Bitcoin is finding its way into more and more portfolios, and the acceptance of cryptocurrencies as an alternative asset class is rising. Companies are adding Bitcoin to their treasury reserve assets, and notable macro investors and asset managers have formulated their investment thesis for Bitcoin or already decided to allocate part of their portfolios to it.
As Bitcoin grows, so does the focus on the externalities of the cryptocurrency, most prominently its energy consumption. As a blockchain that relies on proof-of-work to secure it, the computational puzzle that miners need to solve to add new blocks is energy-intensive, and Bitcoin currently uses as much energy as Sweden (131 TWh/year) or Belgium (78 TWh/year). However, these comparisons depend greatly on the parameters chosen for the estimation.
The topic is more complex than just an overall estimation of the total electricity consumption, though. What are the various factors that should be considered?
Benefit for Bitcoin’s Security
First of all, the high energy consumption is part of what makes Bitcoin so secure. As the oldest proof-of-work blockchain, Bitcoin has shown to be resistant against all sorts of attacks over the years. Bitcoin has never been hacked – any cryptocurrency-related hacks are typically targeting exchanges or unsecure smart contracts. The network itself continues to become more secure, as both higher BTC prices and more efficient chips make it economically reasonable for miners to deploy more hardware to mine Bitcoin (Illustration 1).
Illustration 1: Bitcoin’s hash rate currently stands near its all-time high of ca. 160 million TH/s, a number which has grown by orders of magnitude over the years and with technological improvements.
The energy that Bitcoin uses is not wasted – it powers the most secure global value transfer and storage network.
Renewable vs. Non-renewable Energy Sources
To assess the carbon footprint that comes with any sort of energy consumption, it is important to get an idea of the energy mix that is used. Much of Bitcoin’s hash rate is powered using renewable electricity sources, mostly hydropower, and its carbon footprint is often overestimated. Recent estimates place the share of renewables in the overall energy mix at around 73% – more than double the global average share of renewables in the energy mix, which amounts to circa 28%.
Now, why is the percentage in the energy mix that Bitcoin uses much higher than the global average? An important consideration is that Bitcoin miners are highly mobile: They will move wherever energy is cheap and readily available (Illustration 2).
Illustration 2: Bitcoin miners are distributed across North America, Europe and Asia, with large mining farms sitting in Chinese province Sichuan.
Often, that means they end up in China, which is producing large amounts of hydropower. Hydropower plants run below their maximum capacity, and significant amounts of energy – up to 30 TWh – are wasted every year because demand is lower than potential supply. Such overcapacities are highly attractive to Bitcoin miners, as they can purchase this surplus energy at cheap prices and improve their profitability versus mining in areas where electricity is more expensive. Side benefits of this may also be a more stable electricity grid or support of renewables power plants until natural demand grows further.
Accessible vs. Remote Locations
The mobility of Bitcoin miners nicely complements the immobility of some sources of renewable energy. These may be available only in remote locations, where natural demand is low. Bitcoin miners are economically incentivized to use such cheap energy and buy it when no one else would – thus potentially removing the need for government subsidies of such projects and, if the scale is large enough, ultimately enabling a modern grid connection to areas with higher electricity needs.
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.Nic Carter
There are two potential comparisons for Bitcoin’s energy use that come to mind: gold mining, and the financial system. While the latter is hard to estimate, an easier and logical comparison can be drawn to gold mining (with Bitcoin as a digital alternative). At 175 GJ per kg of mined gold and assuming an annual production of ca. 3’000 tons of gold, the total energy consumption amounts to ca. 145 TWh. On top of that, gold mining has additional negative externalities, such as social costs or toxic gold mining waste. However, the Bitcoin mining industry faces a similar waste issue with old mining equipment that can no longer be used profitably.
Proof-of-Stake as an Alternative
Alternatives to the energy-intensive proof-of-work have been researched and tested since the early 2010’s. Proof-of-stake as a mechanism to secure the network is gaining popularity, and uses very little energy, since the prerequisites to produce new blocks are shifted from computational power to capital in the form of a network’s native cryptocurrency. The second largest cryptocurrency by market cap, Ethereum, has started its journey towards proof-of-stake, and others in the top 10 – such as Polkadot or Cardano – use it to secure the chain.
Bitcoin’s energy consumption and its effects on the environment are more complex than simply estimating the overall energy use and converting it to a carbon footprint by applying a normal grid mix of electricity sources. Renewables play a major role in generating new BTC and operating the Bitcoin network, and miners are economically incentivized to keep it that way and look for cheap, otherwise potentially inaccessible energy sources. In the long run, other sybil control mechanisms such as proof-of-stake may also prove to be equally secure and further reduce the overall environmental impact of cryptocurrencies, while improving their alignment with ESG investment principles.