The world is arguing about Bitcoin’s energy consumption again, this time from opposite ends of the political spectrum.
Chinese premier Xi Jinping and Tesla founder Elon Musk might differ ideologically, but they share a communal punching bag: Bitcoin.
Elon Musk became a cryptocurrency hero when he announced in February that Tesla would accept payment for its products in Bitcoin. Musk later backtracked and said that Tesla actually wouldn’t accept Bitcoin until it had a better energy track record. Chaos ensued.
China is also reducing its environmental impact and Bitcoin mining is in the firing line. Home to the majority of the world’s leading Bitcoin mining operations, China’s recent crackdown on Bitcoin mining on environmental grounds means that even the largest sites will now face closure.
These events are just the latest examples of the wider discussion about Bitcoin and energy. We live in a climate conscious world and critical discussion of how and why we use energy is more important than ever. But the conversation about Bitcoin needs to be based on facts so that people can make an informed decision for themselves.
In short: It’s time to cut through the noise.
The truth about Bitcoin and energy
Let’s start with an obvious clarification. I’m not going to deny that mining Bitcoin requires some serious power. But that power is being used for a vital purpose.
Bitcoin is a secure financial system. In fact, Bitcoin is so secure that it has never been compromised in its 12 year history. But all this security requires a whole lot of juice.
Bitcoin is underpinned by technology called blockchain, a digital ledger made of individual blocks of data. This data contains information about Bitcoin tokens and their ownership history to stop double spending or fraudulent transactions. To make sure this data is protected, it is encrypted through hashing, which involves processing the data into an output of fixed length to protect it from hackers.
Bitcoin miners need to produce a new hash that is equal or lower than the value of the encrypted hash in order to add new blocks to the blockchain and earn the reward of 6.25 newly minted Bitcoin. This can take millions of attempts because the hash is effectively created at random. The hash rate is the combined computer power to mine Bitcoin on the network. The more computers mining Bitcoin, the higher the hash rate. A higher hash rate improves network security. This process makes it both extremely difficult and expensive to try and compromise Bitcoin. Because the mining process is ongoing, the network continues to become more secure each day, but needs greater power to support its development.
The point I’m going to make is that the environmental impact of this power is both overstated and based on a fundamental misunderstanding of how Bitcoin works. Criticism of Bitcoin’s energy consumption at this level is usually based on two assumptions: That using Bitcoin requires as much energy as Bitcoin mining and that energy consumption is equal to carbon emissions.
Let’s tackle Bitcoin’s supposed thirst for energy first. The majority of energy used in the lifespan of Bitcoin happens during mining. But Bitcoin mining has an expiration date. Only 21 million Bitcoin can ever exist and nearly 90 percent of these have already been mined. The amount miners earn as a reward for mining Bitcoin is halved every four years, meaning that the most energy intensive part of mining will shrink over time and be replaced by competitively participating in and validating new transactions, thereby reducing Bitcoin’s carbon footprint. After this initial phase, Bitcoin energy usage is minimal.
Both carrying out transactions and having them approved across the Bitcoin network costs little to no energy. But the word transaction here is almost misleading. Unlike the traditional financial system, a single Bitcoin transaction can process payment to hundreds of individual addresses in one go. Consequently, Bitcoin can move billions with barely any energy expenditure.
This doesn’t get rid of the initial problem that mining Bitcoin consumes a lot of energy. But here’s the crucial point: energy consumption does not always equal carbon emissions.
Local grid power is mostly generated by non-renewable energy and has a large carbon footprint. In this sense, the more energy consumed, the greater the carbon emissions. This would be bad news for Bitcoin if it relied on the same power as the local grid. Except it doesn’t.
Miners actually use power with a proportionally higher mix of renewable energy. Even if miners are using more electricity, they are not dispensing an equal amount of carbon into the atmosphere due to renewable energy’s lower impact on the environment.
Most Bitcoin energy is green
Calculating the exact energy mix used by Bitcoin miners is tricky, because most energy information is only available at a national level.
For this reason, estimates about what percentage of energy used by Bitcoin is renewable tend to vary. Despite this, a number of studies show that Bitcoin is actually much greener than most people assume. A 2019 report found that up to 73 percent of Bitcoin’s energy consumption was carbon neutral. A more recent study by the Cambridge Centre for Alternative Finance (CCAF) reported that the renewable energy share was probably closer to 39 percent.
Such a big reduction makes it seem like Bitcoin mining is indeed a dirty business. But I believe these statistics actually provide an excellent insight into why Bitcoin is a green energy champion.
While this lower estimate may seem disappointing, it is actually a great defense for Bitcoin. Even at a conservative 39 percent renewable energy mix, Bitcoin would still source nearly twice as much renewable energy as the local grid. Now who’s dirty?
So why is this energy mix higher than average? To find out, we need to look at one of the variables that affects Bitcoin mining profitability: energy cost. Miners are always on the lookout for the cheapest power and renewable is often the cheapest option.
Until recently, most Bitcoin mining took place in Sichuan in Southwest China, a global hydropower hotspot. Hydropower generates an enormous amount of energy that could never be consumed by the local area. The fact that Bitcoin mining used up large amounts of this energy was a holy trinity of positive outcomes: The miners earn more due to lower operation costs, the renewable sector is supported through the increased demand and energy that would otherwise be wasted can now generate a profit. This is a pattern repeated across the world at sites where renewable energy is generated. Analysts had hoped that China’s crackdown would spare Sichuan due to its use of hydropower but regulators are clearly taking a uniform approach to mining across the country. Not only is this a blow to renewable energy providers in Sichuan but also an erratic piece of policy that will see more than 90 percent of Bitcoin’s mining capacity taken offline. The short term consequences of this are probably unavoidable, but I’m confident that miners will form new relationships with green energy providers in ascending nations that are embracing both technology and the many benefits it brings.
But Bitcoin mining doesn’t just contribute to green energy. It also minimises the waste of non-renewable energy. Oil is currently the largest producer of energy and, like it or not, the world isn’t ready to give it up just yet. Extracting oil releases a lot of gas directly into the atmosphere and Bitcoin miners realized that this resource could be used for carbon neutral mining. If dirty industry isn’t disappearing overnight, it makes sense to optimise its profitability and reduce waste to an absolute minimum.
Bitcoin is cleaner than traditional banking
Traditional finance is one of the biggest polluters on the planet. Consider the swarm of cash machines on every street, the millions of bank branches around the world and the clusters of skyscrapers that make up their headquarters. Traditional finance needs a physical presence to work and this comes with a staggering carbon footprint. When you add the sheer size of the workforce required to keep mainstream finance moving, the figure grows larger still.
The finance industry is already chugging out an inconceivable amount of carbon and we haven’t even started looking at how it works yet. Centralized payments rely on a complex network of interconnecting systems including automated clearing house networks, central banks, commercial and retail banks, SWIFT and a whole armada of middlemen, all of which require both manpower and electricity.
But that’s not all. There’s even an argument that links the U.S. dollar, the world reserve currency that underpins global finance, to yet more carbon emissions. According to some critics, the dollar is, by virtue of its backing by the United States government, linked with the extraction of oil. This link comes from oil producing countries receiving security support from the United States military in exchange for selling huge quantities of oil exclusively for dollars. I’m not going to say that we should add the energy cost of the whole U.S. military to that of fiat currency. I do believe, however, that the monetary hegemony enjoyed by the greenback is associated with the political hegemony enjoyed by the U.S., which is in turn because of their military dominance over the last century. I am not going to cheapen this article by speculating on a number, but even attributing a small percentage of the cost of the military to the traditional finance system would massively tip the scales in favour of an apolitical option like bitcoin.
To make payments in Bitcoin you just need Bitcoin. It’s a self-contained financial system that doesn’t rely on third parties using vast amounts of natural resources. Bitcoin doesn’t have a headquarters. It doesn’t even need regional branches. What’s best, Bitcoin is democratic way of doing finance that is spread by like-minded people, not at the point of a gun.
Bitcoin’s carbon emissions pale in comparison to the traditional finance industry. It would take up to 1,000 years of Bitcoin’s energy consumption to even come close to the energy used by mainstream finance during the 2008 crisis alone.
Bitcoin is worth the energy consumption
Global industry and mainstream finance both dwarf Bitcoin’s energy consumption, yet neither are subject to the same level of criticism. The question is clearly not about the actual energy consumption itself, but rather about what value we gain from the environmental impact. In my opinion, Bitcoin’s critics don’t take Bitcoin’s most important use cases into account.
For people living in authoritarian regimes who have little control over their finances, Bitcoin is a vital tool for building independent savings that can’t be confiscated or devalued by high levels of inflation. For the 1.7 billion people that don’t have access to traditional financial services, cryptocurrency can make a life changing difference. For the millions of migrant workers living away from their families to earn a living, Bitcoin is the first option to cut out middlemen and make sure their hard earned money goes straight back home.
In the West, people typically enjoy stable currencies so there is no pressing for Bitcoin to replace the Euro or Dollar. Nuri customers invest in bitcoin as a new assets class. With inflation at the forefront of everyone’s mind, there has never been a more compelling case for investing in a digital, deflationary asset. We’ve used gold as a store of value for thousands of years. With bitcoin, we finally have a digital version.
We must strive for a cleaner financial world
The conversation about Bitcoin and energy use is one that the world is intent on having and I absolutely encourage that. But the current dialogue is filled with misinformation and permeated by a lack of understanding. Not only is this deliberately misleading but also detrimental to the crucial goal of reducing our impact on the environment.
The current conversation isn’t good enough for the public and it certainly isn’t good enough for the planet. What we need is for people to have access to clear, thorough research that explains both how Bitcoin uses green energy and plays an important role in supporting and expanding it. I welcome educational initiatives like the Bitcoin Mining Council. We have a long way to go!
Unlike traditional finance, cryptocurrency is a future-facing technology that can adapt to the challenges of the modern world. Bitcoin’s role in making finance both accessible for everyone and kind to the planet has only just begun.