Powering Through The Bitcoin Energy Debacle
Bitcoin energy consumption 101, its energy ranking versus countries, banks and gold, and the extent, truth and future of clean energy…
The debate over Bitcoin’s energy consumption just won’t die, like an active volcano that smolders constantly and periodically erupts. The recent conflagration over Bitcoin’s carbon footprint, however, has inspired more hot takes and counter-arguments than any other.
When Elon Musk tweeted about the “rapidly increasing use of fossil fuels for Bitcoin mining and transactions,” a powerful spotlight illuminated the network and the miners that make it tick. Is Bitcoin a terrible polluter like Musk implied — or does it incentivize renewable energy as argued by Twitter founder Jack Dorsey?
Bitcoin’s Energy Consumption 101
The world’s best-known and most valuable cryptocurrency depends on a little-understood process known as mining. Within the Bitcoin ecosystem, miners play a fundamental role, solving complex cryptographic problems in order to validate transactions and add them to the public blockchain ledger. In return for their endeavors — which secure the network and prevent double-spending — miners bring fresh bitcoin into existence.
In the early days of Bitcoin, it was entirely possible to mine it on a personal computer. However, as the cryptocurrency has grown, competition between miners has intensified and an entire industry has sprung up with the emergence of dedicated mining companies and resource-intensive pools comprising millions of powerful computers. Today, Bitcoin consumes more TWh per year than countries such as the Philippines and the Netherlands.
When set against the electricity consumption of nation states, Bitcoin ranks 33rd according to the Cambridge Bitcoin Electricity Consumption Index (CBECI). On the face of it, it is difficult to know what to make of this fact. Is 33rd place what you might expect from a borderless asset whose value recently surpassed $1 trillion? Is a high energy output an acceptable tradeoff for a provably scarce digital asset that anyone can use?
Perhaps comparing Bitcoin to nation states isn’t worthwhile. After all, as both a non-sovereign store of value and an industry, its competitors are not countries but hard assets like gold and the global banking system whose authority it challenges. Research by investor Galaxy Digital indicates that Bitcoin’s energy consumption is less than half that of the banking system. The gold industry is also far more energy-intensive, with countless harm caused to the environment: earth erosion, damaged draining systems, air pollution. According to the Environmental Protection Agency, 40% of watershed headwaters in the U.S. have been contaminated by mining operations.
Much of the bad press surrounding Bitcoin’s energy consumption stems from the fact that mining is largely concentrated in China, where coal constitutes two-thirds of the energy mix. However, the 2020 Global Cryptoasset Benchmarking Study by the University of Cambridge tells a different story, determining that three-quarters of miners utilize renewable energy as part of their energy mix — with 62% favoring hydroelectricity.
Could Bitcoin Run on Clean Energy?
The Bitcoin Clean Energy Initiative believes that Bitcoin mining could “accelerate the global energy transition to renewables by serving as a complementary technology for clean energy and storage.” When used as a flexible load option, miners “could potentially help solve intermittency and congestion problems, allowing energy grids to deploy substantially more renewable energy” according to the Initiative’s recent research paper.
This is a plausible hypothesis: the competitive nature of bitcoin mining compels miners to source the lowest cost of power production, which theoretically should lead them to clean power (solar, wind) in the years to come.
The reality of mining also leads miners to energy sources that are otherwise stranded or wasted, giving rise to the scenario floated by the BCEI: that miners can represent an “energy consumer of last resort” and utilize the ‘waste’ energy companies create through overproduction.
We can already watch this scenario play out in real time: in April, a company named Crusoe Energy Systems raised $128 million to build out its operations. The vision? To utilize excess natural gas from energy operations to mine cryptocurrency.
Even Elon Musk has undergone a volte face regarding Bitcoin’s environmental credentials in a typically Muskian space of time — less than a week after first raising concerns.
On May 24, Michael Saylor tweeted that he’d hosted a meeting between Elon Musk and the leading bitcoin miners in North America, claiming: “The miners have agreed to form the Bitcoin Mining Council to promote energy usage transparency & accelerate sustainability initiatives worldwide.”
This was confirmed by Musk, who had earlier tweeted: “Spoke with North American Bitcoin miners. They committed to publish current & planned renewable usage & to ask miners WW to do so. Potentially promising.”
What About Other Cryptocurrencies?
Bitcoin is not the only cryptocurrency with a considerable energy footprint. Ethereum, which also uses a proof-of-work consensus algorithm to secure its network, uses around 45,000 gigawatt hours per year.
In recent years, the Ethereum community has made efforts to reduce this burden by executing transactions off-chain. The transition to a new system (proof-of-stake) with the long-awaited ETH 2.0 upgrade is also expected to reduce the network’s energy consumption by as much as 99%.
With proof-of-stake, only those who hold Ethereum’s native currency (ETH) can participate, meaning the electricity cost is shouldered by servers that host Ethereum nodes. Individual miners can also compete. The ETH 2.0 update is expected to be complete by the end of this year.
While there are no serious indications that Bitcoin will abandon proof-of-work, its advocates argue it is already on the right track. And where Bitcoin leads, the rest of the crypto market tends to follow.
The economic incentives built into PoW compel miners to seek out the cheapest energy possible. This means obtaining power from energy sources that cannot, for practical purposes, be utilized elsewhere. Coupled with the profound social pressure for Bitcoin to clean up its act, there is grounds for optimism. Bitcoin mining is far cleaner than mainstream media would have you believe — and is getting greener by the day.
About the author: Ruben Merre is a repeat tech entrepreneur, polyglot, life-long learner and founder and CEO of NGRAVE, the digital asset security company behind “ZERO”, the most secure cryptocurrency wallet in the world. Since 2018, Ruben and his team have partnered up with the top tier in nanotechnology, cryptography and hardware security, as well as thought leaders such as Jean-Jacques Quisquater, famous cryptography professor and second reference of the bitcoin paper. The result: a true end-to-end solution for managing digital assets, at maximum security (EAL7, highest security certification in the world), and an intuitive user interaction.
