Bitcoin’s Electricity use is Not a Problem
As someone who cares deeply about climate change and efficiency, the fact that so much energy is being spent mining for bitcoin and other cryptocurrencies causes me pause. However on deeper inspection the energy used by bitcoin in particular is not the shocking problem it seems to be at first blush. There are several key reasons why.
Before digging into the argument, lets assess the current electricity usage for bitcoin. According to https://digiconomist.net/bitcoin-energy-consumption bitcoin current usage is at a rate of 73.4 TWh at an annualized rate. This is an enormous amount of power. The value of that power is approximately $4T USD.
First it should be noted that bitcoin is in a distribution phase still. A block is mined approximately every 10 minutes, and with each block the winning miner receives a reward currently valued at 12.5BTC (at time of writing that is worth $80,719.63USD). Which is valued at $4.2T annually. This reward justifies people to spend money on electricity by the individual miners out there. The hype that has allowed the price of bitcoin to skyrocket is what keeps attracting such a large amount of mining to happen. However, this is all a result of the economic balance between, price, reward and electricity costs. The reward is set to decrease over time and that trend should put negative pressure on miners. If this works out, the excessive current electricity usage may be a temporary situation that alleviates itself over time.
Similarly the price of a bitcoin is currently ahead of it’s inherent value. This is analogous to a stock trading at a high multiple of it Price to Earnings Ratio (PE). Trading at a high PE is natural for growth stocks as people bet on the future value of the assets to increase over time. The inherent value of bitcoin will come from it’s ability to facilitate more transactions the volume of which is only in its infancy. Ideally the price will slowly converge to current value as the limits of future growth trail off. This effect happens naturally to stocks, for example, Apple Inc currently trades at a low PE multiple because it has established and saturated most of it’s markets, perception is that there are limited areas for future growth and the price reflects that. If this proves to be the case with bitcoin the block rewards will align more with the value of the transactions in the future.
Comparatively, we can look at the energy costs of the existing financial sector. Large banks own and run a disproportionate amount of the massive high-rise buildings in the worlds largest cities, they have a distributed network of ATMs and local bank branches at which countless desktop computers and servers suck up their own power requirements. The resources required for coin and paper money production are also immense with nearly every country in the world spending time and resources to design and print their own currency, they mine and refine the plastic, metals and paper that goes into each of those coins and bills. Further costs are added by the various payment networks and the various middlemen and re-sellers that are between VISA, MasterCard etc, the banks and the merchants. Banking and financial services are notorious for providing limited productive value to society — billions are invested in developing High Frequency Trading systems for instance which does nothing to help make the world a better place, except for the handful of people that temporarily have the best Algo. Financial services companies employ some of the smartest people on the planet. There is an opportunity cost that is impossible to quantify for what could have been if all that intelligence was allocated to engineering and science instead.
It should be noted that the electricity cost of mining is a key part of the deterrent that keeps bitcoin from being attacked. In a 51% attack the attacker must be able to harness enough of a majority of the mining power to mine a new longer branch in the blockchain starting from a block before the transaction they want to double spend. Given the current electricity demand allocated to mining it would be infeasible for anyone to attack. Thus, making bitcoin very secure.
Also, it should be taken into account that the nature of the power grid is that it consists of base power that provides consistent electricity from sources like Nuclear, Hydro and Coal, and peak power that may come from gas, solar, wind or diesel. Uneven power usage on the grid is problematic. If power usage drops below base levels the power producers start to lose money. infrastructure for the peak power plants needs to be built in order to avoid brownouts, but may sit idle for much of the day waiting for demand to pick up. Mining could be incentivized with peak pricing of electricity to help even out the base load demand and therefore improve the utilisation of the power assets we have. By improving utilisation the infrastructure costs can be amortised over more KWh resulting in a lower electricity price for everyone.
My final argument is that mining does not need to grow with additional usage of the network. If tomorrow every business on the planet started to accept bitcoin payments there would be no need to add more miners.
