Table of contents
- How Does Bitcoin Work?
- Why Does Bitcoin Mining Consume So Much Energy?
- Common Misconceptions About Bitcoin's Energy Consumption
- Final Words
Bitcoin gets a bad rap for many reasons. It's a Ponzi scheme. It's a tool for money launderers. It's a volatile asset that's useless as a store of value. It has no intrinsic value, and people buying it are suffering from Tulipmania.
But the most enduring criticism of Bitcoin, and cryptocurrency in general, ties back to its energy consumption. Bitcoin is a transparent system, so it's easy to calculate how much power it consumes by checking the hash rate, i.e., the amount of computing power required to sustain the network.
Armed with this data, anti-Bitcoiners extrapolate the cryptocurrency's current and future energy consumption, all of them arriving at the same conclusion:
Bitcoin will destroy the Earth's climate and roll back years of gains in sustainability.
There's no doubt Bitcoin's proof-of-work consensus mechanism uses considerable energy. I explained in a recent article why the crypto industry may benefit by shifting away from proof-of-work to more efficient consensus protocols.
However, the number of high-profile stories I've seen on the topic triggered a desire to do more research. I was curious to see how many claims concerning Bitcoin's energy consumption check out.
It turns out that the issue of Bitcoin's power usage is hardly black and white. More importantly, Bitcoin critics often allow biases to influence their opinions on the matter.
This article isn't an all-out defence of Bitcoin's energy consumption. Still, I believe it is important to examine the discussion from all angles, separate myth from fact, and encourage an honest appraisal from all parties involved.
How Does Bitcoin Work?
To understand why Bitcoin uses up a ton of energy, we need to understand how the Bitcoin blockchain works and why it's useful. Those who skip this step are apt to describe Bitcoin as "dirty money" and consider miners as people who burn energy and pollute the environment to enrich their pockets.
The Bitcoin blockchain is a public record of transactions stored across a peer-to-peer network of computers. A common analogy for the Bitcoin blockchain is an accounting ledger.
The difference here is that a) thousands of computers (nodes) hold a copy of the ledger b) the ledger is append-only, so you cannot remove or alter transactions c) the majority of nodes in the network must approve a transaction before you can add it to the distributed ledger.
The cycle of a Bitcoin transaction. Source: Intellipaat.com
With our little Bitcoin 101 lesson out of the way, let's analyze how and why the Bitcoin network uses energy.
Except you live under a rock, "Bitcoin mining" is a term you're likely familiar with. Mining is the process of packaging new transactions and adding them to the blockchain.
Miners are a crucial part of the Bitcoin system, as they keep the system running. They are also responsible for securing the network by validating transactions and preventing double-spending.
By design, mining is a computing-intensive activity. Mining nodes must solve cryptographic puzzles for the right to add new transactions. Think of it as a lottery where you must "pay to play."
To increase their ability to solve these puzzles, miners invest in more powerful, energy-hungry computers. The investment makes sense, given that whoever wins the lottery gets to earn 6.25 BTC (around $250,000).
Bitcoin's energy usage, therefore, comes from the mining of new transaction blocks. Note this fact as it will come up later in this piece.
A Bitcoin mining operation in Russia. Source: Bloomberg.com
Why Does Bitcoin Mining Consume So Much Energy?
If you've come this far, then you may be asking, "why?" Why did Satoshi Nakamoto design Bitcoin to consume so much power? Was Nakamoto secretly hoping to singlehandedly trigger the climate Armageddon?
Here’s the thing: Bitcoin's computing-intensive nature is a feature, not a bug. By requiring miners to expend a valuable resource, Satoshi's PoW mechanism reduced the possibility of illicit behavior.
If a miner tried to add bad transactions to the Bitcoin blockchain, other nodes would reject it, meaning no block rewards. A dishonest miner would not only waste money spent on electricity but also lose out on those cool 6.25 BTC up for grabs.
Bitcoin is difficult, if not outrightly impossible, to hack because of its PoW structure. A would-be hacker needs to simultaneously control at least 51% of nodes, which would require a massive amount of resources.
Put simply, hacking Bitcoin is expensive—which explains why it has remained secure for years, even with no central body controlling it.
Per-hour cost of a 51% attack on popular PoW blockchains. Source: crypto51.app
A much-talked benefit of Bitcoin is its status as a "decentralized means of exchanging value." Bitcoin is decentralized because it is free from centralized control; unlike the dollar or euro, no one controls the supply of bitcoins in the economy.
This quality makes Bitcoin a hedge against inflation since no one can say, "Hey, let's produce more bitcoins." However, many fail to realize how Satoshi's genius was instrumental in turning Bitcoin into the world's first widely accepted decentralized currency.
Imagine you're Satoshi Nakamoto, and you just created the first viable, non-state currency. You need a way to introduce new units of the currency into circulation. But you also need to ensure that tiny minority doesn’t hoard the lion's share of coins.
The solution? You create a mechanism where new coins are created only after individuals expend a valuable resource (electricity). As a result, those responsible for creating these new units, i.e., miners, cannot hoard bitcoins because they need money to cover electricity bills.
You also add a feature that adjusts the difficulty of creating new currency units according to the number of miners competing for the prize. This keeps supply stable and ensures your new "Internet money" retains a finite supply, much like real money.
In a nutshell, proof-of-work is the reason Bitcoin has value. Once you understand this fact, it becomes easier to see why Bitcoin is considered "digital gold."
Gold is valuable because of the difficulty associated with producing it. Gold needs to be extracted—a resource-intensive activity—before undergoing refining and eventual conversion into gold bars.
Miners cannot control all the gold since they have to cover the costs of extraction. And the resource-intensive nature of gold mining increases scarcity and inflates gold's value.
Gold derives value from the difficulty of mining it. Source: Financial Times
As we can see, Bitcoin's PoW consensus—and its power consumption—isn't as unnecessary as critics have us believe. This point is important because debates around Bitcoin's energy consumption mostly follow the same line of argument:
Bitcoin shouldn't be allowed to use electricity because it's useless “virtual money”.
Sure, people won't come out directly to say an asset with a billion-dollar market cap is "useless," but you can notice the bias by reading between the lines. For example, here's an excerpt from an article on Bitcoin's environmental impact from The Guardian:
“Burning huge amounts of electricity isn’t incidental to bitcoin: instead, it’s embedded into the innermost core of the currency, as the operation known as “mining”. In simplified terms, bitcoin mining is a competition to waste the most electricity possible by doing pointless arithmetic quintillions of times a second.”
Our friendly author here is obviously parroting the same "Bitcoin is useless, so let's stop mining" line. Such people have never taken the time to understand how the Bitcoin protocol works and why proof-of-work is an integral part of the system.
Common Misconceptions About Bitcoin's Energy Consumption
The Bitcoin community has gotten used to seeing common misconceptions about the crypto asset pushed by media pundits. However, some of these misconceptions—especially those related to Bitcoin's energy use—are baffling since some quick research would reveal the truth.
Let's look at some popular claims about Bitcoin and see if they hold up under rigorous examination:
Myth 1: Bitcoin's Energy Usage Rises With Transactions
Critics caution against the mass adoption of Bitcoin, saying that a rise in Bitcoin transactions would adversely affect the environment. The thinking is that energy consumption is tied to the validation of transactions on the Bitcoin blockchain.
If only people would take Bitcoin 101 before writing misleading articles!
Validating Bitcoin transactions is a simple task your cheap home PC can perform. Mining, which involves bundling transactions and broadcasting them on the blockchain, is what increases Bitcoin's energy requirements.
So, no, Bitcoin's energy usage won't skyrocket if it becomes a widely accepted currency in the future. Even if that were the case, the growth of Layer 2 solutions like Lightning Network capable of bundling thousands of transactions into one would solve the problem.
Myth 2: Bitcoin Will Remain Inefficient Forever
Environmental do-gooders like to rail against Bitcoin because they believe the cryptocurrency will continue to burn energy forever. Their reasoning is based on questionable research, including a debunked study that claimed Bitcoin would cause the Earth's temperature to "rise by two degrees Celsius."
A closer look reveals a glaring flaw in this argument: these claims extrapolate Bitcoin's future energy usage from current consumption figures. Which is just poor reasoning if you asked me.
We've already established that mining accounts for most Bitcoin's energy usage. However, mining won't continue to consume copious amounts of energy forever.
Mining is lucrative currently because of the associated block rewards (6.25 BTC or $268,000 at the time of writing). Thus, miners are incentivized to buy powerful Graphical Processing Units (GPUs) and Application-Specific Information Computers (ASICs) to increase their chances of mining new blocks.
Bitcoin's proof-of-work mechanism is designed to reduce the block reward every 210,000 blocks (roughly four years). Known as "the Halving", this process explains why block rewards have dropped from 50 BTC to the current 6.25 BTC.
Historical halvings of Bitcoin’s block reward. Source: @ChartsBTC
Per calculations, the next halving will occur in 2024, reducing block rewards to 3.125 BTC. Although it's hard to know the precise time, we can expect the block reward to eventually drop to 0.
Miners will continue to mine transaction blocks, but their earnings will come from transaction fees, not block rewards. The lucrativeness of Bitcoin mining will drop, meaning no one would bother investing in high-grade computing power for mining.
If miners reduce their power use in the future, then it follows that Bitcoin will become efficient. Anyone saying Bitcoin will become the sole trigger of the climate change crisis clearly doesn't have the facts right.
Myth 3: Bitcoin Mining Causes Environmental Pollution
Several statistics concerning Bitcoin's perceived pollution base their calculations on the energy consumption of Bitcoin miners. Bitcoin uses so much energy, so it must be polluting the environment—right?
In reality, things aren't as straightforward.
For starters, high energy consumption doesn’t equal high pollution. You cannot simply estimate pollution figures without knowing the precise mix of energy sources used.
Here's an illustration:
Two companies, XAZ Corp. and XYZ Inc. use 15 terawatts and 10 terawatts of energy annually. While XAZ Corp. uses solar energy, XYZ Inc. uses fossil fuels (crude oil).
To the average individual, XYZ Inc. is more "energy-efficient" since it burns less energy. But the truth is XAZ Corp. has a lower carbon footprint since it uses a renewable and cleaner source of energy.
The same concept applies to Bitcoin mining. Until anyone can reliably confirm what kind of energy miners prefer, calling Bitcoin "dirty money" is a logical overreach.
Perhaps it's important to note that miners have historically favored regions with large supplies of renewable power.
China became the world's mining capital because several inland regions there had excess amounts of hydrothermal energy. Other mining hotspots, including Iceland and Texas are popular among miners because they also offer access to cheap, eco-friendly power.
Because electricity accounts for 60-70% of mining costs, miners have to look for the cheapest sources of power. As such, it's safe to believe Bitcoin mining could single-handedly drive the renewable power industry.
Not so dirty now, is it?
Myth 4: Bitcoin Mining Is Useless and Wasteful
There’s something we need to understand about the Bitcoin energy debate. Most arguments are less about Bitcoin's power use and more about whether using so much energy is justified.
After all, the fiat banking system consumes similar amounts of power—think of the energy used by ATMs, bank buildings, and other key players. Still, you don't see anyone calling the dollar "dirty money."
The first section of this article has explained how mining helps Bitcoin achieve the decentralization, security, and scarcity needed for a store of value. However, there are even more reasons why Bitcoin's resource intensiveness is an acceptable tradeoff.
Bitcoin miners are maintaining and securing a payments system processing billions of dollars annually—without any pulling strings in the background. Moreover, the Bitcoin blockchain is a final settlement layer, meaning transactions are fast, irreversible, and secure.
With Bitcoin, anyone can send and receive money from anywhere in the world, as long as they have an Internet connection. For the millions of unbanked individuals, Bitcoin is their only chance at sidestepping cumbersome regulations and participating in the global monetary system.
Bitcoin is revolutionary, and mining is a critical part of its infrastructure.
Some may point to more efficient consensus algorithms like proof-of-stake or proof-of-authority. However, these consensus mechanisms often trade-off decentralization and security for faster transactions.
No matter how you slice and dice it, Bitcoin's energy intensiveness is a necessary evil if we hope to create a secure, inclusive, and independent monetary system.
As we have seen, Bitcoin’s energy use has been exaggerated and inaccurately framed by individuals bent on discrediting its value. If the mainstream media’s anti-crypto propaganda machine continues to run, then you can expect more articles painting Bitcoin as the biggest threat to the Earth’s survival.
Bitcoin believers know that arguing about the cryptocurrency's energy use is missing the forest for the trees. Yes, Bitcoin may be resource-intensive—but the value it provides is more than enough justification for its energy consumption.