The Bitcoin Energy Fallacy, Is Mining Environmentally Sustainable?

Bitcoin as an ESG alternative

“Bitcoin mining is an environmental disaster.”

Huh? You must have heard people say this or might even believe it yourself or maybe you have no idea about it, much less what bitcoin mining is.

Bitcoin the Mining

I think Bitcoin is in the name, mainly because the word coin that first image people have is of a coin that apparently is digital.

The bitcoin network, bitcoin token, blockchain technology, at first blush, these words appear as heavy jargon, deterring many from even attempting to understand it.

First thing is to understand some differences in these synonymously used terms.

Bitcoin network = The software running on the computers,

Bitcoin token = The native currency of this network,

Blockchain = The technology used.

Now let us see how these are connected,

Bitcoin’s blockchain is a database that records the flow of its native currency, bitcoin. This database takes the form of a ledger which is digital.

Allow me to get a little technical,

Bitcoin’s blockchain is a distributed, cryptographic, and immutable database that uses proof-of-work to keep the ecosystem in sync.

Don’t worry I will break it down.

Anyone in the world with a computer and internet connection can access and maintain the bitcoin network, thus distributed which creates transparency leading to trust.

So anyone anywhere can tap into the bitcoin network to see the record of debits and credits between different accounts, much like a bank statement only that it is accessible to all.

These debits and credits, the transactions are not added to the digital ledger one at a time but in ‘blocks’ that are ‘chained’ together, hence the term blockchain.

This data can only be added to the blockchain but never deleted, which makes it immutable.

How do these immutable data of transactions get grouped in blocks and how are these blocks chained together?

The answer is proof-of-work, it ties together the concepts of a distributed, and immutable database, with cryptography, and that’s how the distributed computers agree upon which group of transactions to add to the blockchain.

Various computers in the bitcoin network compete with one another to get the privilege to add blocks of transactions to the bitcoin’s blockchain, once the block is added, those transactions are confirmed. Each time a block is added to the blockchain, that computer is rewarded with a newly minted native token which is bitcoin(currency).

This reward of the newly minted token is known as the ‘block reward’ and the process is known as mining, the computer participating is known as the miner.

Where does cryptography fit in?

Proof-of-work is a mechanism that builds on the assumption that all network miners(computers) could potentially be corrupt. That is why these miners are made to compete by searching for the solution to a cryptographic puzzle that will allow them to add a block of transactions to Bitcoin’s blockchain.

This cryptographic puzzle involves combining four variables:

• Time,
• A summary of the proposed transactions,
• Identity of the previous block,
• Random number called the nonce.

These 4 variables are run through a cryptographic algorithm which in the case of bitcoin is SHA-256, the result of which is known as a hash function. The hash of a validated block represents the work done by the miner.

The difficulty of meeting this criterion is adjusted dynamically so that one miner finds a solution to this mathematical puzzle roughly every 10 minutes, the block reward gets reduced by 50 percent every 210,000 blocks, thus around every four years. This event is known as the halving.

Moving forward I need you to keep 2 things in mind,

• The hash of a validated block represents the work done by the miner.
• Halving affects the reward for the work done by the miner.

Speaking of the Disaster

The impression exists that bitcoin mining and maintaining the bitcoin network uses a tremendous amount of energy and is a major contributor to greenhouse gas emissions.

So much so that people think that as the bitcoin price rises more miners will be incentivized to enter the mining market, which will further contribute to the price rise thus recreating a vicious cycle.

Let’s stack the facts

Since bitcoin is a distributed network the data required to calculate the electric power is readily available on the internet itself. This is represented by the hash rate.

The hash rate of the network has ranged between 100–200 EH/s i.e ExaHash (quintillion) of hashes.

The computers used for mining purposes are specially designed machines to achieve the maximum hash rate for example Bitmain Antiminer S19 Pro. This miner consumes 3,250 watts(3250W = 3.25kWh) of energy for a 110TH/s hashing power.

Let’s do some mathematics taking the peak hash rate,

200 EH/s = 200 million TH/s

Dividing it by the hashing power of one miner, to get the maximum number of miners,

(200 million TH/s)/(110 TH/s) = 1.818 million miners

Electricity consumption of one miner as per 3250W = 3.25kWh

If running it 24h a day = 3.25*24= 78kWh

So running it a year 365 days a year = 78*365= 28470kWh = 28.47MWh

Running max miners for a year at peak hash rate,

28.47MWh X 1.818 million = 51.76 TWh

Phew! That is plenty of maths, but what is 51.76 TWh worth? Time to get some perspective.

The world’s total yearly electricity consumption is 22,315 TWh, which is 430x what the bitcoin network consumes.

Data networks consumed about 250 TWh of in 2019, that is the electric power consumed for our cloud computing, movie streaming, video, mobile networks and other data storage like Netflix, Zoom, YouTube. Which is about 5x of what bitcoin consumes.

As I sometimes call bitcoin digital gold and since the process of acquiring it is also called mining, let us see the gold industry's energy footprint.

Gold mining

According to the World Gold Council, in a report published in 2019 the greenhouse gasses(GHG) emitted by the mining process(Scope 1 in the figure) and the electricity used for the mining process(Scope 2 in the figure) amount to 100,404,000 tonnes of equivalent CO2 emission.

According to U.S. Energy Information Administration, to convert the GHG emission number into KWh we will use a carbon intensity multiplier of 0.92 pounds of CO2 emissions per kWh.

Time for a little math,

100,404,000 tonnes = 200,808,000,000 pounds

Equivalent energy consumption = 0.92 X 200,808,000,000 kWh

So gold mining industry uses 184.74 TWh of electric power, 3.57x of what the bitcoin network uses.

Now you might say that bitcoin was made as a decentralized payments system, so why not compare it with something like Visa cards. We can not compare bitcoin just to visa as the banking system provides the roots on which the payment system stands, so let's have a look at the whole thing.

Banking system

Since all the calculations are outside the scope of this article, I will be referring to the Galaxy Digital report, where they calculated electricity consumption by the banking system. Key takeaways,

• Banking data centres = 238.92 TWh
• Bank branches = 19.71 TWh
• ATMs = 3.09 TWh
• Card Networks(such as Visa) = 2TWh (still does not include their own office buildings)

Total banking system energy consumption is 263.72 TWh per year, which is almost 5x of what the bitcoin network uses.

The calculations and figures presented above are to provide a yardstick to the people who say the bitcoin network consumes an enormous amount of energy but forgot to ask compared to what exactly?

Having the Silver lining

In the above calculations, while calculating the energy consumption of the bitcoin network I calculated it using the example of Bitmain Antiminer S19 Pro, you might say that there might be lesser efficient systems that are more power-hungry. Haha!

Recall halving, the reduction of bitcoin mining reward by half, due to this very reason the bitcoin protocol itself incentivizes a reduction in energy use. Since the reward is halved every 4yrs the profitability of previous-generation machines diminishes or much better is eliminated, forcing mining companies to move to more energy-efficient solutions.

Bitcoin mining must become continually more efficient; it is structurally incentivized to do so. That is why there has been a 70% reduction in power use per terahash in just the past three years.

Since the next halving is less than 3 years from now, in May 2024, when the miner’s block reward will be cut by another 50%, to 3.125 coins. Merely to survive, the industry must constantly reduce its consumption of electric power. There is a vicious cycle here, but in the opposite direction than most people think.

ESG-centric Bitcoin

Yes! You read it write.

I believe that any amount of power consumption is substantial and can not be excused for its inefficiencies, the proof-of-work consensus used in bitcoin is programmed to be inefficient in order to make the system more robust as it makes tampering with the network economically unviable for the hacker.

Energy consumption represents the largest operating cost for mining operations (79% of operational expenses on average). This makes bitcoin mining one of the most energy price-sensitive industries in the world.

At the same time, there are some unique features to it as well,

• Mining rigs can be made operational anywhere with internet and electricity
• They can be scaled flexibly, that too instantly with the simple push of a button

The transmission losses in the US alone are around 206 TWh thus this can power the bitcoin network about 4 times, so mining companies tend to put shop near such power sources they purchase this stranded energy at a discounted rates, disincentivizing urban miners thus the notion that bitcoin mining competes with consumers is wrong.

A problem with the renewable power producers is their inconsistent cycle times, like solar panels in day time vs night time. Due to which traditional power production (like nuclear, coal) plants are kept in an always-on mode at baseload to balance the load and avoid blackouts. This excess power which otherwise will be wasted is sold to the miners at heavy discounts who in turn agree to turn off mining rigs at peak load times.

Miners can consume the excess energy produced by renewable producers which can not be transmitted due to limitations in the lines, in such times bitcoin “subsidizes” the production of renewable energy when it isn’t otherwise financially viable. That relationship can actually facilitate the acceleration of renewable energy infrastructure.

Such balancing acts will become more and more in demand as the use of renewable energy production increases.

Another very shocking example I came across was from ‘The methane hunters’. Oil fields let massive amounts of methane spill into the atmosphere, methane has almost 80 times the greenhouse effect CO2 does. With flared methane as an energy source, bitcoin mining could contribute greatly to a reduction of greenhouse gases.

There is a new generation of mining coming up called Green Mining, thus this so-called energy-intensive industry is going to get greener, hopefully at a better pace than most traditional industries.