Is Bitcoin bad for the environment? As with many things in life, people always want simple answers to questions, even when reality isn’t simple at all. And unfortunately there is no simple answer here.
Yes, off course Bitcoin has an environmental impact. As do smartphones and running shoes. So the question really should be, is the environmental impact acceptable? And, when assessing the environmental impact, what is it being compared to? The answer to that is nuanced and requires a deeper understanding of how Bitcoin works.
Everything is relative.
Every manufactured product has an environmental impact. It’s a question of trade-offs. The production of solar panels and batteries involve carbon emissions, which is bad for the environment. But when compared to the alternative of burning fossil fuels, it’s definitely a worthwhile trade-off. Likewise, Bitcoin cannot be viewed in isolation. It’s competing for the status of global reserve asset, against incumbents like gold, the US Dollar, the Euro, Pound, Renminbi and Yen.
Simply put, yes, Bitcoin uses a lot of electricity. In fact, it uses about as much electricity as a medium sized country like Argentina. But compared to the mining, printing, infrastructure, security and legal protection afforded to its global competitors, Bitcoin’s energy usage isn’t even a drop in the bucket.
Bitcoin’s energy consumption does not follow its price.
That being said, Bitcoin isn’t (yet) as big as other reserve assets. At a market cap of around 1 Trillion USD, Bitcoin is approximately ten times smaller than gold and two hundred times smaller than the US Dollar. So, one might assume that if Bitcoin uses the same amount of electricity as Argentina right now, but grows in value to replace the US Dollar, then (hypothetically) Bitcoin will become the energy equivalent of 200 Argentinas. Which would be catastrophic. But that isn’t what is happening. Not all all. Bitcoin’s energy usage does not scale with the value of the network.
Bitcoin mining power is measured in hashes per second, which is really just a measurement of the sum total of all calculations performed by all miners on the network racing to solve the proof-of-work algorithm and earn mining rewards. In December 2018 the collective Bitcoin mining power was hovering around 30 Ehash/s, or 30 x 1 000,000,000,000,000,000 hashes / second, meaning that miners were collectively performing 30 quintillion calculations per second in an attempt to produce the next valid block. At that time, the price of Bitcoin was just over $3,000.
More recently a new all time high saw the price break above $60,000 with mining power also reaching a new all time high of 195 Ehash/s. Notice that while the price increased by a factor of 20x since December 2018, mining power on the network only increased by a factor of less than 7x.
This is because, while miners are motivated by the block subsidy, which they earn in the form of newly created Bitcoin issued with each new block that they mine, the Bitcoin protocol adjusts mining difficulty every two weeks. This means that doubling the mining power of the network makes it twice as difficult to mine new Bitcoin precisely so that double the mining power does produce twice the amount of newly issued Bitcoin.
Bitcoin issuance is uncorrelated to mining power. Instead it’s tied to a predetermined and diminishing supply schedule. And the issuance of new Bitcoin has dropped over time in accordance with that schedule, despite a massive increase in mining power.
Simply put, mining power (and thus electricity consumption) is trending towards an equilibrium despite the continued rise in price. Thus, if (hypothetically) Bitcoin rises to replace the US Dollar, it would do so using far FAR less energy than what is currently consumed providing security for the US Dollar.
In environmental terms, like solar panels and batteries, Bitcoin isn’t a perfect solution. But it vastly improves on our current situation.
Bitcoin’s energy consumption does not follow its transactional capacity.
Mining power also does not increase alongside wider use of the network. The VISA payments network alone processes more than 20,000 transactions per second, and, while comparing Bitcoin to VISA is an apples to moon-rocks comparison, because Bitcoin currently only processes about 5 transactions per second, the obvious question is, what happens when Bitcoin becomes more widespread?
Again, if Bitcoin uses as much electricity as Argentina right now, with only 5 transactions processed per second, to reach VISA-like capacity will Bitcoin become the energy equivalent of 4,000 Argentinas?! Certainly not. If there is little correlation between mining power and network value, there is even less correlation between mining power and transactional capacity.
As explained above, miners are motivated by block subsidies. Yes, there are transaction fees attached to all Bitcoin transactions, and the block subsidy is reduced every four years, but still the majority of miner revenue comes as a result of the block subsidy. Over the course of the last year, despite a rising Bitcoin price (and subsequent higher demand for transactions leading to higher transaction fees) transaction fees as a percentage of miners’ block reward has hovered around 8%.
Simply put, the number of transactions processed on the network does not influence the revenue of miners nearly as much as the block subsidy, which a miner would earn even if they mined a block with fewer transactions in it. Miners wouldn’t care as much whether or not Bitcoin processed more or less transactions.
Furthermore, Bitcoin transaction throughput at the base layer of its blockchain is already near its full capacity. It may be improved, but not by the orders of magnitude necessary to compete with VISA.
Bitcoin will never compete with VISA. Instead, that challenge falls to second-layer solutions like the Lighting Network. Since 2014, Bitcoin developers have been planning to push the majority of transactions onto second layer solutions that can process a near infinite number of transactions, at insignificant cost, and which does not rely on the electricity intensive mining process for transaction confirmation.
Eventually, Bitcoin (as a medium of exchange) will have the same environmental impact as WhatsApp.
Mining is just another business, like any other.
Bitcoin mining has notoriously thin profit margins. Miners are very sensitive to the cost of electricity. However, miners are also very mobile and quickly gravitate toward the most affordable form of electricity available, regardless of where that might be. Mining operations exist in some of the planet’s remotest corners. The classic example is China. While China is infamous for its dirty coal burning Bitcoin mining operations, it is unfortunately not equally famous for its rainy season miner migration to the northern provinces of China.
Seasonal rains in northern China means that hydro power plants produce vast amounts of surplus power, far more power than what is needed (or used) by the electrical grid. Bitcoin miners migrate here and switch on mining operations during the wet season because they buy the electricity at very low cost. Power companies are only too happy to sell electricity that would otherwise simply have been wasted. And this electricity is generated in a relatively environmentally friendly way.
Then, when the rainy season has passed, miners switch of their rigs there and focus on where next they’ll find the cheapest electricity. In this regard, the concern about Bitcoin’s electricity consumption says more about our methods for generating electricity than it says about Bitcoin mining itself.
If the argument here is that we should switch off Bitcoin because it’s bad for the environment we should also switch off our TV’s, microwaves, kettles and lights. It’s our methods of generating electricity that is the problem. Not Bitcoin. Like every other rational market participant Bitcoin miners simply use whatever form of electricity is most affordable. And the solution is not to vilify Bitcoin, but to make renewable electricity cheaper than fossil fuel generated electricity, through increased production of renewable energy hardware and infrastructure. And not only for the sake of Bitcoin mining, but for all of society.
And if the rapidly falling prices of solar panels is anything to go by, this process is already well under way.
Simply put, Bitcoin mining will become environmentally friendly long before the average household because, unlike the average family of four, a Bitcoin miner can spend its entire lifetime in the middle of the desert, if that’s where it finds cheap renewable electricity.
Money as tool for coordinating economic activity has always had costs associated with its production.
Do you remember your parents telling you that “money doesn’t grow on trees?” They said this because we all intuitively understand that money has to have unforgeable costliness in order to work. If money grew on trees it would be worthless. No one would use it and we’d have to find other ways to trade goods and services.
Traditionally, that unforgeable costliness was the cost of extracting gold from within the earth’s crust. People have used gold as a form of money for millennia because it holds its value. I could trade my labour for gold today and store that for the future, until I needed it. And precisely because gold cannot be forged, and because it is costly to produce, it holds its value. If gold nuggets were lying about and easily picked up like seashells gold would never have been adopted as money in the first place.
In modern fiat monetary systems the cost of producing money is virtually zero, money is simply an electronic database entry. However the unforgeable costliness of fiat money is created by a system of laws and law enforcement which is meant to, first, disincentivize and, second, punish counterfeiting.
Bitcoin simply transfers that cost onto a global network where the value of money is rooted in its relative use of electricity.
Simply put, when it comes to money, there is always going to be some form of cost involved in its creation. If we can transition society onto a global network of clean and renewable energy, Bitcoin affords us the opportunity transfer the costs of money creation onto that same network.
Everything is still relative.
Finally, the question really boils down to whether or not we value the utility provided by Bitcoin. Everything carries an environmental cost. We exhale carbon dioxide simply by being alive. But life is valuable and we can offset our own environmental cost of living by maintaining a healthy environment capable of absorbing and recycling our carbon dioxide into breathable oxygen. But, still nothing comes without a cost. So the question really is, is Bitcoin worth it?
Bitcoin is the re-invention of democracy. It is the first workable fully decentralized model of governance. There are strict rules on the network, ensuring a level playing field and equal rights for everyone. No matter who you are.
And it is precisely because of its ingenious electricity-consuming proof-of-work consensus mechanism, that the rules on the Bitcoin network are enforceable by the network itself, without the need for corruptible authority. No-one, no matter their influence, wealth or stature can bribe the system to obtain special favour or exemption, because there is no-one to bribe.
So the question really is, is it worth it?
If you truly understand what Bitcoin enables, I believe the answer is a resounding, yes.