Bitcoin cannot be created on a whim, unlike dollars, yen, euros, etc. Similar to gold, creating new bitcoins takes work.
Instead of relying on central bankers to determine money supply, Bitcoin is decentralized. Miners record transactions that are verified by a global network of nodes¹ enforcing Bitcoin’s protocol. As of writing, 18.5 million bitcoins are in circulation, having been mined as a reward for computational power securing the network.
Only 21 million Bitcoin will ever exist.
After its initial creation on January 3rd, 2009, anyone with a basic computer can participate in Bitcoin’s democratic network. As outlined in the Bitcoin white paper, mining “is essentially one-CPU-one-vote.” While all computers possess a CPU that is technically capable of mining, network competition quickly began to heat up as Bitcoin’s popularity surged. Today, tens of thousands of specialized computers compete to mine Bitcoin from all corners of the world.
How much electricity does Bitcoin mining consume? As a digital object of great fascination, many media outlets have written sensational articles on the topic. One of the most reliable sources is likely the University of Cambridge’s Bitcoin Electricity Consumption Index. Assuming an average electricity of cost of 5¢/kWh, the Index estimates that Bitcoin consumes ~63 TWh annually as of writing.
At its lower to upper bound, the Index currently estimates that Bitcoin consumes ~35–90 TWh of electricity per year. That’s a wide range, as the census of miners is challenged by Bitcoin’s inherent privacy. Currently ~900 new bitcoins are minted per day, or ~37.5 per hour. A terawatt-hour (TWh) is a unit of energy equal to outputting one trillion watts for one hour. Mining one bitcoin in October 2020 requires outputting 0.9–2.4 trillion watts per hour. That’s a lot of power.
In the early 20th century, industry leaders like Henry Ford and Thomas Edison were interested in replacing gold or the dollar with “the energy dollar” or “units of energy” (commodity/energy currency). The concept was popular due to its sound money characteristics, including: a well-defined unit of account, easy measurement/not easily counterfeited, divisibility into smaller units, and fungibility (that these units would be equivalent to any other unit). However, energy money was flawed — it could not be transmitted or stored easily.
- No one knows how much gold exists.
- No one knows how much gold will be mined next year.
- Gold cannot be near-instantly transferred from one side of the planet to another.
- Counterfeit gold cannot be identified with the naked eye.
- You cannot easily flee a corrupt country with $100k worth of gold.
- Bitcoin is highly portable, easily divisible, and its historical record of transactions is audited by thousands of computers globally.
To gain perspective on Bitcoin’s energy consumption, it is still a relatively minor percent of global electricity consumption. According to Our World in Data, the world currently consumes nearly 150,000 TWh of energy per year.
By generously assuming that Bitcoin’s energy consumption is currently ~150 TWh annually, this would amount to merely 0.1% of global energy consumption. Bitcoin is the most innovative free market that the world has likely ever seen. As such, media alarmism about Bitcoin’s energy use is likely futile. Further, Coinshares research suggests that a meaningful proportion of Bitcoin mining is fueled by renewable energy:
“We calculate a conservative estimate of the renewables penetration in the energy mix powering the Bitcoin mining network at 74.1%, making Bitcoin mining more renewables-driven than almost every other large-scale industry in the world.”
While still niche, there are also a variety of emerging innovations for Bitcoin mining. U.S. companies are building miners that repurpose wasted natural gas from oil drilling, and cheap hydroelectric power is fueling a Bitcoin mining boom in Nordic countries.
Bitcoin is sound money backed by trillions of watts of electricity. So long as Bitcoin is valuable, there will be an economic incentive for mining by sustainable energy sources across the world.
- Although miners play an important role, their influence over Bitcoin’s network is balanced by a global network of nodes. Nodes are computers that verify Bitcoin’s core software against its historical record of transactions. Anyone with even a simple computer can participate to verify Bitcoin. While miners are concentrated in China, nodes are primarily found in developed markets such as the U.S. and Germany.