Is Bitcoin Sustainable?
Bitcoin’s sustainability has been hotly debated since Tesla’s decision to stop accepting it as a payment method last month. The announcement, which cited an increase in fossil fuel usage, is considered by many to have caused the largest crypto crash since 2013. But how justified are those concerns? With the World Environment Day, this debate seems to have intensified.
Let’s dig deep into one of Bitcoin’s most long-standing criticisms. Do the benefits of Bitcoin outweigh its environmental impact?
At first glance, this question depends more on how you feel about Bitcoin. If you’re pro-Bitcoin, then learning that it consumes approximately 0.55% of annual global electricity production sounds like a great deal. However, if you’re anti-Bitcoin, is it really fair for a glorified Ponzi scheme to consume as much energy as Malaysia or Sweden?
Just a little observation in how much context matters when presenting statistics.
This is an incredibly broad question, with multiple touchpoints to consider. For the sake of clarity, let’s break these down into segments - and tackle each of them in turn.
This is not to “win” an argument, but to introduce more nuance to this debate and bring in alternative perspectives.
How much energy does Bitcoin consume?
The transparent nature of a blockchain network makes it fairly easy to estimate Bitcoin’s energy requirements. One can do this by looking at the Bitcoin hashrate, which is the total combined computational power used by the network. This information is then used as a reference to estimate the energy requirements of the hardware miners are using.
A May 2021 report by Galaxy Digital states that the Bitcoin network consumes an estimated ~113.89 TWh/yr in total. A terawatt hour (TWh) is a measure of electricity that represents 1 trillion watts sustained for one hour.
For context, Bitcoin consumes 0.09% of the global annual energy supply of ~166,071 TWh/yr.
This sounds like a lot, and very little at the same time. Schrödinger's energy consumption, if you will.
Introducing a related industry as a comparison would help make more sense of this statistic. But which industries? Bitcoin is novel, and no existing systems fit perfectly as a 1:1 comparison. However, it would be appropriate to benchmark its energy consumption against gold and the traditional banking system - the spaces it is most often compared with.
The Galaxy report estimates the banking system uses 263.72 TWh of energy annually, while gold uses ~240.61 TWh/yr. To put this in perspective, both traditional banking systems and gold mining have been found to consume twice the energy of Bitcoin mining. Do keep in mind that these estimates are less informed, due to their significantly opaque systems relative to Bitcoin.
Energy Consumption ≠ Energy Emission
Next, we need to keep in mind that there is a difference between how much energy a system consumes and how much carbon it emits. This is due to the difference in the precise energy mix - the share of different energy sources used. For example, one unit of hydro energy will have a much less environmental impact than the same unit of coal-powered energy.
As we’ve seen, estimating Bitcoin’s energy usage is the easy part. Which is probably why the narrative often stops there.
Bitcoin mining is immensely competitive, and miners are rarely keen to share details on their setup. This makes estimating the environmental impact much more difficult. The best estimates for energy mix can be made using studies from the Cambridge Centre for Alternative Finance (CCAF). The CCAF has worked with major mining pools to put together an anonymized dataset of miner locations. However, there are plenty of limitations to this data, which still leave us in the dark about Bitcoin’s energy mix.
Consequently, we see a large variance in estimates for the use of renewable energy in Bitcoin mining. One December 2019 report stated 73% of Bitcoin’s energy consumption was carbon neutral. Compare this to CCAF data which estimated the figure to be closer to 39% in September 2020.
Even if we take the lower bound, we’d be seeing that Bitcoin used twice as much renewable energy compared to a country like the US.
Where do Bitcoin’s energy requirements come from?
Bitcoin’s direct energy consumption comes from three sources:
Plenty has been said about the energy cost per transaction, which is a misleading metric.
Consumption is not evenly distributed among these sources. In fact, almost 99% of energy consumption stems from the mining process. Once new Bitcoins have been introduced into supply, the energy required to validate transactions is minimal.
With this in mind, it becomes difficult to point to the past trend in Bitcoin’s energy consumption to predict future growth. The Bitcoin halving system, an event that occurs roughly every four years where the block reward for mining Bitcoin transactions is cut in half, means that it is economically unviable for a miner to continuously expand their operations. Mining becomes less profitable with Bitcoin halving which leads to miners temporarily pausing their investment in new mining hardware and even switching off less efficient hardware, resulting in the energy consumption of the Bitcoin network to fall.
It is also worth noting that Bitcoin’s energy requirements are much more versatile than most. Nearly all energy produced worldwide is placed relatively close to its end-user. Bitcoin has no such limitation as it can be mined anywhere. Miners can utilise energy sources that are otherwise inaccessible.
There is a limited finite supply of 21 million Bitcoins. Around 88% have already been mined and soon, all available Bitcoins will be mined. This would mean that miners will earn revenue from fees rather than from the energy-intensive Proof of Work process. So, in the long term, Bitcoin’s energy consumption, which is already half of the traditional banking systems, is likely to drop or, at the very least, plateau.
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