIRONMENTAL SUBSIDY TO ALTERNATIVE ENERGY
Research about Bitcoin and its energy footprint
Preface
During the year 2018, we have seen many articles concerning the insane energy consumption of Bitcoin. Articles that have been written by using The Bitcoin Energy Consumption Index from Digiconomist as a source. Digiconomist is a study writing by Alex De Vries, whose result of the consumption of the Bitcoin network would be 73.12 TWh (Sept 2018) and points out that the network consumes 898 kWh of electricity per bitcoin transaction, which is obviously dishonest. However his study emits many criticisms which you will find the critics of Marc Bevand in an article entitled “Serious faults in Digiconomists Bitcoin Energy Consumption Index” and another critic in annex of this document.
Many articles have also introduced the idea that« Bitcoin is a waste of energy ». That’s an ideological and philosophical debates surrounding Bitcoin to which the problematic is; Do we need a planetary Proof-of-Work transactions system, global, open-acces, fully encrepted and privacy protected to remain censorship resistant on a global scale? This document fled this debate.
Short introduction of Bitcoin mining
How to create a Bitcoin: Mining
Mining is the process by which Bitcoin transactions are secured. To this end the miners perform with their computer hardware, a mathematical calculations for the Bitcoin network. Thus if more computational power is employed in mining, then the difficulty will adjust upwards to make mining harder. And if computational power is taken off of the network, the opposite happens. The difficulty adjusts downward to make mining easier.
Reward
As a reward for their services, they collect newly created bitcoins as well as transaction fees that they confirm. The block reward started at 50 in 2009, is currentlty 12.5 bitcoins per blockc in 2018, and will continue to decrease every 210 000 blocks (≈four years). This diminishing block reward will result in a total release of bitcoin that approaches 21 million.
Hash rate
The hash rate of the bitcoin network references the amount of computing power used by the network. The higher the hash rate, the faster a computer is able to complete operations necessary in the mining process, and the faster that mining can take place. For miners, a higher hash rate can be both a blessing and a curse, as hash rate growth means that mining companies must make continuous reinvestments in order to remain competitive.
Immutable ledger
The Bitcoin ledger can only be immutable if and only if it is costly to produce. The fact that Proof-of-Work (PoW) is “costly” is a feature, not a bug. Bitcoin’s public ledger is secured by its collective hashing power.
Bitcoin consumption
Hash rate methodology
According to the study of Marc Bevand, the best way to calculate the Bitcoin consumption would be with an Hash rate methodology. The best average electricity consumption of Bitcoin miners on 11 January 2018, was 18.40 TWh per year with an average hash rate of 16200 PH/s.
The graph shows the increase in Bitcoin’s hash rate and the efficiency of the Bitcoin Miners. We can see the timeline in 10 phases representing the releases and discontinuances of mining ASICs between December 2014 and February 2017.
However, the hash rate continues to grow. From January 2018 to September 2018, the hash rate increased from 16,200 PH / s to 54,430 PH / s, an increase of more than 335% in 9 months. The recently increased of the hash-rate of 335% doesn’t mean that the electricity consumption increased of the same percentage. The increased is due to the releases of new generation of mining ASICs of Bitmain (0,42J/GH), BitFury (0,55j/GH) and other ASICs industrials.
Cooling consumption
However, using only the hash rate methodology is undervalued the significant consumption of cooling. Study have shown that a significant portion, can be over 40% of the total energy consumption of many data centers is caused by the efficient operation of their cooling systems (CRAC — Computer Room Air Conditioning).
Bitcoin consumption: conclusion
The computers heat up and need to be kept cool. To solve this problem, miners are located in low temperature zone (China, Mongolia, Russia, Iceland, North of Europe, North of America) because there’s no need to install cooling units , these locations has naturally cool climate that regulates the mines, internal heat from the outside. This means it’s not necessary to spend money and energy to cool the computers.
Bitcoin is often accused of being an energetic sinkhole, especially because of the Proof-of-Work (Pow) process. The study of Marc Bevand whose energy needed for the mining of bitcoin is estimated, in January on average at 18.40 TWh / year. In July 2017, this same average was then estimated between 7.15 and 8.27 TWh / year.
Another study, that of Digiconomist is even more alarming since energy consumption would have, over a similar period of one year, multiplied by 4 to reach with 40 TWh / year in January.
Whatever the study you take into account, the result is the same: the increase in energy needs is significant. But think that this increase will be constant is wrong because every four years the reward decreases until the 21 billions Bitcoin will be mined.
Many studies stop at the conclusion that this consumption is alarming and that bitcoin is an ecological disaster.
However this conclusion is very ative because to make the shortcut between strong energy consumption and ecological disaster without studying the market of the electricity is worthy of laziness.
Continuing this paper, we will analyze the evolution of the electricity market in recent years, the cost of electricity according to the different means of production, the means used by miners to consume electricity as cheaply as possible and then we will see how Bitcoin is starting to change the energy landscape of thess regions towards energy production with sustainable development, clean and therefore with a lower carbon impact than what we can think. Bitcoin is beginning to attract some regions and has become an environmental subsidy to the world.
Bitcoin, a waste of energy (?)
« Bitcoin is a waste of energy », is how many journalists have titled their documents. That’s an ideological and philosophical debates surrounding Bitcoin to which the problematic is; Do we need a planetary Proof-of-Work transactions system, global, open-access, fully encrypted and privacy protected to remain censorship resistant on a global scale? This document fled this debate.
The energy utilization problem analysts use against Bitcoin is not exclusive to the dominant cryptocurrency. The same argument can be applied against traditional sectors in which Bitcoin competes; gold or banking sectors whose doesn’t serve any other purpose besides maintaining a currency system.
Note: Restricting Bitcoin to these two sectors alone, would be simplistic not to see other Bitcoin applications, such as data anchoring (e.g. woleet.io).
Bitcoin vs Gold
Bitcoin and gold are both stores of value, it makes sense to compare the energy usage and costs of digital gold mining to physical gold mining.
Comparing the cost of production of a Bitcoin with an ounce of gold would not be correct because the supply of Bitcoin is limited to 21 million, 80% of which have already been mined, whereas for gold the total above ground stocks of 190.040 tones.
Whereas if we compare the total energy consumed annually Bitcoin and Gold the result is obvious that Bitcoin mining is still far more efficient in therm of energy consumption than gold mining. Moreover in Bitcoin mining transactions are included that is not the case for gold production.
Bitcoin vs Banks
As Bitcoin a digital asset, it also makes sense to compare the energy usage and costs of Bitcoin mining to bank industry.
According to Carlos Domingo, estimates for how many banks are in the world range from around 14600 to 25000, or even more than 60000. In this comparison (30,000 banks) he included three values: server costs, branches costs and ATM costs. Of course, banks (and its employees), consume a lot more electricity from other sources. Adding together all of these factors, we get approximately 100 terawatts of power consumed by banks each year. What he didn’t factor in was the energy (not just electricity) of all the employees involved in a bank, also the number would be much more (According to Santander environmental report, Santander consumes 1,2 terawatts).
We can take into account many other KPIs, such as global production of cash and coins that consume around 11 terawatt hours per year.
Bitcoin vs Gold vs Banks: Conclusion
Bitcoin, Gold, Banks required a lot of energy. From now Bitcoin is far more energy and socioeconomic efficient than the traditional sectors. But let’s imagine that one day Bitcoin energy consumption is going beyond these sectors, will it really matter?
Important industries required important energy. According to the first law of thermodynamics, everything requires energy and it’s important to take into account that the energy consumption and GDP are higly correlated for the world as a whole.
According to researchers, Data centre sector could be using 20% of all available electricity in the world by 2025. With 50 billion devices to be connected by 2020, the technologies of tomorow will consume far more than the technologies of yesterday and it shouldn’t be a surprise for anybody.
Fortunately, the energy production sector is itself in transformation and the energies of tomorow will also have a smaller impact on the planet than the energies of yesterday. However this energy transition has a cost, so we will study how Bitcoin is an effective way to finance this energy transition.
Energy sector, Footprint and cost comparison
Miners are strictly profit-motivated. Bitcoin network do not need more miners for being efficient. Bitcoin is already censorship resistant.
The mining has grown from a handful of early enthusiasts into a cottage industry, into a specialized industrial-level venture. Thus all-in mining cost will shift from the upfront accessibility cost of ASIC hardware to the ongoing energy costs to operate and of course, electricity is the biggest expense.
Since the physical location of mining centers is not important to the Bitcoin network and are movable, miners move to areas generating low cost electricity for the lowest marginal costs. The miners with underpowered setups will find more money is spent on electricity than is generated through mining.
Determining where to set up a cryptocurrency mining facility is generally based on five key factors:
- A sufficiently fast internet connection to quickly receive and broadcast data with other nodes on the network.
- Locations that have low temperature zones: offer substantial advantages as cooling costs.
- Low-cost electricity.
- Short distance to a power station.
- Opportunity to partner with the local government.
=> The question is not how much energy is spend on Bitcoin but from where the energy is coming.
Lazard’s study
Lazard has conducted this study comparing the levelized cost of energy for various conventional and alternative energy generation technologies in order to understand which alternative energy generation technologies may be cost-competitive with conventional generation technologies.
Levelized Cost of Energy, Solar
Levelized Cost of Energy, Fuel Cell, Microturbine, Geothermal, Biomass Direct, Wind
Levelized Cost of Energy, Diesel, Natural gas, Gas peaking, IGCC, Nuclear, Coal, Gas combined Cycle
Energy source, Bitcoin miners
Mining localization
According to the the study of the University of Cambridge, a substantal fraction of the cryptocurrency mining capacity is not reported on the bellow map because the consumption and location of many mining facilites across the globe are kept secret but this map is a very interesting tool to see how the mining sector is articulated.
Surplus capacity for renewable energy
The renewable energy are cost-competitive with conventional generation technologies. But the problem is that most of major projects are anticipating the consumption of the next decades and the continued construction of hydropower in some regions of the world has led to surplus capacity, trembling profits and unbalanced the energy system.
As reported by the Sichuan office of the National Energy Administration (NEA) of China, show that 9.7 billion kilowatt hours were wasted in 2014, up from 2.6 billion kilowatt hours in 2013, an increase of almost 400%. If the situation does not improve then wastage in 2020 is projected to be 35 billion kilowatt hours, 8.6% of total hydro production for that year. Reuters reported that “wasted [Chinese] wind power amounted to around 12 percent of total generation in 2017.
The success of solar and wind energy in California is also having a surprising side effect: It may be undercutting revenue for hydroelectric dams, the longtime stalwart of “green” energy in the West.
According to Yu Xiaogang of Yunnan environmental independent organization Green Watershed, hydropower producers would make their money back in the first decade in the past, now it generally takes two. Nowadays, the sector is much less profitable for incoming investors.
Till today, there is no efficient means of storing electricity and as Bitcoin miners are strictly profit-motivated, it’s not a surprise that Bitcoin miners have settled in these regions that produce a surplus of electricity in order to negotiate competitive prices.
Hydropower Worldwide
Focus on China
China is the world’s largest producer of hydropower, with 80% of potential hydropower resources concentrated in Yunnan, Sichuan and Tibet. Together with Guizhou and Guangxi.
A zoom into China shows a significant concentration of miners can be observed in the Sichuan province, where miners have struck deals with local hydroelectric power stations to access cheap electricity.
Bitcoin as a way to amortized renewable energy
The best mining locations has cool weather, stable governments and ample hydroelectricity, a form of power that lets miners avoid awkward questions about whether computational busywork justifies significant carbon emissions. Bitcoin mining rushes took hold in Asia, Scandinavian countries, Austria, Bulgaria as well as parts of Canada and the northern U.S.
CNBC recently reported about the number of bitcoin and cryptocurrency miners locating in Wenatchee, Wash., U.S., calling it “the epicenter of bitcoin mining in the United States.” Why Wenatchee? Power is 2 to 3 cents per kWh thanks to the hydropower capacity of the Columbia River.
Additionally, the province of Quebec in Canada already had 120 megawatts of capacity used by about 20 companies. But Hydro-Québec’s Jonathan Côté said in an interview with The Narwhal that new applications from more than 300 companies totalled 15,000 megawatts — or more than a third of the province’s entire installed capacity.
The Canadian utility Hydro-Quebec plans to get in on the action. Bloomberg reported that the utility “expects to announce agreements in 2018” and envisions cryptocurrency miners using about 5 TWh of power annually from the hydroelectric facilities in the region.
A company, called HydroMiner, has been established that uses “green energy drawn from hydro power stations in the Alpine region of Europe” to power its crypto currency mining efforts. HydroMiner says that thanks to hydropower, its cost of electricity is 85% lower than the average in Europe.
Iceland, where geothermal and hydroelectric energy are plentiful and inexpensive, has attracted several mining operations. Iceland became the first country to use more electricity on mining cryptocurriencies than on its households.
Government agreements are needed
The legitimacy of selling surplus electricity is not clearly defined which provoked the massive influx of minors in certain regions. Some regions of the world already stoped new entrence of mining (Canada, USA, China), some governments decide to regulate the sector and ask to the miners to be registered with the government as a licensed business entity in order to be able to tax them.
In 2017, the Grant County public utility district in Washington State (USA) has received new service inquiries for more than 2,000 MW of power, which represent more than three times the electricity needed to power all Grant County homes, farms, businesses and industry. About 75% of those requests are from cryptocurrency miners.
The restriction in some regions will not slow down the miners, in effect the potential in hydroelectric is consequent.
e.g. In Congo, there is sufficient hydropower potential (>10 times) to meet all electricity demands.
CONCLUSION: BITCOIN AND ITS ENERGY FOOTPRINT
Bitcoin network is using a large amount of energy
Bitcoin network is using a large amount of energy power and there is different approaches to trying to estimates his annual consumption. But we can’t compute this precisely because it’s a decentralized network with miners operating all over the place who haven’t documented their activities.
The energy utilization problem analysts use against Bitcoin is not exclusive to the dominant cryptocurrency. The same argument can be applied against gold, silver, fiat, data center, etc. Bitcoin is far more energy and socioeconomic efficient than the traditional sectors.
Mining location key factors
Determining where to set up a cryptocurrency mining facility is generally based on five key factors:
- A sufficiently fast internet connection to quickly receive and broadcast data with other nodes on the network.
- Locations that have low temperature zones: offer substantial advantages as cooling costs.
- Low-cost electricity to run their operations profitably
- Short distance to a power station.
- Opportunity to partner with the local government for a sustainable activity.
Fast adoption of renewable energy
Obviously a significant number of miners rely on non-renewable of energy and especially coal, which is the cheapest conventional energy. But the augment against the use of energy as a unsustainable energy consumption fails to consider the rapid adoption of renewable energy sources.
Energy projects are built to anticipate the energy production of the next decades, which will lead to a surplus of production for many years. The surplus production of the renewable energies and especially hydropower in the North America, Northern and Eastern Europe as well as in China, is wasting a lot of money to governments and investors, this has led to the cancellation of many renewable energy projects and thus curb their development.
Bitcoin as an environmental subsidy to alternative energy
By consuming a large amount of energy 24h/7days, Bitcoin represents a huge potential for those regions that are losing money. That’s why a significant concentration can be observed in the Sichuan province, where miners have struck deals with local hydroelectric power stations to access cheap electricity (0.02–0.05 USD/ TWh). The Bitcoin mining energy consumption represents an important growth story for companies investing in wind and solar power combined with energy storage.
- With no efficient electric energy storage to date, Bitcoin mining represent an effective, stable and predictable energy value storage solution.
- Bitcoin contributes to the development of alternative energy solutions by using the wasted energy.
- Because Bitcoin miners needs a large amount of energy and are sensitive to the price of electricity, it should push R&D in the energy market.
If you have any question, please be free to contact me on LinkedIn or by email at busnel.jeanchristophe@gmail.com
Sources
Electricity consumption of Bitcoin: a market-based and technical analysis, Marc Bevand, 2017
Global cryptocurrency benchmarking study, University of Cambridge centre for alternantive finance, 2017
A comprehensive view of global potential for hydro-generated electricity, Pacific Northwest National Laboratory, 2014
BITCOIN vs. GOLD: Which One’s A Bubble & How Much Energy Do They Really Consume, srsrocco, 2017
Bitcoin consumption, Andres Antonopoulos, 2017
Energy Consumption and GDP highly correlated, Gail Tverberg, 2017
A Visit to a Bitcoin Mining Farm in Sichuan, news.bitcoin.com, 2017
The Cost of Crypto Is Turning Miners Towards Green Power, Bloomberg, 2018
China builds a hydropower plant for bitcoin mining, Jycloud9, 2017
Bitcoin Uses a Lot of Energy, But Gold Mining Uses More, Longhash, 2018
Putin’s Aide Seeks $100 Million to Rival China in Bitcoin Mining, Bloomberg, 2017
Cheap electricity made China the king of bitcoin mining, Techinasia, 2017
Santander environmental footprint report, Santader, 2015
What’s the carbon footprint of your credit card?, creditcards.com, 2009
The Bitcoin vs Visa Electricity Consumption Fallacy, Carlos Domingo, 2017
Energy consumption Bitcoin vs Banking System, climatestaste, 2018
Bitcoin Miners Are Flocking to Central Washington for Cheap Electricity, seattlebusinessmag, 2018
China’s rising hydropower demand challenges water sector, School of Nature Conservation, Beijing Forestry University, 2015
Bitcoins and Hydropower: What’s the big deal?, Elizabeth Ingram, Hydroworld, 2018
The First Law of Thermodynamic, mit.edu
How Iceland became the bitcoin miners’ paradise, TheGuardian, 2018
Before you join the moral panic about bitcoin destroying our environment, remember that cash could be a whole lot worse, Independant, 2018
Appendix: Critical of the analysis of Digiconomist
The electricity consumption per transaction: Wrong
The results of the analysis provided by Alex De Vries on Digiconomist is based on the wrong KPI. He compares the energy consumed by the Bitcoin network to the payment system of Visa by claiming that one bitcoin trasaction consumed a total amount of 898 Kw hour and that 100 000 Visa transactions consumed 169 Kw hour, which is wrong.
The energy spent is per block, not by transactions and thankfully, the Bitcoin network allows for more than one transaction per block.
Moreover, the number of transaction is always getting more efficient, thanks to Segwit and Lightning; 100 000 transactions on the lightning network can only costs a few centsif you use the same chanel.
The network is mostly fueled by coal-fired plants in China: Wrong
« This type of electricity has an emission factor of up to 1 kg CO2e per kilowatt-hour (KWh). The estimate featured on the Bitcoin Energy Consumption index applies a more conservative emission factor to the network, based on the emission factor of China’s national electricity grid (including electricity from other sources) of around 0.7 kg CO2 per KWh, for only 70% of the total electricity consumed by the network (the remaining 30% is assumed to be based on clean energy). » Digiconomist
According the China’s National electricity grid, in fact the rate is overvalued, it is 58% of coal, with a prediction of 32% for 2040 and 30% of clean energy (source iea.org), moreover, the average emission of 1 kg CO2e per KWh for coal is overvalued of 10%.
Despite the overvalued of the coal cosumption, his analysis is wrong by thinking that if 58% of the energy consumption of China, 58% of the electricity of the mining in China comes from coal. Indeed, as announced by many mining farms (Bitmain, Haibtc, and many others) have publicly announced use a hydropower station source as a low cost of maintaining infrastructure, as they can negotiate a very low price (0.2 USD-0,5 USD / KWh) for the long term unlike the rising cost of coal.
