Bitcoin Energy Consumption

Is Bitcoin Energy Consumption a Problem?

It has been pointed out more than once that Bitcoin’s energy consumption is comparable to that of countries. For example this BBC article; Bitcoin consumes ‘more electricity than Argentina’.

Another example highlighting Bitcoin energy consumption is of Elon Musk who announced on Twitter that Tesla will no longer accept Bitcoin as payment for its cars on the 12^th of May. Since then he has asked for data from miners on the energy mix they are using.

Bitcoin’s energy consumption is touted as a big deal, but the way the debate is being framed is not doing justice to what is truly happening on the ground. There is a lot of varying data available from different sources. Firstly because things change very quickly in the crypto sphere and secondly because some data is hard to retrieve. Nevertheless –

In this post we cover the following statistics:

• Bitcoin consumes 135 terawatt hours (Cambridge Centre for Alternative Finance) 0.08% of world energy use
• 85% of energy use is due to mining (Nic Carter co-founder of Coin Metrics)
• 30% is used to cool the mining computers and other ancillary demands (BloombergNEF)
• 89% of all Bitcoins have already been mined (Blockchain.com)
• Mining efficiency will result in a 32% decrease in carbon emissions due to non-linear effects (Frontiers in Sustainability)
• 39% of Bitcoin energy consumption came from renewables (Cambridge university study)
• 76% of Bitcoin miners use a mix of renewables and other energy sources (Cambridge university study)

How Much Energy Does Bitcoin Use?

In 2019 the world used just over 170,000 terawatt hours of energy a year. Let’s assume that the world consumes about the same amount in 2021.

Global primary energy consumption by source – sourced from Our World in Data. Primary energy is calculated based on the ‘substitution method’ which takes account of the inefficiencies in fossil fuel production by converting non-fossil energy into energy inputs required if they had the same conversion losses as fossil fuels.

Around 135 terawatt hours are used to run the Bitcoin network in May 2020.

Sourced from Cambridge Centre for Alternative Finance

That would mean that 0.08% of the energy used worldwide is used to power the Bitcoin network.

Bitcoin vs Visa

There have been some comparisons of Bitcoin energy consumption versus Visa like on Statista. These estimates do not factor in a lot of things making this data problematic. Additionally comparing Bitcoin’s energy use to Visa’s is not comparing like with like.

Visa is a payment processor and a part of the financial system not the whole system. Bitcoin is a full monetary system in its own right. When comparing, it is best to compare Bitcoin to the entire banking system.

If we had to compare, Bitcoin uses 40% of the amount of energy it takes to mine gold and 8.5% of the energy that powers the banking system.

Sourced from ARK invest

Breaking Down Bitcoin’s Energy Consumption

According to Nic Carter a co-founder of blockchain analytics company Coin Metrics 85% of the energy used by Bitcoin is due to mining. The remaining energy consumption is taken up by transactions in the network.

Moreover, 30% of Bitcoin energy consumption is used to cool the mining computers and for other ancillary demands.

Bitcoin Energy Consumption is Not Linear

There is an assumption that just because a unit of Bitcoin consumes X amount of energy then it stands to reason that 100 units will consume another 100 and so on. However, this is not the case.

A research report done by Aalborg University Denmark and Paul Scherrer Institute in Switzerland says that emerging technologies do not have linear trends.

This is because of:

• economies of scale
• industrial synergies
• increased efficiency
• better system designs
• activities at different scales
• technological maturity

All these factors will have their own impacts throughout a products life cycle. For example, increased production volume from 200 to 500,000 units of hydrogen fuel cells reduces environmental impacts by as much as two thirds.

Location, Location, Location

What the researcher discovered is that environmental impacts of Bitcoin mining is mostly dependant on the location where they are mining. That is to say what sources of energy they are using.

Chart sourced from Frontiers in Sustainability. Global Warming impact in kg CO₂ -eq/TH (Terahash) for different Bitcoin mining scenarios. BAU: Business as usual scenario (linear growth): Scenario 1: location-sensitive scenario. Scenario 2: equipment-sensitive scenario. Scenario 3: location- and equipment-sensitive scenario.

As a result because governments can flip on a dime and be welcoming or unwelcoming to Bitcoin miners, the situation could change quickly. This means that since mining efficiency will increase, scenario 3 is more likely to happen over time with a 32% decrease in carbon emissions. However if miners were allowed to move to areas where there are renewables emissions could go down even further.

Issues with the methods used to identify non-linear effects

The researches mention that they did their best efforts to create an accurate model. However, it is not able to consider rapidly changing conditions like mining revenue from Bitcoin halving and legal changes that would restrict miner locations.

39% of Bitcoin Energy Consumption is Using Renewables

According to a study published by Cambridge university 39% of the Bitcoin energy consumption comes from renewables.

The bulk of Bitcoin’s energy consumption is taken up to mine Bitcoin from the blockchain. Certainly miners are incentivised to chase cheap energy to maximise profits. Cryptocurrency miners are part of one of the few industries that are able to uproot themselves and move to another region for more favourable conditions at flip of a dime.

This is unlike industries like gold mining which are tied to mining deposits in specific areas or even the banking sector which has to have fixed branch locations.  

Subsequently Bitcoin miners end up in regions of the world that are the most favourable. For example Norway, Sweden, Iceland, Canada, Switzerland and France. In these countries they are using hydroelectricity, geothermal energy and excess natural gas which would otherwise be wasted. This offsets the carbon footprint.

Additionally miners that set up in countries supporting cooler climates can benefit from reduced costs to cool down their computers. This further reduces their energy costs and overall impact on the environment.

Miners do not necessarily use 100% renewables. 76% of miners use a mix of renewables and other energy sources.

Average Bitcoin mining renewable energy by percentage used by Region

Sourced from Cambridge university

That is to say, there is drive not only from the miners side but other factors pushing for miners to source energy from renewables and continue making Bitcoin more eco-friendly. For example China’s Ya’an city in Sichuan province has called for blockchain firms to burn off excess hydropower supplied by the city. This is energy which would otherwise be wasted.

China is also looking to get tough and implement harsher measures on crypto activities. As a result mining is going to shift to other countries that are more receptive to miners. Miners will also keep in mind that there is a desire from consumers to make Bitcoin more green and operate in ways that will have less of an adverse affect on the environment. Moreover will have a positive affect on the Bitcoin price for them to continue making profits.

Bitcoin Energy Consumption is Efficient

There will only ever be 21 million Bitcoin that can be mined from the network and 18.7 million of them have already been mined within 10 years. Which means 89% of the Bitcoin available has already been mined.

Additionally the average time to mine blocks has stabilised since mid 2014 at just under 10 minutes.

Blocks mined in minutes sourced from Data Bitcoinity

As a result, a predictable 144 blocks per day on average are mined from the Bitcoin blockchain. Another predictable event is the Bitcoin halving that reduces the amount of bitcoin mined from the Bitcoin network every 210,000 blocks.

The combination of these events will lead to 99% of Bitcoins being mined by 2035 as Michael Saylor a co-founder of Microstrategy pointed out.

This will lead to miners needing to get their revenue from transaction fees which require less energy to operate. By then mining computers efficiency would have exponentially increased.

Efficiency of Bitcoin mining hardware sourced from the International Energy Agency.

Saylor explains that 20 years from now the cost of securing 100 trillion dollars in Bitcoin might cost around 50 billion. Consequently this would make Bitcoin the most energy efficient technology ever discovered. You can see Saylor discussing this point on this Kitco YouTube video at 14:50.

Bitcoin Energy Consumption Conclusion

With the continued pressure to make Bitcoin more energy efficient that it already is there will definitely be more incentive to drive green energy forward. The main advantage of Bitcoin mining is that it is not tied to any location which has enabled miners to set up shop where conditions are welcoming and favourable.

This has proved to benefit not just their profits, but the environment. Additionally with increased technological improvements and a decrease in mining activities in the future will decrease energy consumption drastically. As a result even with greater adoption Bitcoin will be the most energy efficient monetary system we will ever have had to date.