Six Bitcoin Energy Myths
Newsweek: Bitcoin Mining on Track to Consume All of the World’s Energy by 2020
Bloomberg: What if there were a safe digital currency that *didn’t* wreck the planet or disappear when you forget the password?
New York Times: In Coinbase’s Rise, a Reminder: Cryptocurrencies Use Lots of Energy. The company’s stock market arrival establishes Bitcoin and other digital currencies in the traditional financial landscape. It also elevates a technology with astonishing environmental costs.
In our supposed age of ‘disinformation’ the leading purveyors always emerge from self-anointed truth discerners in America’s elite institutions. Those that dictate culture don’t appreciate threats to their perches. As such, cryptocurrencies, particularly Bitcoin, have become increasingly despised. Bitcoin answers to no one. It doesn’t need permission. It can’t be browbeaten to conform by bureaucrats, movie stars, or academics. Its power derives from coded rules, validators, and millions of users.
The first, although not the last, attack on Bitcoin’s cultural obduracy is energy use. This supposed sin has opened an attack vector that will only intensify.
Bitcoin uses a consensus mechanism called ‘Proof-of-Work’ (PoW) to secure the system over thousands of computers operating globally and independently. PoW secures the next block of transactions through open computational competition. The winning computer rig or ‘miner’ wins Bitcoins, the rest verify the winner and the process restarts. Energy use is the price of an open, secure, permissionless system. Current estimates place Bitcoin energy use at around 110 Terawatt hours per year. This compares to a small country like Malaysia or Sweden.
Bitcoin’s energy use, though not insubstantial, will not “wreck the planet.” Purveyors of such dreck ply propaganda, false analogies, and sloppy analysis. Here are six myths of Bitcoin energy use:
Bitcoin Myth Number One: Energy Use equals Carbon Emissions
Anti-crypto advocates often conflate energy use with carbon emissions but a large portion, anywhere from 28% to 74%, of Bitcoin’s energy comes from renewables. This number is growing since China’s mining ban last year.
As columnist Nic Carter states:
While determining energy consumption is relatively straightforward, you cannot extrapolate the associated carbon emissions without knowing the precise energy mix — that is, the makeup of different energy sources used by the computers mining Bitcoin. For example, one unit of hydro energy will have much less environmental impact than the same unit of coal-powered energy.
Bitcoin’s energy consumption is relatively easy to estimate: You can just look at its hashrate (i.e., the total combined computational power used to mine Bitcoin and process transactions), and then make some educated guesses as to the energy requirements of the hardware that miners are using. But its carbon emissions are much harder to ascertain.
Hass McCook, a civil engineer, who has written extensively on this topic states:
Bitcoin is a rounding error in the global scheme of things, and from a carbon-intensity point of view, has significantly less emissions per kilowatt than finance, construction, healthcare, industry or the military, and will only improve further in time. My prediction still stands: Bitcoin’s carbon intensity will go from 280 g CO2 per kWh today, to around 100 g in 2026, and zero by 2031, and maybe, finally, we’ll be done with this debate.
Bitcoin Energy Myth Number Two: Bitcoin Miners Compete with People for Electricity on Grids
Bitcoin miners can’t use normal grid energy because mining would be unprofitable. Competition incentivizes miners to seek the cheapest energy available, often this means wasted energy like flared natural gas from oil fields or energy accessible only to miners because of rig portability. Miners are incentivizing a race to transform the world’s wasted energy into productive use.
As Drew Armstrong and AJ Scalia write in Bitcoin Magazine:
Bitcoin mining directly incentivizes new and more efficient forms of energy generation by offering a “bounty” to anyone, anywhere, at any time, who finds a cheaper way to produce energy at scale. This direct financial incentive for more efficient generation and the newfound viability of previously uneconomical sources of energy will cause a general decline in the price of energy worldwide.
Bitcoin Energy Myth Three: Bitcoin Energy Use should be Measured per Transaction
Critics often divide Bitcoin’s slow transaction throughput by its energy use and compare that with payment providers like Visa. But this is a false comparison. First, Bitcoin energy use occurs during the mining process. Like Visa, individual transactions have no energy usage, and more network transactions would not increase energy.
As Coincenter’s Peter Van Valkenburgh writes:
It’s a common misconception that energy usage scales up with the number of bitcoin transactions and that if Bitcoin ever became widely adopted for payments, then the energy usage would be enough to boil the oceans. This is incorrect. . . . [M]iner energy usage moves up or down with the amount of competition between miners, not the number of transactions being validated. Digital signature validation uses a trivial amount of computing power. . . . This competition is healthy because it means that the effort spent securing the network scales automatically with the value of the transaction data on the blockchain—not the number of transactions.
Bitcoin Energy Myth Four: Bitcoin Mining Energy Use will Keep Expanding at the Current Rate
Some assert as Bitcoin grows more popular its energy consumption will follow linearly. But this ignores structural and market constraints. First, Bitcoin’s relatively small number of transactions per second limits its ‘Layer One’ utility as a payment network. As Nic Carter states, “Bitcoin is a settlement, not a payments network.” ‘Layer Two’ applications built on top of Bitcoin like Lightning and Liquid can handle vastly more transaction but do not require more energy because they only “settle” once for unlimited tranches.
Not even a massive increase in Bitcoin price would spur energy use as investment strategist and Bitcoin commentator Lyn Alden writes:
If we say [Bitcoin] reaches an outrageously high price of one million dollars per coin, for a critically important market capitalization of $20 trillion, with billions of users, then at 0.50% annual security cost, that would be $100 billion, or about 6x as much energy usage as bitcoin was using at an annualized rate in the first half of 2021. This would represent maybe 0.6% of global energy usage, which seems appropriate for a network used by billions of people for multiple purposes, as it would need to be at that point in order to reach such a high value.
Bitcoin Energy Myth Five: Bitcoin Mining is Inherently Wasteful
Some detractors object to any energy use for mining at all, even if completely obtained through renewable sources. They point to the adequacy of legacy payment systems or other consensus mechanisms, namely ‘Proof-of-Stake’ (see Myth Six). But these arguments fail to grasp the benefits in decentralization and security PoW brings. Throughout history people have used energy expenditure as a proxy for value. It’s why gold has retained its value through the centuries. Bitcoin simply makes this relationship explicit.
As Coincenter’s Peter Van Valkenburgh writes:
This energy usage is anything but useless, it is securing data about transactions worth hundreds of billions of dollars. Unlike the energy used by a gold miner, it goes directly to providing a public good: online peer-to-peer payments infrastructure that anyone on Earth with a smartphone and internet connection can use.
Bitcoin produced a new way of securing transactions online as analyst Dan Held writes:
The Bitcoin ledger can only be immutable if and only if it is costly to produce. The fact that Proof of Work (PoW) is “costly” is a feature, not a bug. Until very recently, securing something meant building a thick physical wall around whatever is deemed valuable. The new world of cryptocurrency is unintuitive and weird — there are no physical walls to protect our money, no doors to access our vaults.
Bitcoin Energy Myth Six: Proof of Stake works just as well without the Energy Burden
Critics also point to an alternative consensus mechanism known as ‘Proof-of-Stake’ (PoS) as an efficient alternative. It is true, ‘Proof-of-Stake’ consumes much less energy and provides a market alternative for those solely focused on energy consumption. But it comes with drawbacks, particularly in centralization that PoW avoids. PoS determines governance by crypto holdings (stake). Validators are rewarded additional stake. This system is vastly more complex from a security standpoint.
Further it centralizes the governance in those that have the most stake or perhaps are willing to buy it. This invites all the issues of censorship, exclusion, and rule by cultural elite that plague the current web.
As Nic Carter states:
‘Proof of Stake’ is just a fancy phrase meaning “those who have the most wealth wield political control.” That sounds a lot like our current system, which Bitcoin is specifically designed to solve. Bitcoin explicitly rejects politics, and doesn’t grant any special privileges based on coins held. If holding more coins gave you more control, the attempted takeover of Bitcoin through the 2X movement (backed by the largest custodians and exchanges in the industry) would have succeeded.
Lyn Alden analogizes this to voting:
It would be like a political system where you get a vote for every hundred dollars you have, and then also get paid a dollar by the government for casting a vote. Mary the high school science teacher with $20,000 in net worth gets 200 votes, and earns $200 from the government for voting. Jeff Bezos, with $200 billion in net worth, gets 2 billion votes, and earns $2 billion from the government for voting. He’s a more valuable citizen than Mary, by a factor of a million, and also gets paid more by the government for already being wealthy.
Proof of Work is apolitical and self-sustaining
Bitcoin and ‘Proof-of-Work’ consensus represent a new way of transacting and interacting. But it also threatens those at the top of the cultural pyramid. It is unsurprising reactive forces emanating from legacy media, academia, and government would so oppose this paradigm shift. It is also ironic these same forces imbue their self-identity in solidarity with the oppressed, marginalized, or “the planet.”
But the coming world Bitcoin points us all toward a world without need of self-appointed stewards. It enables us to choose our own path, even if it costs some energy.
By Jossey PLLC
This post originally appeared on the blog of the Competitive Enterprise Institute https://cei.org/blog/six-myths-about-cryptocurrency-energy-use/