Converting Musk and Methane to Bitcoin
If you had switched on the news in May, you might have heard that Bitcoin is ruining the planet. In fact, crypto assets regularly come under fire for their perceived environmental toll, and you would be right to hesitate before investing in a damaging asset. But is Bitcoin as bad as they claim? Could it have a net-positive impact on global emissions? And can a Bitcoin mine be used to save methane from being released into the atmosphere?
Like every story involving Elon Musk, it all started with a tweet. Musk and Tesla released a statement saying that they would no longer be accepting BTC as payment for new vehicles and, while they would hold the bitcoin they had purchased earlier in 2021, implied that they wouldn’t be adding any more to their treasury. Musk cited the “rapidly increasing use of fossil fuels for Bitcoin mining and transactions” as the reason the electric vehicle manufacturer had suspended BTC payments, and noted that they would resume transactions “as soon mining transitions to more sustainable energy”.
As Bitcoin has no headquarters and certainly no PR team, defending its image publicly is incumbent upon its community. This is also true of cryptocurrency as an asset class. When someone as influential as Elon Musk publicly mocks cryptocurrency, there stands no unified community voice able to respond and challenge misinformation. In an upcoming article, we at Xpressify will take a deeper look at this problem and even explore a possible solution.
Cryptocurrency and Elon Musk are, for whatever reason, inexplicably intertwined. News of Tesla adding Bitcoin to its balance sheet in February gave BTC the leg up it needed to break $40k, and the news of Tesla suspending BTC payments managed to cause the price of BTC to plummet by around 16% in just two hours, a move which took with it around $3 billion in open positions. Since then, an avalanche of bad press has rocked the crypto world, with even the Pope making a subtle dig at its energy consumption.
There’s something distasteful about one of the richest men in the world playing God in the market of an emerging asset class. Many speculate that Tesla could announce their own range of carbon-neutral mining rigs in the future, or even their own “green” blockchain or cryptocurrency, which would make Musk’s unsavory behavior even less palatable. It is tough to imagine that Tesla made their $1.5b Bitcoin investment without extensive research into the technology and the energy requirements of the mining network that upholds it. Billion-dollar investment decisions aren’t usually made on a whim, and one doesn’t have to look too deep to see the many question marks that have hung over Bitcoin’s climate footprint like a black cloud since its inception.
This article will contrast Bitcoin against the pre-existing value transfer systems Satoshi Nakomoto sought to disrupt and attempt to explain and consolidate the fuzzy and disparate data around Bitcoin’s energy use, hopefully cutting through the noise that always seems to drown out any meaningful discussion on this topic.
Before beginning, we need to challenge a few baseline assumptions in the debate on Bitcoin’s energy consumption, the first being that energy use is an inherently bad thing. Historically, and to this day, energy consumption per capita has always been tightly correlated to societal markers of human development. Healthcare and education, for example, have always been incredibly power-hungry, but you would be hard-pressed to find articles deriding the massive energy usage of hospitals and research laboratories. Why? Because the supposition is that these sectors are inherently valuable, that they provide positive outcomes globally and, therefore, that any energy expenditure is not only justifiable, but necessary.
This leads to the second commonly held notion: Bitcoin’s energy consumption is waste. If you are of this belief, or sit somewhere on the fence, fully defining the value propositions of Bitcoin unfortunately falls outside of the bounds of this article. Put simply though, Bitcoin delivers utility and positive economic outcomes through its functions, primarily as a store-of-value, but also as a decentralized, trustless payment network. Why this is important varies depending on your personal philosophy, but imagine the implications of a global financial system that, instead of being controlled by the few, is instead distributed in the hands of the many.
The notion then that Bitcoin wastes energy is fundamentally misinformed. In fact, the undeniably vast power requirement of the network actually serves as a tangible representation of its deep security. Bitcoin’s mining network currently draws approximately 12.6 GW, or 113tWh on an annualized basis — about 3.4% of the total energy consumption of the United States in a year. However, this energy isn’t consumed in one place or from one source: what this actually represents is a globally distributed array of miners, all of whom are economically incentivized to uphold the validity of the transactions on the network. The larger the network, the more secure it becomes.
At the heart of any cryptographically secured network lies the trilemma of security, scalability and decentralization. The general consensus is that strengthening one of these factors means weakening the others. Many believe that the Bitcoin network runs in perfect equilibrium at the intersection of these factors, and that to vary from the Proof-of-Work (PoW) consensus mechanism that secures it would disrupt this balance. So while it is true that the Bitcoin network requires massive amounts of energy, it does so to provide tangible value, and it must run as such to properly secure the value being transmitted in a sufficiently fast and decentralized way.
The third assumption that we must contest is that when a new miner is plugged into the network, new marginal kilowatt hours must be produced to cater for it. We can boil this assumption down to a fundamental misunderstanding of the nature of energy grids and how energy generation and transmission works globally. A new miner “doesn’t make the coal turbine spin one more time around the axle or the new nuclear turbine heat the steam one iota more, or the net gas pipeline pump in one more unit.”
To have a substantive discussion about the true impact of the Bitcoin network’s energy usage, we need to begin with a more fundamental look at how energy is generated, transmitted and consumed. When we do, we discover that, in most cases, Bitcoin doesn’t actually use any energy that wasn’t already being generated, and that economic incentives push these miners to find the most efficient energy sources that they can — most often in renewables.
So why the fanfare? Perhaps because the Bitcoin network’s energy consumption is incredibly easy to attack as it’s forced to wear it on its sleeve. Bitcoin’s transparency as an open-source protocol gives it the illusion that anyone with a calculator can do some rudimentary calculations and figure out things like energy use per transaction, total energy usage and CO2 emissions. In reality, any such attempts should be qualified with a plethora of caveats that stipulate the shortcuts and assumptions they employed to generate their figures.
Generating the Hashrate
Accurate comparisons between monetary networks must consider as many factors as possible. Bitcoin and other sufficiently decentralized cryptocurrencies exist as independent systems and rely on minimal externalities; it is the network itself that attracts participants to interact with and within it. Bitcoin itself is lightweight: it’s an open-source protocol that only requires miners, node operators and captured energy to operate. Security, transactions and proof-of-ownership are all regulated within its code. What this means is it requires no offices to power, no commuting workers, no air-conditioning and heating, no paper and office supplies, no commercial banks or ATMs to which people must drive and no system of federal reserve banks who rely on their respective nations to enforce the value of the pieces of paper they print.
Optimized energy efficiency is also at the very heart of the Bitcoin mining process. Hardware engineers are in a perpetual ‘arms race’ to produce more efficient mining equipment for mining operators, who are themselves always looking to decrease energy expenditure. There is strong and perpetual financial incentive for miners to seek out cheap and efficient energy, and to minimize the amount of energy their systems waste.
Nevertheless, Bitcoin’s power consumption is nothing to scoff at. Unlike traditional monetary networks, however, the transparency of Bitcoin allows us to find relatively accurate figures for its energy usage and even determine the makeup of its energy sources. Here it is critical to appreciate the wide mix of energy sources that contribute to Bitcoin’s power use. Naïve extrapolations linking energy consumption to CO2 emissions suppose that the energy mix is invariant at the global or country levels, where in fact the Bitcoin network’s energy sources are heterogeneous from a carbon footprint perspective.
Bitcoin mining is mainly driven by renewable and stranded renewable energy. CoinShares estimates the “lower bound of renewables penetration in the bitcoin mining energy mix to be 77.6%”. This figure is a result of “defensible conservatism” as they believe the number to be significantly higher. For comparison, the global average renewable energy use estimate is 28%, as of 2020.
Hydroelectric power is by far the largest component of this figure. The power grid of China’s Sichuan province (which is second only in hashpower to Xinjiang) is characterized by a massive overbuild of hydroelectric power, so great that its hydropower potential is double the capacity of its power grid. What this means is a lot of wasted potential energy: so much that the hydropower wasted in Sichuan and Yunnan alone would be enough to power the entire global Bitcoin mining network many times over. This situation is not isolated to Sichuan or Yunnan, nor is it to hydropower generally. In fact, this issue presents itself globally across all energy sources.
Wasted potential energy can be found in many other steps in the generational process, a major one being losses during transportation. Electricity decays as it leaves its point of origin and even the best high-voltage transmission lines suffer ‘line losses’: in fact, roughly 8% of all electricity globally is lost in transit. This is why locating energy sources near population centers is so vital in reducing the cost of energy within their respective grids. This is where Bitcoin and wasted energy, renewable or otherwise, meet at a very promising new crossroad: as Bitcoin mining is highly mobile, it has the potential to capture a seemingly infinite supply of energy that is not only being wasted, but actually damaging the environment.
Imagine a topographic map of the world, but with local electricity costs as the variable determining the peaks and troughs. Adding Bitcoin to the mix is like pouring a glass of water over the 3D map — it settles in the troughs, smoothing them out. As Bitcoin is a global buyer of energy at a fixed price, it makes sense for miners with very cheap energy to sell some to the protocol. This is why so many oil miners (whose business results in the production of lots of waste methane) have developed an enthusiasm for mining Bitcoin. From a climate perspective, this is actually a net positive. Bitcoin thrives on the margins, where energy is lost or curtailed. — Nic Carter
Here Carter is alluding to the intersection of Bitcoin and ‘stranded’ energy. Stranded energy is power that is being wasted simply because it doesn’t have a market to be sold to. This type of energy is often the by-product of other processes, and can sometimes be more harmful in its raw state than if it is processed for electricity generation. One place where this dangerously true is in oil and gas mining and the practices of ‘venting’ and ‘flaring’.
In the process of extracting oil, gas is seen as a by-product. While it is indeed valuable, it is much less so than oil, and therefore extractors seeking to maximize profits will be more than willing to release any excess gas they’re unable to use or sell.
Venting is the process whereby this extracted gas (predominantly methane) is released directly into the atmosphere. For context, methane can be anywhere between 30 and 50 times heavier and 86 times more effective at trapping the sun’s heat than CO2. It is a key ingredient in smog, which causes 260,000 premature deaths and 775,000 asthma-related hospital visits annually, as well as 25 million tonnes in crop losses. In modern systems, venting practices are thankfully kept to a minimum, and predominantly occur for safety when excess pressure builds up during the extraction process.
Flaring intends to mitigate the damage of methane by burning it through flare stacks. What this does is converts the greenhouse gas into CO2 before sending it into the atmosphere. Theoretically, if gas is flared rather than vented, up 29 times less hazardous air pollutants are emitted. Unfortunately, this conversion is far from perfect. The IEA state that “more than 99% of the natural gas is combusted when flaring is done in optimal conditions”. In real-world conditions, however, flaring can be significantly less efficient due to a number of factors, like wind or even output fluctuations. As a result, significant amounts of methane can be released into the atmosphere, along with black carbon and nitrous oxide — all dangerous greenhouse gasses.
Decontextualized from venting, flaring alone is still an incredibly destructive practice. A report from Environmental Health Perspectives found that for pregnant women “exposure to a high number of nightly flare events was associated with a 50% higher odds of preterm birth and shorter gestation.” A separate report by Environmental Research found that “swift action to cut methane emissions could slow Earth’s warming by 30 percent”, and as the oil and gas industry are one of main emitters of methane globally, flaring is one of the most challenging energy and environmental problems facing the world today.
As a result, flaring has become much more heavily regulated. In some places, regulators deploy drone fleets over fields that measure how much flaring is occurring, and once particular thresholds are reached they actually force the producers to cease operations. Normally, producers can be extracting around the clock, but with these regulations they are only allowed to operate for around 12 hours per day. This presents a gigantic opportunity cost, not only due to the downtime, but also because of the maintenance required on ‘stale’ wells that decrease in output efficiency while they’re closed.
There exists a wealth of emerging technologies showing great potential to curb the methane emission crisis, but the fundamental issue with all of these is incentivizing global implementation. Deploying flaring reduction options can be especially difficult for individual and small-scale operators who cannot benefit from economies of scale. For an industry ravaged by plummeting oil and gas prices consequent to the Covid-19 crisis, there is unfortunately very little fiscal incentive for mitigating methane emission producer-side, which remains worryingly under-regulated in many parts of the world.
Converting methane into Bitcoin
Enter the story of Great American Mining (GAM). GAM “monetizes wasted, stranded and undervalued gas throughout the oil and gas industry by using it as a power generation source for bitcoin mining.” On their search to find cheap, abundant energy, Marty Bent and his team stumbled across the oil and gas industry. Specifically in North Dakota, where there are very strict regulations put on producers dictating how much and how often they’re allowed to flare and vent their extracted gas.
Bent and his team bring shipping containers containing extremely compact and energy dense mining rigs that they call “gas to hash containers” to the well pads. They then plug the well’s excess gas pipeline directly into EPA-certified generators to convert the gas into electricity, which then powers the energy-intensive Bitcoin mining rigs on-site. The by-products of generating electricity with gas are significantly less harmful than those produced by simply flaring, and GAM earns a Bitcoin block reward for their efforts. Through this process, GAM diverts methane that would have otherwise entered the atmosphere, and have begun paving a fiscally viable pathway for oil and gas operators globally to cease flaring altogether.
Like most solutions though, it’s not perfect. In North Dakota, although massive amounts of methane are being diverted from the atmosphere, GAM allows the oil and gas industry there to bypass flaring regulations, theoretically enabling them to operate around the clock. According to Bent, flaring “is turning from a drag on their balance sheets and income statements into a positive income stream, significantly more resilient and profitable.” Critics might rightly suggest that Bitcoin mining in this way is providing new life to an otherwise destructive and dying industry. However, the reality is that flaring will continue globally until there is strong enough economic incentive or governmental regulation to stop it.
Outside of America, many countries are flaring in completely unregulated environments with primitive flare stacks that leak massive amounts of methane. For developing nations trying to establish themselves economically, it is unfortunately the case that maximum profit comes from minimum regulation, therefore little investment is being made into clean flaring technology. For these countries especially, Bitcoin mining can provide an easy-to-implement, profitable solution that benefits both the industry and the planet. As we’re very much racing against the clock against irreversible climate catastrophe, applicable solutions like these (among others) may be what buys us the time we need to challenge and change our current relationship with this planet.
Bitcoin miners are nothing more than energy arbitrageurs. Mining is incredibly competitive, and the driving force shared by all miners is the desire to reduce energy costs however possible. As is unfortunately the case in some places, fossil fuels are providing that concession. But throughout the rest of the world, it just so happens that some of the cheapest energy is also some of the most environmentally friendly. Whether it be methane that would otherwise be floating around in the atmosphere or geographically isolated renewable energy that would otherwise go wasted, Bitcoin miners are spreading like water, transmuting this wastage into digital gold wherever they go.
Takeaways
· Energy use is not an inherently bad thing. Historically, energy consumption per capita has always been tightly correlated to societal markers of human development.
· If you accept that Bitcoin provides positive economic outcomes globally, the Bitcoin network does not waste energy.
· New miners in the Bitcoin network don’t require new marginal kilowatt hours to be produced.
· Bitcoin requires much less physical infrastructure to support it than the current banking system.
· Bitcoin mining naturally moves toward optimum energy efficiency.
· Bitcoin is roughly 77.6% driven by renewables, about 50% higher than the global average.
· Geographically isolated renewable energy sources benefit from the mobility of Bitcoin miners.
· The gas and oil industry release huge amounts of methane into the atmosphere, which is 30–50 heavier and 86x more effective at trapping the sun’s heat than CO2.
· Bitcoin miners have the potential to divert massive amounts of methane from entering the atmosphere using EPA-certified generators.
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