The reports of bitcoin environmental damage are garbage

Martibezyose
Nov 3 · 10 min read

I have a background in electricity, from when I was an investment banker. I worked in a Natural Resources & Power group for about 8 years and modelled electricity systems and assets in the UK and China in the context of acquisitions, capital raisings, restructurings, and regulatory submissions. One of the banks that I worked for was HSBC, in their emerging markets M&A team, and I know China well. The models, created in groups, were used to support perhaps $4–5 billion equivalent of transactions, including public tender offers, acquisition finance, syndicated loans, and bond sales. The only time I went back to my old business school for course work was for modules offered by Decision Sciences, one of which was an in-depth power systems dynamics course. The financial models were built using @Risk statistical software to apply a distribution shape to inputs. When I left investment banking, I purchased (with partners) an electricity business in Italy that had eight run-of-river hydro plants and two CCGT facilities.

I’m also an environmentalist. I grew up mainly in rural Canada and I like the outdoors a little bit more than people. Now I live in Switzerland and do a lot of mountain climbing. I donate to two (moderate) environmental groups.

I believe that crypto is the best way to reduce inequality in the world and provide financial inclusion to low-income people. I think that most people get into crypto for reasons related to value and values.

I write this article because I’m sick of being confronted by people, even others in crypto, about crypto allegedly being an environmental disaster. It isn’t. That is an egregious lie.

Patient Zero

Almost all news articles that repeat the lie that crypto is an environmental problem can be traced back to one source: Alex de Vries, a twenty-something year old who has zero knowledge of the electricity industry, power system modelling, China, or any related real-world experience. He blogs from home on digiconomist.net. His “reports” are about as unscientific and unethical as you can get.

While claiming to be unbiased and touting “peer reviewed” “academic articles” his site uses incendiary language to describe the bitcoin computers that maintain system security and administration as “consuming huge amounts of energy” which have now, apparently, reached “epic proportions”. This “massive energy consumption” isn’t the biggest problem, though, according to de Vries; it is that “the network is mostly fueled by coal-fired power plants in China”, resulting in “an extreme carbon footprint for each unique Bitcoin transaction.”[1]

He goes on to write: “Additional research published in Nature Climate Change (October 2018) even suggested that Bitcoin mining alone could push global warning ‘above 2 °C within less than three decades’.”

He then compares the efficiency of bitcoin to the Visa system, writing “the current global payment system handles 6,800 times more digital transactions per day than Bitcoin does. Even on this flawed comparison, Bitcoin still requires 3,400 times more energy than an average non-cash transaction.”

He also claims that there are “half a billion people who might be mining Bitcoin without even knowing it” and then, generously, says that he doesn’t include these miners in his calculations. Yet, elsewhere on his blog, he says that the only way to mine bitcoin today is by using specialized mining equipment, like an Antminer S9. I don’t have an Antminer S9 at home (at least, I don’t think I do), but I understand that they are about the size of a small refrigerator and throw off a fair bit of heat. I think that half a billion people might notice. Anyway, regardless of where he gets this “information” the only proper response to it is to think WTF that isn’t very likely and not to repeat it.[2]

Antidote

I address his assertions one by one, so we can get to an honest appraisal of the situation.

Economic assumptions

In respect of his Bitcoin Energy Consumption Indexde Vries writes: “The index is built on the premise that miner income and costs are related.”

That is wrong. The market price for a product made by a business and the prices for what it takes to create the product are (in almost all cases) completely separate. Want to sell mud pies and you set up an expensive factory to do so, hire lots of staff, spend a lot on marketing? Well, the price you sell the mud pies for has nothing to do with the input prices you have to pay. No one who has a basic understanding of economics or has run a business in the real world would make this error.

Based on his own assumptions, de Vries completely contradicts himself in his calculations: since the price of bitcoin has fallen significantly, based on the assumption on his site (which is a fixed cost to income ratio), the costs to miners must also have fallen equivalently. But, no. Now that the price has fallen, he simply changes his assumptions to fit his narrative. There is no commensurate decline in his index; his assumptions still conclude that bitcoin allegedly consumes more energy than [pick whatever small country you want].

Methodology

The empirical way to test hypotheses since the Scientific Revolution is to collect input data, perform some operation, and then observe the output. You might have heard about this at school.

So, this is what de Vries does, right? Well, no. It is a lot of hard work to collect input data and he doesn’t do this at all. He has a better idea. He asserts that this method produces errors and the data isn’t available, so he “therefore proposes to turn the problem around, and approach energy consumption from an economic perspective.”

Does that sound valid to you? Do you want to know what he really means by this? I’ve read everything in his reports, so I’ll make it simple for you to understand.

He means that his power consumption index starts with the financial output (i.e. the income and costs for the miners who maintain the Bitcoin architecture) and then backs out the technical inputs to these financial statements (i.e. the amount of electricity consumed). So, he has these financial outputs, right, and makes them available? Well, no again. He doesn’t have this information either. So, his methodology, if you can call it that, is to make assumptions for financial information that he doesn’t have, to then derive the technical volume. The derivation method is also completely based on his assumptions. Which he just makes up out of thin air; they are not at all based on any empirical data whatsoever. Given that everything is basically his own assumption, does he bring any biases to the “analysis” that we should know about? Well, on his site he writes that the index is designed to “raise awareness on the unsustainability of [bitcoin’s architecture].”

Here is what a real scientist thinks about his approach.

Enter Jonathan Koomey, special advisor to the Chief Scientist of the Rocky Mountain Institute. He was a lecturer in Earth Systems at the School of Earth, Energy, & Environmental Sciences at Stanford University and a Research Fellow at the Steyer-Taylor Center for Energy Policy and Finance at Stanford University. He worked as a researcher and scientist at Lawrence Berkeley National Laboratory for more than two decades and he serves on the editorial board of the journal Contemporary Economic Policy.

Koomey says that de Vries’ work is “fundamentally flawed” because it backs into bitcoin’s power consumption by estimating miners’ revenues and expenses. “Any time you do that, you introduce multiple layers of error and uncertainty. It’s a completely unreliable way to do the analysis, and no credible energy analyst would ever do that.”[3]

The assertion by de Vries that “the network is mostly fueled by coal-fired power plants in China”

He provides absolutely zero evidence for this statement, like almost everything else on his site. I guess that, if you knew nothing about the electricity industry, you might have a general idea that China has a lot of coal plants and you might superficially come to this conclusion.

However, it is completely incorrect. Most of those who administer the Bitcoin network and provide security (called miners) are located close to cheap, and underutilized, hydro power facilities. I recently spoke several times and at length to former power industry colleagues in Hong Kong and their estimate is that more than 80% of all Chinese miners are located in Sichuan province. The vast majority of power produced in Sichuan is from hydro power. I was in China late last year and visited Sichuan and some of the locals told me that officials are extremely keen on crypto because it leads to more jobs and taxes. There was a policy to curtail renewables development, as there was so much overcapacity, until crypto arrived.

A recent report into crypto energy use, done by Coinshares, which is the only honest, data-driven report ever to be undertaken[4], concludes that almost half of global bitcoin mining takes place in Sichuan. Overall, they estimate that 77.6% of global bitcoin mining is powered by renewable energy. My former colleagues in Hong Kong and I think that the real amount is closer to 85% and rising. This is mainly concentrated in cooler climates with abundant, and underutilized, hydro power, including: Quebec, Iceland, and the Pacific North-West.[5]

My former colleagues in Hong Kong characterized the assertion that the Bitcoin network is fueled by coal-fired power plants in China as “laughable,” “amateurish” and “obviously made up by someone who doesn’t know [the power industry in] China at all.”

Bitcoin is going to cause us to miss global warming targets …

On his main page, de Vries writes: “Additional research published in Nature Climate Change (October 2018) even suggested that Bitcoin mining alone could push global warning ‘above 2 °C within less than three decades’.” So, I read the article, which was written by Camilo Mora, an associate professor of geography at the University of Hawaii at Manoa and published (and included it in a press release) on 29 October 2018. It was the subject of a lead article on Bloomberg, in which Mora says of bitcoin, “If this takes off it will be something that we will not be able to control.” According to Bloomberg, “Mora’s research often uses large data sets to tackle far-off problems.” Great, I thought; finally some data. However, on reading the Hawaii paper it is curious that … there is no data. The core “data” for the paper comes from … guess who? That is right, our blogger friend de Vries.[6]

So, for corroborating support on his website, de Vries references an “academic” article whose main source is … de Vries. It is unbelievably disingenuous.

The allegation that the Bitcoin network displaces energy consumption

Again, completely incorrect. It shows a shocking lack of knowledge of the electricity industry. Electricity systems are quite complicated, mainly because electricity cannot be stored, except in small quantities. So, you have the concept of pools, grid operator despatch functions, etc. Hydro power is mainly located in mountains, a long way from population centers. The transmission line losses often make it unfeasible to transport the electricity supply to where it is demanded; consequently, a lot of hydro power is underutilized.

Miners are highly mobile; they can move to where the cheapest power is, in a way that hospitals, schools, etc. cannot. Hydro power is cheaper than coal and the vast majority of miners have, naturally, set up close to cheap and underutilized hydro facilities. The ones who have not are economically incentivized to move there and they are clearly doing so.

In my conversations with former industry colleagues and from what I heard in Sichuan, it seems that, today, there is an enormous amount of unused hydro power capacity. Because of transmission constraints, they just cannot use all of the power that they have. Some people commented that every deal that they do with a miner is “pure profit”; the electricity revenues would otherwise be lost. The same appears to be the case in a neighboring province. A few local industry experts told me that they estimated that at least 200–225 TWh per year of surplus hydro power exists, just in Sichuan. For reference, the Bitcoin network uses maybe between 25–35 TWh per year.[7]

Of course, hydro power is not completely carbon zero and it does have an environmental impact. But, for anyone to state that most of the Bitcoin network is powered mainly by coal or that renewables used for the network displace other users or have an electricity price impact are just blatant lies.

Energy consumption compared to country size

On his site, de Vries has a comparison of (his complete guesstimate of) bitcoin energy consumption compared to energy consumption by certain countries (Hong Kong, Singapore, Portugal, etc.). He has a reference for this data: www.bitcoinenergyconsumption.com. It must be another authoritative third-party source for these conclusions, right? If you type in www.bitcoinenergyconsumption.com guess what happens? Well, you are directed to http://digieconomist.net. There is no such site as www.bitcoinenergyconsumption.com, despite it being prominently displayed as the source. It doesn’t exist.[8] There is no third-party verification, as the reader is led to assume. It is just de Vries again. It is unbelievably unethical. The graph, with this fake reference, appears in at least a dozen news articles that I could find before I got bored and stopped searching for new ones.

It gets more unethical. On the site he writes, “The entire Bitcoin network now consumes more energy than a number of countries, based on a report published by the International Energy Agency,” to which he provides a link. However, the link is to the IEA’s main page, not to an IEA report that finds that the Bitcoin network consumes more energy than a number of countries. So, I called the IEA in Paris. There is no such report. The IEA does publish reports on energy consumption by country, but they don’t assert that the Bitcoin network consumes more electricity than these countries. It is de Vries who asserts this, not the IEA. The only connection to the IEA is that de Vries uses their data for country energy use. He then compares IEA country data to his own made-up numbers for Bitcoin energy use. His article in the academic journal Joule also references the IEA. It is the same story: there is no IEA report asserting that the Bitcoin network consumes more energy than small countries. Just de Vries does this.

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