What does bitcoin’s energy consumption mean in the real world?

Andrew Munro 29 June 2018 NEWS

Bitcoin's energy guzzling is much less complicated than both sides of the debate would suggest.

OPINION:

It's not possible to accurately assess how much energy bitcoin actually consumes, and even the most thorough analysis is just a broad estimate, extrapolated from network hashrate and then shoved through guesswork formulas to arrive at the wrong number.

71 TWh per year is one of the most widely accepted wrong numbers. It's probably in the right ballpark, but at the end of the day no one really knows.



Bitcoin enthusiasts will often criticise studies of bitcoin energy use for being inaccurate, because they are. Many of the more apocalyptic predictions of bitcoin's energy consumption are even more meaningless.

That widely repeated "one bitcoin transaction takes as much energy as a household uses in a week" shtick, for example, is typically just based on one day's energy consumption estimate, divided by however many transactions happened that day based on bitcoin's transactions per second (TPS) at the time. To massage the answer in either direction just pick different starting estimates or run the calculations on different days, or arrive at that daily estimate by picking a single day or just dividing an annual prediction by 365. Or you could just measure the TPS on a slow day, or anything else.

The usual next step is to then compare that number to Visa's per-transaction energy consumption, to really drive your point home. Looking at you, BIS.

But as bitcoin advocates will correctly point out, it's a completely meaningless exercise. All the numbers are just estimates of estimates which have been put through an agenda-driven wringer and those Visa numbers are nonsense too. They're just performing the same energy consumption/TPS calculation on a couple of data centres, rather than Visa itself.

Someone who wanted to make a fair comparison rather than just bashing bitcoin would have to account for the energy that goes into manufacturing the plastic Visa cards, the energy use of the entire Visa company rather than just the data centres, the energy that goes into moving money between banks in the traditional financial system before you can spend it, and whatever else.

And at the end of the day, many criticisms of bitcoin's energy consumption stem from a failure to understand what bitcoin does or how it works. It's an immutable ledger that can conduct transactions, not just some payment network.


Bitcoin's energy problem in the real world

Another common criticism of anti-bitcoin energy hog arguments is that they fail to account for bitcoin's many past and future improvements. These aren't so valid.

Forget about TPS

Bitcoin devotees will often point at upgrades like SegWit, the Lightning Network and other improvements to bitcoin network speed which can potentially multiply TPS. Factor those in and now bitcoin's energy consumption per transaction is looking much better on paper.

Unfortunately there is no connection between bitcoin energy consumption and bitcoin TPS except to the extent that the latter might impact bitcoin prices. It wouldn't be processing any more transactions with more electricity, or any fewer with less electricity.

By the same token, there's no point in measuring bitcoin's energy consumption per transaction, or comparing its energy to transaction ratio to anything else.

Think about the energy

Another development which advocates say will help stymie bitcoin's ever-growing energy use is the development of more energy-efficient mining machines. They're also wrong there, even according to the Bitcoin Wiki, because more energy-efficient miners always translates into producing even more hashing power with the same amount of electricity, rather than cutting back on power consumption.

The cost of energy, hashing power and bitcoin price

Most discussions around bitcoin energy sustainability overcomplicate themselves. Some even start using numbers.

But at the end of the day, there are only three factors to consider if you're trying to see the future of bitcoin's energy consumption. They are the cost of electricity, the hashing power, and bitcoin prices.

All bitcoin mining involves getting a mining machine and pumping it full of electricity. It turns that electricity into hashing power. The more hashing power you have the more bitcoin you make. Different mining machines will have engineering quirks that can introduce factors like storage or cooling expenses, but the biggest cost for any miner by a very large margin is electricity.

What miners want

The goal is to produce as much hashing power as possible within the constraints of energy costs on one side, and bitcoin prices on the other. As long as you're within those parameters you can never have too much hashing power.

The system is also geared towards growing hashing power as quickly as possible. With the total pool of hashing power constantly increasing, any company that fails to keep up will see their own revenue constantly shrink, even as their operating costs remain the same. And without keeping up, they don't have the revenue stream to keep expanding their operations and to stay in the game.

Producing more hashing power means consuming more energy, so the goal of bitcoin mining is quite literally to aggressively consume as much energy as possible as quickly as possible, as long as bitcoin prices are above a certain threshold. Currently that threshold is estimated to be in the $3,000 to $4,000 range for the most efficient miners. As long as bitcoin prices don't crash much harder than they are, a bitcoin miner's explicit goal is to hunt down the cheapest energy source possible, and consume as much of it as possible as fast as possible.

The same is true of any mineable proof-of-work cryptocurrency. Even the so-called energy efficient proof-of-work coins will fall into the same trap of needing to constantly consume as much energy as humanly possible. A coin might dub itself 100 times more energy efficient than bitcoin, but that just means miners can pump out more hashing power for a lower cost. Either way, the number one priority is to find and consume as much energy as possible.

Bitcoin just happens to get the most flak because it's the biggest pig in the trough.

A theoretically unlimited drive to consume energy is just one of many deal-breaking problems with mineable proof-of-work cryptocurrencies, but it doesn't have to be with way. There are objectively superior alternatives like proof of stake, but it's difficult or outright impossible for most existing coins to switch over and there's a huge amount of time, money and already-built physical infrastructure riding on successfully downplaying and ignoring these glaring problems.


When does it come crashing down?

Unless bitcoin developers pencil a Dyson sphere into the roadmap, it's safe to assume that this self-evidently unsustainable system will come crashing down at some point.

The places to look for cracks are the energy costs, the hashing power and the bitcoin prices.

Electricity costs

If you give crypto miners cheap energy they will typically consume as much of it as possible as fast as possible, especially in cold climates where the margins are even better thanks to savings on cooling costs.

For a sense of the current situation, you need only look at Canada, where in the last six months alone bitcoin and other crypto mining companies have applied to use more than a third of Quebec's total energy capacity. That's obviously not going to happen, so Hydro-Québec tripled the prices for these applicants, to reverse the incentives originally intended to draw real tech companies and shoo off the miners.

But other countries are more welcoming. Russia, for example, is welcoming miners with open arms, with plentiful cheap oil and coal power at discount prices.

Miners' demand for energy is insatiable, and some countries are happy to enable them even as others turn them away. There are enough willing to welcome them that the future is likely to see increasing geographic centralisation of proof of work cryptocurrencies in a handful of welcoming countries.

As some have already done, they'll probably be looking to expand their energy grids as quickly and cheaply as possible to power these operations, so bitcoin's near future is likely going to be very filthy, and driven largely by oil, gas and coal. It's probably not ideal.

Hashing power

More competition for energy, and the elimination of less profitable mining companies, will see bitcoin's hash rate consolidate further under the most efficient operation – Bitmain.

Rather than openly control more than 51% of the bitcoin hash rate it will continue to artificially boost smaller mining pools to create the illusion of decentralisation. This is a very safe bet, because that's what it's already doing to conceal its majority control of bitcoin's hashrate.

By maintaining its illusion of decentralisation it can better maintain bitcoin prices and make mining more profitable, and continue enjoying a profitable sideline in selling outdated miners to others.

Bitcoin has been centralised for a long time and there's no reason to expect people to suddenly start caring about it in the near future, so let's all continue ignoring it.

Bitcoin prices

This might be where bitcoin falls apart, providing a natural solution to its energy problem. The prolonged bitcoin slump has already seen plenty of mining wannabes fall out of the race, and without further price growth bitcoin's energy use will naturally be capped somewhere.

And even if its prices do skyrocket and stay up, the incentive mechanisms will eventually shift towards hostile miners attacking the network rather than just expending an infinite amount of energy on mining. This will be especially true if bitcoin lives long enough to see its block rewards fall off.

Basically, the best guess is that bitcoin is damned if it does, damned if it doesn't.

If bitcoin prices keep going down then the amount of energy that can be profitably consumed will be capped at a lower amount than it's already consuming. This has already happened to a certain extent, but if bitcoin drops as low as $3,000 or so, the big players will have to re-evaluate their position and interesting times will descend on bitcoin.

If bitcoin prices keep going up and break that $100,000 barrier then it runs into brand new problems, which only get compounded over time as direct mining rewards drop off and miners need to find other ways of getting value from their machines.

Don't sweat it

Bitcoin's mining system is entirely unsustainable, but the only reason to really worry about it is if you think it's going to survive long enough and grow big enough to become digital gold, pushing back up beyond $20,000 and further. If it does, it might do some serious damage before passing away. Fortunately it's far more likely to collapse entirely before then.

If it does, the crisis is averted. If it doesn't, you can just drive away from all your problems in a sweet Lamborghini.


Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, XRB

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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One Response

  1. Default Gravatar
    GuillaumeJune 30, 2018

    In “What does bitcoin’s energy consumption mean in the real world?” the author Andrew Munro wrote: “A theoretically unlimited drive to consume energy is just one of many deal-breaking problems with mineable proof of work cryptocurrencies, but it doesn’t have to be with way. ”

    How is it unlimited if it’s within a certain threshold as he stated?

    “Producing more hashing power means consuming more energy, so the goal of bitcoin mining is quite literally to aggressively consume as much energy as possible as quickly as possible, as long as bitcoin prices are above a certain threshold.”

    And after all the 21 millions Bitcoin have been mined, around 2140, there will be no more newly emitted Bitcoin and miners will continue to be paid with transaction fees alone.

    Cryptocurrencies aren’t a 0 sum game, nor are they free from the free markets which are never unlimited.

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