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Bitcoin is not a Battery — it is a Sink

In a recent blogpost, Nick Grossman argues that Bitcoin acts as a battery — moving electricity across time and space, from where it can be cheaply produced to where it can provide the most utility. In this blogpost, I argue that Grossman’s economic analysis fails to consider the particularities of Bitcoin’s mining mechanism. Bitcoin is not a battery; it is a bottomless sink for marginal-cost electricity. It doesn’t store energy to be deployed later; instead, it sucks marginal cheap energy and produces no marginal asset in return. The reason is simple: if Bitcoin was a battery, then the more electricity you’d put into it, the more “charge” you’d get. But that’s not the case: in Bitcoin, more electricity does not buy “more Bitcoin”, it rather buys “more security”, a common good for the entire Bitcoin system. And security is not an asset, and cannot be later traded. As a result, Bitcoin likely does not have the social utility that Grossman ascribes to it, of promoting the production of cheap power.

Comparison to Aluminum Smelters: Smelters produce Aluminum, but the Bitcoin Network produces Network Security

Let’s go back to Grossman’s argument. Grossman compares Bitcoin to Icelandic Aluminum smelters. He explains that Aluminum smelters are a battery: smelters convert cheap electricity into a commodity, which can then be moved across space and time. (This claim about Aluminum smelters might be dubious as well, because it once again includes uninternalized externalities; but from a theoretical economics viewpoint, we can take “smelters == batteries” as a reasonable economic model of smelters.)

Wrapping it up.

To summarize: Bitcoin is not a battery. Bitcoin is a sink for low-cost power. As such, its environmental impact is quite negative (in a vacuum), and will get more negative as the price of Bitcoin climbs. Still, Bitcoin has many useful social properties as digital money, and is still likely much cheaper than the banking system (depending on how you measure it). Bitcoin also provides the substrate for the development of useful protocols and primitives, which will build Web 3.0, a global network efficiently transacting in data and value, with immeasurable social utility. Bitcoin’s contribution to the world is (in NPV terms) more than worth its energy cost. But we shouldn’t ignore Bitcoin’s energy cost; this is a nuanced topic, which shouldn’t be swept under the rug by wishful thinking.

ℹ️ About me

🎆 I’m a computer scientist, investing in startups changing the world using computer science.
Are you building a pre-seed startup based on cryptography, machine learning, optimization, or any other kind of algorithms? Are you bringing cutting-edge science to market in a way that can change the world? I’d love to talk to you! Please drop me a line at elad@lunarventures.eu !
Do you know someone building such a startup? Send them this blog post or just tell them to email me!

Footnotes:

  1. Grossman is a bit too optimistic about the social utility of Bitcoin. He writes:

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Lunar Ventures is a pre-seed/seed VC fund investing in deep-tech software and computer science startups, run solely by R&D experts, investing into globally ambitious algorithmic startups across Europe.

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Elad Verbin

Berlin. Computer Scientist & Algorithms developer. Invests in pre-seed algo-tech: ML, blockchain, zero knowledge, ... Partner @ Lunar Ventures