Bitcoin and the Environment

How bad is Bitcoin mining for the environment?

TLDR:

• Bitcoin mining already uses up 0.58% of all global energy, and the trend suggests this will continue to grow. The more energy used, the better it is for Bitcoin.

• High energy usage is not necessarily bad though. High energy usage is in fact strongly-correlated with higher GDP growth and wealth creation.

• The source of energy used is a more important factor and, according to the Bitcoin Mining Council in 2022, 59.5% of energy used comes from clean sources.

• Dirty energy is still around 40% which is a real problem. Miners and legislators should endeavour to set the right incentives to reduce this further.

Last week we looked at Bitcoin difficulty and the hash rate. We saw that the hash rate just keeps rising and rising, and that this is great for the network as it’s more protected than ever, but what about the impact on the environment?

This is a very contentious point and one that often get’s used to attack Bitcoin to try to suggest it shouldn’t exist or that it’s use of proof-of-work should be removed. Today we’ll take a deeper look at this.

Bitcoin’s Energy Usage

As we discussed in last week’s post on Bitcoin difficulty and the hash rate, the more hashing power goes up, the more the network is protected, yet the more Bitcoin’s energy consumption goes up too!

One of the biggest arguments against Bitcoin is that it uses up a lot of energy, which as we saw last week is both essential to it’s existence and shows no real chance of slowing down. The trend is in fact for Bitcoin’s energy usage to continue to grow, which from the perspective of the network is a good thing.

However, it’s reasonable to be concerned with Bitcoin’s ever growing energy usage, and there’s a really handy index from the university of Cambridge “Cambridge Bitcoin Electricity Consumption Index (CBECI)” that can help us get a better look at the data.

As the graph below shows, Bitcoin already uses up more energy annually than entire countries like Ukraine, Pakistan, Norway and Sweden - keep in mind that Pakistan alone has a population of over 240 million people!

In fact Bitcoin mining today uses an estimated 0.58% of all electricity production in the entire world!

As you can see these are shockingly large numbers, and as Bitcoin energy usage continues on it’s upward trend it will inevitably overtake more countries and take up a larger global percentage.

Is Energy Usage Bad though?

Now while this data is clearly shocking and at first glance appears to be a cause for concern, the deeper you look into it the more nuanced this conversation becomes.

First of all we should probably start by addressing our initial assumptions on energy usage itself. We’ve been taught to believe that using more energy is inherently a bad thing predominantly because of an association with the impact on the environment.

However, in a hypothetical future scenerio where all energy is created by entirely renewable sources, like solar power or nuclear fusion, the use of energy wouldn’t necessarily be harmful at all for the environment since there wouldn’t be any greenhouse gas emissions, mining or fracking, nor deforestation necessary.

When we look more deeply at the “use of energy” we realise that the problem isn’t the energy, but rather the source of it! If the source of energy used in Bitcoin mining is coal or oil for example, then we do get all the negative externalities mentioned above.

Data in fact shows that countries that use more energy are generally wealthier, and as society progresses we tend to use more energy, not less. Wealthier countries are generally speaking better at looking after both their people and their environment. So if anything it’s a reduction in energy usage that’s a bad thing, not an increase!

Moreover, Bitcoin’s still a tiny fraction of energy usage in comparison to lots of other industries and appliances. If there’s a real desire to reduce energy usage, we could for example get a larger proportionate gain by looking at fridges in the US alone, that are 100x more energy intensive:

Since Bitcoin is still not particularly well understood by most people, and it is relatively easy to measure its energy usage, people prefer to point the finger at Bitcoin as a problem rather than try to understand it’s importance.

If we consider that traditional finance could be upended by Bitcoin and crypto with the likes of DeFi, then it’s probably best to compare the energy usage against that of traditional finance, which you’ll find Bitcoin is still several magnitudes lower and is trending to be ever more energy efficient over time too.

Ultimately though we should be championing energy use. Using more energy isn’t the real problem, no, the real problem is the source of that energy, and that’s where we need to be paying attention.

Source of Energy for Bitcoin mining

It’s therefore by looking at the sources of energy for Bitcoin mining that we begin to get into the more interesting discussions around this topic.

Bitcoin mining incentivises the use of the cheapest sources of energies in the world, as the cheaper the source the lower the mining cost and hence the higher the returns for the miner.

Iceland for example is one of the largest Bitcoin mining hubs in the world. It’s a country with 100% renewable energy as they are a volcanic island and have more geothermal energy produced than they consume.

One of the most famous crypto-mining farms in Iceland called Enigma, pictured below, intelligently made use of a combination of the abundant renewable energy as fuel, and the low temperatures to cool their mining servers - both smart and clean.

However, the problem is that Bitcoin doesn’t just incentivise the use of clean renewable energy, it also incentivises the use of cheap dirty energy. In Dresden in the state of New York a once deactivated coal power plant came back online when they realised they could run it profitably to mine Bitcoin.

This was indeed a case where Bitcoin set the wrong incentives and there are probably many other similar cases out there. Local legislation prohibiting the re-activation of old fossil fuel power plants, regardless of their use-case, is probably enough to deter this sort of thing from happening again.

A report from the Bitcoin Mining Council in 2022 showed that around 59.5% of Bitcoin mining energy usage comes from renewable energies, but this means over 40% still comes from dirty fuels fuels, and this is indeed a problem.

My personal take is that instead of trying to cut off one of Bitcoin’s main protection mechanisms by removing proof-of-work, miners and legislators should cooperate together on the incentives at play to incentivise more environmentally friendly mining like the example in Iceland and deter the use of harmful energy sources as in Dresden.

Bitcoin as a Battery

Bitcoin has found a very curious and growing use-case in the energy sector as a sort of “financial battery” - this topic deserves it’s own full post, but it’s worth a quick mention here now.

Since our battery technology has not yet had the scientific breakthroughs that we need to support holding significantly large charges for prolonged amounts of time, when there’s a surplus of energy on the grid it often gets “thrown away”.

Renewable energies are some of the most effected by this because you cannot reliably control the sun, wind or water. So for example if a prolonged wind leads to a large surge of electricity in a wind farm, that energy generated could be mainly thrown away due to a lack of demand and the inability to efficiently store it.

In these examples Bitcoin miners have found a very interesting use-case!

Since miners can be portable and hooked up anywhere, companies like EZ Blockchain offer miners to power plants that can make use of this excess energy and essentially convert it into money through providing that energy to a Bitcoin mining pool and being rewarded with a portion of the BTC mined.

This is a fascinating use-case that essentially turns Bitcoin into a form of “financial battery” to store the otherwise unused excess energy created by these renewable power plants. It’s a clear example of where Bitcoin mining is in fact good for the environment as it helps to make the operations of renewable energy more profitable.

Bitcoin and the Environment

To summarise, Bitcoin certainly uses a very large amount of energy with a pretty shocking 0.58% of global energy usage today. This number will continue to grow, which in fact from Bitcoin’s perspective is a good thing as the higher it is the more secure the network becomes.

While this high energy bill can certainly have negative environmental externalities, this conversation is a lot more nuanced than at first glance. Firstly simply gauging the high usage isn’t a very valid measure, it really depends more on the source of the energy. Moreover, in many cases Bitcoin can actually incentivise use of renewable energy and even provide a more profitable business model for renewables.

Bitcoin currently uses around 40% of dirty energy though, which is certainly bad. I’d personally like to see more collaboration between miners and legislators to help set the right incentives to grow the use of clean and renewable energy in Bitcoin mining.

Governments will regulate the sector regardless of what anyone says, so we can only hope they try to generate the right incentives focusing on the source of energy used in Bitcoin mining rather than it’s total energy usage.