Bitcoin energy consumption explained.
Elon Musk recently posted a tweet that stated Tesla would be ceasing the acceptance of Bitcoin for any purchases. The narrative that Bitcoin wastes a tremendous amount of energy immediately became a popular headline.
Coming from a carbon and energy trading background, I view the narrative as not grounded in reality and, in some way, deeply misinformed.
The first thing to remember is that even after the tweet, Tesla didn’t sell their Bitcoin. Elon, Tesla, and SpaceX still hold billions of dollars worth of Bitcoin. And they’re not selling it because of this energy narrative. So let’s always stick to what they do, not to what they say.
In the tweet, Elon said that “we are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emission of any fuel.”
Let me clarify. According to the Cambridge Center for Alternative Finance, 76% of miners use renewables in some capacity. The financial incentive for the miners is to build a mining operation on the other side of the planet and find the cheapest form of power generation. Electricity is their most significant cost input. Since coal-fired power plants have a heavy burden to bear in various carbon trading schemes and carbon taxes, the financial incentive for the miners is to adopt renewable power.
The world generates 25,000 terawatt-hours (TWh) of electricity a year. Of that, 5,000 TWh is wasted. In other words, one-fifth of all electricity produced is surplus production. The Bitcoin network consumes about 150 TWh. And media like to point out that it’s more power consumption than Argentina.
However, in reality, that’s only 0.6% of the power produced globally in a year. On top of that, the 0.6% amounts to about 3% of all the wasted energy.
In effect, Bitcoin miners have become crucial clients for power grids to ensure a balanced grid in the day-ahead markets. To put it differently, the grid operators can earn extra income instead of wasting the production.
As a result, the 3% percent of all wasted energy gives people in Asia, Africa, and South America a chance to protect their livelihoods against poverty.
And even if you eliminated Bitcoin and deprive women and children in Venezuela, Nigeria, or Zimbabwe of decent living, we’d still waste about a third of the electricity generated.
China accounts for more than 65% of the hash rate and is the world’s dominant Bitcoin miner.
Many argue that miners in China predominantly use coal to mine digital currency. That’s not accurate either.
According to the University of Cambridge, four provinces account for about 90% of China’s mining capacity, Xinjiang, Sichuan, Yunnan, and Inner Mongolia. Xinjian is powered by 50% renewable energy, Sichuan with Yunnan are almost 100% hydro-power during the wet season, and Inner Mongolia recently banned bitcoin mining.
Moreover, China is rapidly losing its market share to the United States and Canada. This could lead to more renewable energy. Not to mention, as China’s energy mix is changing, Chinese miners are becoming greener as well.
When you study the Bitcoin network, you’ll find that the cost of securing the networks is extremely low. Currently, Bitcoin market capitalization is about one trillion dollars. If we presume the average electricity production cost is at 3 cents per kWh, the total price to secure the network is about $4.5 billion a year.
That’s 0.45% of all the assets under management in the Bitcoin network. With that in mind, we must remember that the Bitcoin network uses the discarded power that would have gone to waste anyway in many cases. That is to say, its marginal value to society is zero.
In addition, once you wrap your head around the concept of proof-of-work, it becomes clear that the Bitcoin network’s energy consumption is a crucial feature of the network.
Understanding proof-of-work in more detail might help shift the perspective from inefficient and wasteful” to “secure and censorship-resistant.” I encourage every critic of energy consumption to review this concept.
Be that as it may, it’s undeniable that Bitcoin mining not only consumes a lot of power but produces CO2 emissions as well. People ask if Bitcoin is even worth it.
Although this may sound like a valid argument, people used to question the necessity of trains, cars, and planes not that long ago.
For example, in 1999, Forbes claimed that the internet “burns up an awful lot of fossil fuels” and sets the world on a dangerous trajectory of energy usage.
Imagine if entrepreneurs, investors, and developers had listened to Forbes and stopped building the internet.
Bitcoin is a trillion-dollar, open, decentralized, censorship-resistant monetary network, and over 100 million people put their trust in it. If someone figures out a more energy-efficient way to secure it without compromising one of these qualities, we can discuss replacing Bitcoin.
And no, Dogecoin is not the answer.
Besides, if Elon Musk is so concerned about coal-fired power production, will he stop selling EVs in China?
Or, perhaps will he stop accepting the U.S. dollar as well?
Apart from being a carmaker, Tesla is a renewable energy company too. Elon is a phenomenal marketer, and this could be yet another of his clever marketing ploys. According to Anthony Pompliano, the plan could be in “a launching pad for Tesla to start a renewable power mining rig or even a mining equipment.”
Anything is possible.
Given these points, I don’t want to dispute the power consumption of Bitcoin or compare Bitcoin’s energy usage to the current banking system.
I simply want to offer a shift in perspective.
Previously published here: https://www.virtuse.com/what-elon-gets-wrong-about-bitcoins-carbon-footprint/