By Is Bitcoin bad for the environment? Or is it a little bit more complex than that?
The climate crisis is on everyone’s minds – and Bitcoin mining is in everyone’s ears. From having the electricity usage of a small country to being as bad for the environment as crude oil, everyone has a bone to pick with the world’s leading digital money. But is it all as bad as it seems, or could Bitcoin mining be the key to the green revolution?
What is Bitcoin and why do we need it?
What is the Bitcoin network?
Bitcoin is a peer-to-peer payment network with its own native currency: bitcoin, or BTC.
Many people think of Bitcoin as a payments aggregator, like Visa. However, it is more akin to Fedwire, a settlement system.
Lyn Alden argues that Bitcoin could one day replace the settlement layer of the traditional financial system. Additional layers would provide microtransaction capabilities.
In Bitcoin, a layer 2 network like the Lightning Network functions more like Visa. Individual transactions are aggregated and then settled in bulk on the layer 1 Bitcoin network like Fedwire settles the bulk transactions of the financial system.
A 2022 White House report acknowledged this distinction, recognising that cryptocurrency/blockchain technology is a financial system unto itself. Credit card transactions require formal banking relations and the physical infrastructure of the financial system.
“For this reason, there is a fundamental difference between a digital asset transaction and a credit card transaction.”
However, they also make the point that in 2020, Visa, MasterCard, and American Express combined used less than 1% of the electricity that Bitcoin and Ethereum used, despite processing a far greater number of transactions. So they seem to have missed their own memo about it not being a fair comparison.
Looking at Bitcoin’s electricity consumption per transaction is relatively meaningless. This is because the vast amount of electricity used by the Bitcoin network goes into the mining process. The actual processing of transactions uses hardly any energy at all.
As Christopher Bendiksen points out, comparisons to companies such as Visa, MasterCard, Paypal etc., are inappropriate. It’s just not apples to apples.
Why is Bitcoin useful?
Bitcoin is the 6th largest base money on earth, excluding gold and silver. Critics may derisively call it “magic internet money“, but millions of people around the world see it as far more than that.
In Venezuela, citizens have used Bitcoin to circumvent authoritarian government controls over their personal finances, as well as hedge against the country’s soaring inflation. The same can be said of Zimbabwe, China, and Russia, where Bitcoin’s peer-to-peer, trustless infrastructure makes government control impossible.
Crypto-based remittances (sending money to other people, such as family in another country) are also being increasingly favoured over fiat-based remittances for their faster speeds and lower fees.
It has use cases in hard-to-reach areas where online banking is unavailable and physical money has to be transported through wilderness, towns, villages, and sometimes even war zones to be delivered to people in order to pay them.
With Bitcoin, none of the traditional financial infrastructure is needed, just a crypto-wallet and internet connection. In 2017, more than 1.7 billion people were unbanked, meaning they were unsupported by the traditional financial system.
Bitcoin doesn’t require any information such as your name, national ID, or current address. Anyone with an internet connection can become banked with Bitcoin.
The Bitcoin network offers decentralised, peer-to-peer financial services, a store of value, financial security, and censorship resistance (transactions can’t be blocked by a third party).
Some people worry that this means Bitcoin will be used for illegal activity. However, fiat money is still used far more for illegal activity than Bitcoin. This is partly because anyone can audit Bitcoin, and all transactions can be traced.
Despite this, the same critic that referred to bitcoin as magic internet money also called the work of the Bitcoin miners that maintain the network “non-essential“. Try telling that to the Venezuelans.
What is Bitcoin mining?
Bitcoin mining is the process of validating transactions on the Bitcoin network according to the Proof of Work consensus mechanism.
Transactions are compiled in blocks which each have a unique identifying hash, a series of numbers and letters. The information contained within the block cannot be reverse-engineered from the hash, but the data will always produce the same hash when run through the hash function.
Because of this, it’s difficult to find what the hash of the block is, but very easy to check if you have the right one.
Under Proof of Work, miners use computational power to guess the hash. Once someone has it, they broadcast it to the rest of the network, where other validators confirm that it’s correct. The winning miner gets to add the block to the blockchain and collect the block reward (bitcoins) and miner fees. Miner fees are voluntary tips that people include in their transactions so that miners will prioritise their transaction and validate it ahead of others.
The Bitcoin network uses a protocol that changes the hashing difficulty in order to keep the block time the same. Each block should take an average of 10 minutes to solve. If the hash rate on the network increases, the difficulty will also increase so that the block time remains consistent.
For this reason, the more miners join the network, the harder the guessing game becomes, and the more electricity the network requires.
Does Bitcoin mining use too much electricity?
A small country
By now you’re probably familiar with the claim that Bitcoin mining uses more electricity than a small country. In fact, the White House report pointed out that the mining of “crypto-assets” (including Ethereum prior to its move from Proof of Work (PoW) to Proof of Stake (PoS), as well as all other PoW networks) used more electricity than Argentina or Australia.
Bitcoin alone is currently estimated to use more electricity than countries such as Norway and the Netherlands.
One thing that can muddy the waters is when people use “electricity” and “energy” interchangeably. Electricity is purely electrical energy, whilst “energy” on its own refers to electricity generation, transport, and heating. Whilst Bitcoin may use more electricity than many countries, it does not use the same amount of energy when factoring in transport and heating.
However, it’s important to note that no one is entirely sure how much electricity Bitcoin mining actually uses.
What are the estimates?
The White House estimated in 2022 that mining used between 120 and 240 Terrawatt hours (TWh) annually. Ethereum accounted for 20-39% of this. The Cambridge Bitcoin Electricity Consumption Index (CBECI) estimates it between approximately 60 and 200 TWh annually whilst giving an actual estimate of 120 TWh. The Bitcoin Mining Council (BMC), a voluntary organisation consisting of actual Bitcoin mining companies, estimates the highest electricity usage with 275 TWh globally for 2022.
Since the BMC has access to the most data on Bitcoin mining and has by far the highest estimate, let’s assume 275 TWh is the correct amount. That would bump it up 14 places to be between Taiwan and Australia on electricity usage per year, putting Bitcoin mining in 19th place on the worldwide leaderboard.
That’s a lot of electricity.
How does Bitcoin mining compare to the world?
Do these numbers really mean anything to you? 60 TWh, 120 TWh, 275 TWh. What does it all mean? Is it a lot, or not so much? It must be a lot if it’s more than entire countries, right?
Well, yes… but also no.
In the grand scheme of things, Bitcoin mining accounted for around 1% of global electricity consumption for 2022. The BMC estimate of 275 TWh amounts to approximately 1.1% of the estimated 25,300 TWh of global electricity consumption in 2021, whilst amounting to just under 1% of the 28,500 TWh of global electricity production in 2021. If the Cambridge estimate is correct with 120 TWh, these become 0.5% and 0.4%, respectively.
According to the BMC, Bitcoin mining accounts for approximately 0.17% of global energy usage, including electricity, transport, and heating.
So in terms of just electricity, Bitcoin mining accounts for roughly 1% of global electricity consumption per year. That’s going with the larger BMC estimate.
One one-hundredth of the entire electricity usage in the world, fewer than only 18 countries. That still sounds like a lot, right?
Well, yes… but also no.
Bitcoin mining electricity consumption in context
Comparing the electricity usage of entire industries, or even individual companies, to countries is slightly misleading, to say the least.
According to the CBECI, Bitcoin mining consumes less electricity annually than:
- Cement production – 384 TWh
- Paper and pulp production – 586 TWh
- Iron and steel production – 1233 TWh
- Chemical production – 1349 TWh
Global data networks use an estimated 250 TWh per year, whilst data centres use 200 TWh, and copper production uses 167 TWh.
Global air conditioning uses a whopping 2199 TWh per year. That puts it 3rd on the list of countries by electricity consumption, behind the United States and ahead of India.
The White House report acknowledges that mining in the US uses less electricity domestically than TVs, home lighting, or fridges.
In fact, the amount of electricity wasted by people not turning off appliances when not using them could power the Bitcoin network several times over.
As for air conditioning, the US alone uses more electricity for AC than the UK uses in total per year. This shows that sometimes it means very little to compare the electricity consumption of an entire industry, technology, or even just a company, with a country.
How do other industries compare?
Google, just one company in the tech sector, used just 12.7 TWh of electricity in 2019. That’s still enough to put it in the top 90 countries, more than Sri Lanka and Zambia. Google’s electricity usage also doubles roughly every three years. In 2020, it was up to 15.4 TWh. We don’t yet have data for 2021 or 2022, but we can estimate it at roughly 25 TWh by 2023.
Google, Amazon, Youtube, and Facebook also use more electricity than entire countries. However, Google, Amazon, Microsoft, Facebook, and Apple combined use around 45 TWh per year. This is significantly less than Bitcoin mining, though this number is growing every year, and that estimate is from 2021.
Bitcoin mining also uses less energy than the cruise industry, despite serving a far greater number of people. Of course, this factors in more than just electricity, considering the cruise industry uses a huge amount of fuel.
However, it should be seen as a benefit that Bitcoin mining doesn’t have to consume energy for heating or transport.
Bitcoin mining and greenhouse gasses
Sustainable energy mix
Electricity consumption is obviously an important metric to measure the environmental effects of Bitcoin mining. However, not all electricity is created equal. Electricity produced from coal is going to emit far more carbon dioxide equivalents (CO2e) than electricity produced by wind.
Christopher Bendiksen made the case that “Bitcoin is as green as an electric car.” It’s how you generate the electricity that matters. The greenhouse gas effect of electricity consumption is dependent on the sustainable energy mix of the industry.
For Bitcoin mining, estimates range from 25% to 73%. However, the BMC estimates that the global Bitcoin network has a sustainable energy mix of 58.9%.
The BMC also reports that the sustainable energy mix is growing year on year, alongside growing efficiency.
This makes Bitcoin mining one of the most sustainable industries in the world. It also means it has a higher sustainable energy mix than the EU, USA, Canada, and the world average.
Even if we take the lowest estimate of 25%, that’s still higher than the 20% of the US power grid.
Greenhouse gas emissions
The White House estimated that crypto-asset mining was responsible for roughly 0.3% of greenhouse gas (GHG) emissions. The BMC estimates that Bitcoin mining is responsible for 0.1% of global GHG emissions.
According to some estimates, these industries emit many times more CO2e than Bitcoin mining:
- Gold mining – 3.4x
- Bank branches and ATMs – 4.7x
- Domestic refrigeration – 10x
- The traditional financial sector – 27x
Even if the electricity consumption of Bitcoin mining continues to grow, as long as the sustainable energy mix also grows, the GHG emissions will decrease. Once the sustainable energy mix hits 100%, GHG emissions will drop to zero.
In fact, signatories of the Crypto Climate Accords aim to reach net zero by 2030. If they succeed, they’ll have achieved something most industries are only dreaming of right now. And if the BMC are to be believed, they’re already more than halfway there.
Bitcoin mining is only going to get better
The Bitcoin mining industry is only going to get more efficient and more sustainable over time. Koomey et al. found that the electrical efficiency of computing doubles roughly every couple of years, and the efficiency of mining technology has followed this trend.
The BMC found that from Q1 of 2021 to Q2 of 2022, the hash rate (computing power) of the Bitcoin network grew by 137%, whilst energy usage only increased by 63%. Efficiency also increased by 46%. This shows that the capabilities of Bitcoin miners are outpacing the demand for electricity.
Bitcoin miners sell the block rewards (currently 6.25 BTC per block) to fund their electricity consumption, and the block reward halves roughly every four years. The hash rate needed to mine blocks also increases over time as more miners join the network.
For this reason, miners have an inbuilt incentive to become more efficient as they need to increase their hash rate whilst decreasing their electricity costs as the block reward (essentially their electricity budget) gets halved.
No other industry in the world has such an inbuilt necessity to rapidly become more efficient.
Bitcoin mining’s electronic waste problem
There is one issue to which the Bitcoin industry doesn’t seem to have an answer.
Admittedly, it’s not the only industry without an answer. No one has an answer.
The question is – what do we do with all the electronic waste?
Bitcoin miners use ASICs, which stands for Application-Specific Integrated Circuit. At this point, they’ve become so specialised that they can’t be used for anything other than Bitcoin mining.
Within a year and a half of being developed, following Koomey’s law, they become obsolete as new tech is developed that is more energy efficient. Since miners are always trying to maximise efficiency, they throw out the old machines. These then can’t then be used for anything else.
The Bitcoin network, therefore, produces nearly 51,000 tonnes of electronic waste annually as of February 2023. Less than 20% of global electronic waste is recycled.
However, once again, these numbers need to be put into perspective.
The world generates more than 50 million tonnes of electronic waste every year. In 2021, it’s estimated that 57.4 million tonnes was produced and the number is growing by roughly 2 million every year. This makes Bitcoin responsible for less than 0.1% of the global pile.
Whilst we certainly need a solution to this problem (we could start by recycling more of this electronic waste), the Bitcoin network is far from being the worst offender.
Bitcoin mining and the green revolution
Bitcoin mining is mobile
As the White House report highlights, Bitcoin mining is highly mobile. Mining facilities are generally quick and easy to set up as well as pack up.
The Bitcoin Clean Energy Initiative is a project launched by Square in 2020. Their goal is to make Bitcoin mining a central pillar of the green revolution. In a white paper, they referred to Bitcoin miners as “location agnostic, requiring only an internet connection.”
Miners have been known to behave like migratory animals. Before Bitcoin mining was banned in China, they would head south during the wet season to harness the abundant hydropower. In the dry season, they would then go north to utilise the coal plants.
Bitcoin miners like to set up their operations at the source of electricity. Electricity is usually cheapest at the source because a huge amount of energy is lost through transmission.
In fact, electricity lost in transmission in the USA alone would be almost enough to power the entire Bitcoin network. Electricity lost in transmission globally could power it several times over.
Bitcoin miners offer an interruptible load
Miners are also unique in that almost their entire operating costs come down to electricity. For this reason, they can shut down when electricity is unavailable without burning through cash reserves.
For example, in Q4 2022, 1.28 TWh was released back into local grids during peak demand. The majority of this was in North America, where the interruptible load is equivalent to 25% of installed utility battery storage.
In Texas, heatwaves caused a surge in electricity demand (thanks to those damned ACs). Bitcoin miners were able to shut down, freeing up 1000 MW for the grid.
This was not done out of charity. Miners in Texas have agreements in place to shut down for a price when the grid needs the power. The Texas Blockchain Council (TBC) estimates this happens for roughly 200 hours per year.
This makes Bitcoin mining an effective grid stabiliser, but not just at the high-demand end of the spectrum.
Bitcoin miners as buyers of last resort
Cheap energy is essential to miners, who, therefore, intentionally seek out underutilised or wasted energy.
Particularly in the case of renewable energy, such as wind and solar, supply often peaks at a different time than when demand does. Ironically, demand often peaks when supply is at or near its lowest.
For this reason, much of the electricity produced by renewables is curtailed (wasted). Bitcoin miners are able to set up directly at the source of electricity production and buy the electricity that would otherwise be wasted.
So much electricity is curtailed every year that electricity curtailed in China alone could power most of the Bitcoin network. All the curtailment globally could power it multiple times.
Having Bitcoin miners to buy this wasted electricity makes renewable energy production far more profitable. This is because there is now a buyer for electricity that previously went unsold. Not only does this lower energy prices for everyone else, but it also makes building new renewable energy production more financially viable.
The TBC argues that miners bring in extra revenue that can be invested into new sustainable electricity production, as well as improved transmission and storage infrastructure. This would improve the sustainable electricity mix of the power grid and lower prices for everyone living on it.
The BMC highlights the fact that this makes Bitcoin mining the only industry in the world that incentivises GHG emission reduction without government subsidies.
Using Bitcoin mining to reduce fossil fuel use
Bitcoin miners are mobile and can set up at the source of electricity generation, offer interruptible loads, and act as buyers of last resort. For this reason, they are perfect for the development of sustainable power grids.
The Electric Reliability Council of Texas (ERCOT) did a study which found that building 5 GW of interruptible load data centres could lead to a net reduction in carbon emissions and improve the resiliency of the power grid.
By shedding 13-15% of their load annually, flexible load data centres can facilitate intermittent energy sources such as wind and solar. This means that a decrease in carbon emissions can be achieved despite a simultaneous increase in electricity consumption.
They found that building inflexible (non-interruptible) data centres led to an increase in fossil fuel usage. The increase in renewables is only possible if the data centre can shed its loads during peak demand.
Bitcoin mining and overbuilding sustainable electricity
Power grids need to overbuild their electrical supply in order to be able to cope with peaks in demand. With a fossil fuel based power grid, this is easy to do because you can ramp electricity production up or down depending on when you need it.
Not so with wind or solar.
If the wind is blowing or the sun is shining, your wind or solar farm is going to be producing electricity whether you need it or not. And if you need power at a time when neither the sun is shining, nor the wind is blowing, then you’re screwed.
Overbuilding with sustainable electricity production like wind or solar is therefore largely unprofitable. You’ll just end up wasting most of the energy.
However, Bitcoin miners can set up close to the source of electricity, begin buying up electricity immediately (without having to wait for it to be connected to the local grid), immediately start generating profits, and then continue buying up the electricity that would have been curtailed.
The White House report suggested a possible way to utilise this fact in potential future policy: “To help U.S. climate objectives, industries could volunteer or be required to build zero-carbon energy capacity that produces more electricity than the crypto-asset mine requires, selling excess clean energy back to the grid. “
As the Bitcoin Clean Energy Initiative points out, “Combining generation with both storage and miners presents a better overall value proposition than building generation and storage alone.” Bitcoin mining offers an economic incentive to choose sustainable energy sources over fossil fuels.
They also argue that as more wind and solar is developed, it will increase innovation and improve efficiency. This will lower the cost of (clean) energy, making new uses like desalinating water, carbon capture, and producing hydrogen economical.
Using Bitcoin mining to reduce CO2e emissions
The benefits of burning methane
Buying up electricity that would otherwise be curtailed is obviously a benefit of Bitcoin mining. But electricity isn’t the only thing being wasted.
As the White House report states, 4% of global methane production is wasted as venting or flaring. This produces around 0.7% of the global GHG emissions in CO2e.
Methane is over 100 times more potent as a GHG than CO2 in the immediate period, 80 times more potent over 20 years, and 25 times more potent over 100 years. This means that 1 tonne of methane is effectively 100 tonnes of CO2e in the short term.
Methane can be burnt and used as a fuel to generate electricity. Whilst this does produce CO2, the warming effect on the climate is dramatically reduced. This is because methane is so much more potent as a GHG.
In fact, rather than thinking of it as “producing CO2”, it’s more accurate to think of it as “reducing CO2e”.
The methane is produced either way, so that amount of CO2e is going into the atmosphere whether we use it or not. If we burn that methane in electricity production, we don’t just convert it into a less potent GHG, but we also get electricity out of it that we otherwise would not have had.
Some of this wasted methane is already flared and therefore converted into CO2. However, this method is less efficient than burning it in a power plant. A significant proportion of methane still escapes into the atmosphere. As for the methane that is successfully burnt, no electricity is generated, and the entire thing is wasted.
Burning methane for Bitcoin mining
The World Bank estimates that 140 billion cubic meters of global gas is flared every year. Approximately 750 TWh of energy could be harnessed if this gas was used to generate electricity, more than Africa uses every year.
That’s enough to power the Bitcoin network 2.7 times by the BMC’s estimate of 275 TWh, and 6.2 times according to the Cambridge estimate of 120 TWh.
The White House report acknowledged that Bitcoin miners are exploring ways to use wasted methane to generate electricity and argued that “Crypto-asset mining that installs equipment to use vented methane to generate electricity for operations is more likely to help rather than hinder U.S. climate objectives.”
Some argue (guess who) that this simply provides a new source of revenue to oil and gas giants who can now find new profitability in their fossil fuel extracting exploits. This idea has some merit, considering oil and gas giant Exxon began using wasted methane to power Bitcoin mining.
The obvious counter is that these oil and gas giants are already profitable on their own. All Bitcoin does is give them a way to:
- Utilise otherwise wasted resources.
- Convert methane into a GHG 100 times less potent.
- Make profits from Bitcoin mining which they can then pass on to their customers in the form of lower energy prices.
Does Bitcoin mining keep fossil fuels alive?
We would all love to ditch fossil fuels, but currently, we don’t have a workable plan on how to do that. Using renewables to produce electricity is one thing, but we can’t power a cargo ship on a battery, nor an airliner. Nor do we have anywhere near enough batteries (nor materials to make them) to give everyone an electric car or even store all the electricity we’d need in order to power the globe on an entirely sustainable grid.
Of course, fossil fuels are a finite resource; one day, we’ll have to move on. In the meantime, they release GHGs into the atmosphere and contribute to the very real problem of climate change. But simply shutting down all fossil fuel production is not currently an actionable solution.
Fossil fuels are far more energy dense than batteries or biomass, and we are only in the early stages of replacing petrochemicals with green alternatives. For now, at least, fossil fuels are here to stay. With that in mind, what harm is there in using wasted methane to power Bitcoin mining, reducing CO2e emissions in the process, and lowering energy prices for consumers?
It’s also not only fossil fuel companies that produce methane as a byproduct. Landfills also produce methane gas as organic matter rots and breaks down. Miners have begun setting up facilities at landfills to capture this methane, use it to produce electricity, and use that to power Bitcoin mining.
This utilises an otherwise wasted resource, converts the methane into CO2, and therefore reduces CO2e emissions. All this to maintain the Bitcoin network. Of course, if you don’t see the utility of the Bitcoin network, the whole thing is meaningless to you… but then, we’ve already covered that.
Do we really need Bitcoin?
Why does Bitcoin survive?
Ok, so we’re back here again.
Perhaps you don’t believe that a permissionless, transparent, immutable, secure, decentralised payments settlement system with a globally liquid, inherently scarce currency (Bitcoin is coded to max out at 21,000,000, so there will always be a limited supply) is a good or useful thing for the world.
Fine.
And if enough people agree with you, you have absolutely nothing to worry about because Bitcoin will surely die.
As Lyn Alden points out, the Bitcoin network only uses energy if people are using it. For this reason, as soon as it stops being useful, people will stop using it, and the network will die.
How does Bitcoin survive?
In some ways, the Bitcoin network is like a living consciousness. Much like you can lose half your brain and keep living (seriously), and some of those brain functions will reappear on the half of your brain you still have (seriously… google it), the Bitcoin network can also survive this hemispherectomy.
When China banned Bitcoin mining, approximately half the network went offline. However, not only were those miners able to relocate and set up elsewhere, but the network experienced zero downtime. Imagine if Amazon suddenly had to shut down half their servers and move them to the other side of the planet (most miners went to North America). Could a traditional data network suffer such a hit whilst maintaining full services?
As long as the network is used, it’s alive, and as long as it’s alive, anyone can use it. If people stop using it, it dies, like if all the neurons in your brain were to shut down. Its electricity requirement is always in proportion to its usefulness.
If it becomes useful enough, the Bitcoin network might replace aspects of the traditional banking system. The traditional, centralised banking system does not just use electricity but huge amounts of fuel (for heating and transport), real estate, manpower, and other resources. Replacing this system with a decentralised, trustless system may not just be the best thing financially, socially, and even politically, but also environmentally.
How will miners remain profitable?
For the Bitcoin network to survive, we need miners to compile and validate transactions. Currently, the majority of the money miners make comes from block rewards, currently 6.25 bitcoin per block.
Eventually, when all the bitcoin has been mined, there will be no more block rewards. And long before that, block rewards will be so small that they won’t be able to support mining operations.
Miner fees will then become the predominant source of revenue for miners. Since mining began, miner revenue has grown almost every single year, with a general upward trend. This has happened despite block rewards being halved roughly every four years.
This is mostly because of the dramatic rise in the value of a single bitcoin. 6.25 bitcoin worth $20,000 each are worth a lot more than 12.5 bitcoin worth $5,000 each. But this is also partly because of the growth in the number of users of the network and the number of transactions.
As more users join the network and transact in bitcoin, miner fees will increase as people want to get their transactions prioritised amongst larger competition. If transaction fees rise, more miners will join the network to profit, or at least, the miners currently profiting from block rewards won’t leave the network due to those block rewards no longer existing.
As long as people are using the network, mining will remain profitable. As more people join the network, mining will become more profitable. The more profitable it is, the more miners maintain the network, the more secure it is, the more useful it is, the more people use it, the more profitable it is, and so on.
Bitcoin as a store of value
Perhaps you’re not convinced about Bitcoin as a new financial system or a revolutionary new technology. Many proponents of Bitcoin argue that its real worth lies in its function as a store of value.
Personally, I think this is massively underselling it, but as far as the average person goes, that probably is its most useful feature in the short-to-medium term.
Bitcoin is scarce. It’s in the code. There will never be more than 21,000,000 bitcoin. And considering how much has already been lost (due to loss of wallets, forgetting passwords, deaths of bitcoin holders etc.), the total amount in circulation at any given time will never reach even close to 21,000,000.
Its intrinsic rarity gives it value, much like something else humans have been using as a store of value for thousands of years.
Bitcoin vs Gold
Since we already have gold, why do we need something else?
Well, gold isn’t actually all that great as a store of value for a number of reasons.
- The supply may be theoretically finite, but new deposits are still being found all the time, and new supply influences the price. One day (perhaps sooner than you think), we’ll be mining asteroids that make precious metals so abundant they’ll be cheaper than wood.
- Gold is very expensive to store. You need a vault. That vault needs to be highly secure. You probably don’t have a vault. You’ll probably pay to use someone else’s, such as a bank’s. They’ll charge you a pretty penny for their services.
- Gold is very difficult to transport. Try taking your gold with you when you move house, or better yet, move country. Try bringing a suitcase of gold on an airline. See what happens.
- Gold can be seized. This has historically happened far more than you might think, and not just in war-torn, backwater nations either. Your gold is always subject to seizure by bad actors or your very own government.
How about Bitcoin?
- The supply is finite. It will never be more than 21,000,000.
- It is cheap and easy to store. All you need is a crypto-wallet which can either be online or a physical hardware wallet.
- It is cheap and easy to transport. As long as you have your private key and an internet connection, you have access to your Bitcoin. Your hardware wallet can also be brought with you wherever you go.
- It cannot be seized. Unless you give out your private key, no one but you can access your crypto. Even if someone were to take your hardware wallet, they wouldn’t be able to use it without your keyphrase.
The environmental effects of gold mining
I’m not writing off gold. It has its uses beyond being just a store of value (although the vast majority of gold is used for this purpose).
But if we’re going to put the environmental effects of Bitcoin mining under a microscope, we must surely do the same with gold.
According to Cambridge, gold mining uses approximately 130 TWh of electricity per year. That’s more than the Cambridge estimate for Bitcoin at 120 TWh but less than half of the BMC estimate of 275 TWh.
But gold mining, unlike Bitcoin mining, doesn’t just consume electricity.
Gold mining involves digging in the ground. Sounds obvious. But is it also obvious that in order to mine enough gold to make one wedding ring, over 18 tonnes of waste is also produced? That’s probably more than you thought, no?
Whilst Bitcoin mining produces CO2 and electronic waste as byproducts, gold mining produces CO2, mercury, cyanide, lead, arsenic, acids, and petroleum byproducts that get dumped into water supplies, rivers, lakes, the ocean, or maybe just get left in huge piles close to the mine.
Every year, over 180 tonnes of toxic waste is dumped in water networks, severely impacting local communities and wildlife.
When this waste is not dumped, it’s kept in something called a tailing dam. These can sometimes fail and break, causing death and habitat destruction. Acid mine drainage can occur, releasing the previously mentioned contaminants into the local area.
Gold is separated from its ore through something called heap leaching. This is where cyanide is dripped over huge (sometimes 100m high) piles of ore which dissolves the gold. This is then extracted from the resulting puddle of cyanide-gold solution. 99.9% of the pile becomes waste and is often abandoned as there is no economical way to dispose of it.
Is Bitcoin mining still worse for the environment?
One study found that Bitcoin mining is more harmful to the environment than gold. It argues that the environmental cost of bitcoin mining, as a share of market value, is considerably higher than that of gold mining.
This is calculated using the Social Cost of Carbon, a model that aims to calculate the economic cost of CO2e emissions. They compare the price of 1 unit of bitcoin with the carbon emitted when mining it. They then do the same with other commodities and compare.
Bitcoin was found to be about as damaging to the environment as crude oil or beef. The study notes that, in order to achieve the same environmental cost per bitcoin mined as gold per unit mined, the sustainable energy mix of the Bitcoin network would need to be 88.4%.
This is a dramatic misunderstanding of what Bitcoin is, how it works, and why it works that way.
Bitcoin is not like a physical commodity. With gold, oil, beef etc., the goal is to produce as much as possible, as cheaply as possible, and (for those that care) as cleanly as possible. Bitcoin could theoretically achieve this.
It’s a virtual commodity. It could be coded to produce 10 trillion bitcoin every second for minuscule amounts of power. The point is not to produce as much bitcoin as possible for as little cost as possible. Otherwise, that’s what it would do.
Why would miners spend huge amounts of money on electricity if the only point was producing bitcoin, something that could, as a virtual commodity, be produced in infinite supply for very little electricity?
The vast computational power required to mine new blocks, create more bitcoin (up to a predetermined limit), and maintain the Bitcoin network is by design.
The question, therefore, is why?
Proof of Work vs Proof of Stake
To answer this question, we’re going to have to talk a little bit about consensus mechanisms. I’ve already gone over Proof of Work (PoW), in which miners compete to solve the hash of the next block, expending computational power in the process.
Proof of Stake (PoS) was developed in response to the vast electricity needs of PoW. Rather than requiring validators to expend computational work, it instead requires them to stake some of their cryptocurrency.
In the case of Ethereum, the largest PoS network, validators must stake 32 ether (Ethereum’s native currency) to be eligible to validate transactions and add blocks to the blockchain.
Both methods are an attempt to ensure that validators are honest and don’t validate fraudulent activity, such as double-spending.
In both cases, validators have to put up capital. In PoW, this capital is spent on mining machines and electricity. With PoS, this capital is the stake itself.
The EU Commission referred to Proof of Work as “relatively outdated” and called for a switch to Proof of Stake.
Environmental Working Group (EWG), an NGO, is also campaigning for Bitcoin to change to PoS.
PoW, however, has many advocates, and there is undoubtedly the case that Bitcoin is far better off sticking with PoW, despite almost all newer cryptocurrencies choosing PoS these days.
Electricity usage
The White House report stated that PoS networks account for less than 0.001% of the total global electricity usage.
When Ethereum completed “The Merge”, moving from PoW to PoS, they cut their electricity usage by 99.95%.
It seems clear in this regard that PoS has PoW beaten. But again, we’re forgetting that this isn’t a physical commodity like gold or beef. In fact, we shouldn’t be thinking about these things as commodities at all.
The electricity usage of the Bitcoin network is its security. The more electricity it uses, the more secure it is. As Christopher Bendiksen highlights, if Bitcoin uses more electricity than Norway, that means that even if Norway turned its whole electricity consumption onto attacking the Bitcoin network, it wouldn’t be able to do it.
In order to attack the network, you need to control 51% of it. If the network uses more electricity than entire countries, then even entire countries cannot hope to control it. As the electricity consumption of the network grows, it becomes harder and harder to attack and, thus, more and more secure.
How to attack PoW
There is considerable debate over whether PoW networks are more secure than those using PoS. However, what cannot be denied is that PoW is the only consensus mechanism that has been proven at scale in terms of security.
Whilst smaller PoW networks can be attacked due to their smaller electricity usage, a network the size of Bitcoin is virtually unassailable at this point.
What makes PoW so secure is its simplicity. You have to do the work, hence the name. In order to attack the network or commit fraudulent activity, you would need to have direct control over at least 51% of the mining network. You would need to own half the “work”.
This is because of the way blockchain works. All blocks link together. For this reason, if you wanted to double-spend your bitcoin, you would need to alter the record of the transaction of your first spend. To do that, you would also have to re-mine all subsequent blocks.
The network will always consider the longer chain the “true” chain, the one with more “work” put into it. In order to make your new chain, with your fraudulent spending, the “true” chain, you would need to out-work all the other miners combined, at once.
An attempt to attack the Bitcoin network would likely cost you far more than you could actually make from the attack.
In PoS, things are more complicated. Layers of incentives and disincentives have to be woven together to ensure that validators act in good faith.
How to attack PoS
The basis of security on a PoS network is that validators must own an amount of the network’s native currency and lock it in a pot (stake it) on the network. In the case of Ethereum, they need to stake at least 32 ether. This is just under $50,000 at the time of writing.
If they behave dishonestly or lazily (not participating in validation), their stake will be slashed, and they’ll lose it forever. This incentivises honest behaviour because, by owning a stake in the network, it is in the best interest of the validator to do what’s best for the health of the network.
According to Ethereum, “Overall, proof-of-stake, as it is implemented on Ethereum, has been demonstrated to be more economically secure than proof-of-work.”
PoS doesn’t have the same inherent security that PoW does; it has to be coded in. For this reason, some PoS networks are more secure than others. It depends on the sophistication of the additional security protocols.
For example, here is more from Ethereum:
“51% attacks are just one flavor of malicious activity. Bad actors could attempt long-range attacks (although the finality gadget neutralises this attack vector), short range ‘reorgs’ (although proposer boosting and attestation deadlines mitigate this), bouncing and balancing attacks (also mitigated by proposer boosting, and these attacks have anyway only been demonstrated under idealised network conditions) or avalanche attacks (neutralised by the fork choice algorithms rule of only considering the latest message).”
I’m not going to explain all these different methods of attacking a PoS network or the network’s defences. We’ll be here all day.
The point is that PoS does not have the intrinsic security that PoW has, it needs to be added on top, and these add-on security features create issues in other areas.
Work vs Stake
Some critics of PoS argue that having a financial stake in the network is not enough to ensure honest behaviour. For example, a rival may be willing to burn a significant amount of cash to take down the competition.
If they wanted to do this with a PoW network, they would need to buy a significant amount of mining hardware, set up a mining facility, and use enough power to generate at least 51% of the hash rate of the entire network (which would mean contributing the entire current hash rate plus 1%).
As you can see, this wouldn’t just take huge amounts of money but huge amounts of time and manpower.
To do this with a PoS network, you need to buy the total amount of cryptocurrency currently staked in that network plus 1%. That’s it.
Sure, that’s very expensive. But theoretically, if you have the capital to do that (as, say, a large financial institution might), you are potentially willing to endure a loss in the short term for long-term gain, such as taking out a competitor.
The ease with which stakers can withdraw their stakes is not replicated in a PoW network. The true “stake” is time, hardware, and, yes, money. In PoS, the stakers can ditch as soon as they don’t feel safe; in PoW, miners are bound by sunk cost.
This means validators in a PoW network are likely to continue to maintain the network during a bear market, whereas those in a PoS network may withdraw their stakes and sell their tokens.
This gives PoW networks an inherent advantage in security and longevity.
Forking
One of the main concerns with blockchain is the issue of forking. This is where two different blocks get added on to the end of the same previous block, creating two different chains – a fork.
Forking is inherently disincentivised on PoW because miners, in order to participate on both chains, would need to split their resources in half.
In PoS, this is not the case. When the blockchain forks, the stakes of the validators are duplicated, meaning they can continue to participate on both chains at the same time. This could lead to fraudulent activity, such as double-spending. They could use the same ether twice, once on each of the chains.
This is called the “nothing-at-stake” problem and is unique to PoS networks.
Ethereum argues that honest validators could simply choose to ignore the fraudulent chain and encourage developers (who make apps and run decentralised exchanges on the network) to do the same.
However, this relies on considerable cooperation between thousands, if not millions, of people all around the world who may have conflicting interests.
With PoW, defence against forking is built into the very consensus mechanism itself. With PoS, it relies on good faith and trust in the network’s countermeasures.
Centralisation
Decentralisation is one of the core tenets of blockchain technology, distributed ledgers, and cryptocurrency in general. Bitcoin, the first-ever cryptocurrency, considers decentralisation a non-negotiable.
The reason for this is that centralised control is inherently less democratic, less trustworthy, and more easily influenced and corrupted.
In PoS, the validator is chosen at random, but the size of their stake will affect their chances. The greater their share of the total stake, the more likely they are to be picked. Validators are also rewarded with transaction fees, increasing their stakes.
Since those with larger stakes are more likely to be chosen, and those chosen grow their stakes through fees, those with larger stakes snowball their wealth and influence.
Because PoS networks make governance decisions with their tokens, this means those with more wealth have more power over the future of the network.
In mining pools, the pool owner doesn’t have your governance power, and you can withdraw your mining contribution at any time. In staking pools, you delegate your entire responsibility to the staking pool controller.
For this reason, the fact that over 50% of the Bitcoin network is run by only two mining pools is not as much of a problem as the fact that the now PoS Ethereum network is also in the same situation. In fact, Ethereum is even more centralised in fewer pools than Bitcoin for the above reasons.
Does PoS encourage centralisation?
PoS networks are far more energy efficient and have lower hardware requirements than PoW. This theoretically makes it easier for people to join and become validators, making the network more decentralised.
The idea is that anyone with a computer can become a node, someone who stores a copy of the blockchain and participates in validation. In PoW, you need mining equipment that can be prohibitively expensive. With PoS, theoretically, you can be a node with a basic computer, and a validator with a stake of 32 ether.
In practice (and not even considering that 32 ether is a significant investment of several tens of thousands of dollars), a validator needs several complex software applications and has to be online at all times. Slashing penalties will cut your stake if you have internet downtime and therefore fail to take part in attestations (approving new blocks).
From Ethereum Classic:
“This makes it a financially dangerous endeavor to run nodes, risking your capital if you don’t have a large and professional operation managing a sophisticated data center that is available and correct all the time.”
These risks disincentivise small, independent validators and encourage centralisation amongst large, powerful institutions with reliable data centres and significant capital.
Is this the case for PoW?
As previously mentioned, specialised hardware in the form of ASICs presents a meaningful barrier to entry to be a miner. This centralises the network somewhat as only people with enough money can afford to buy the machines and pay the electricity costs of running them.
Also, since miners are rewarded with a block reward for validating blocks, and those with more mining power are more likely to win the race to guess the hash of the next block, there is some snowballing effect for large mining operations.
However, there are two distinctions between PoW and PoS here.
Firstly, as previously mentioned, when a small miner joins a mining pool in order to take a share of the block reward (since a small miner is unlikely to be chosen to validate the next block), they do not hand over their mining equipment, and they may withdraw from the pool whenever they wish.
In PoS, the stake is handed over to the staking pool. Whilst they still technically own that stake, they do not run their own node, and they do not have any control over validation.
In other words, miners in mining pools still have some autonomy that stakers in staking pools do not. Thus, the effects of centralisation are greater in a PoS network.
Secondly, diseconomies of scale prevent individual mining operations from becoming too large. There is only so much electricity in any given area, forcing miners to spread out. Miners also chase the cheapest electricity, meaning they will spread all over the globe because electricity costs will rise if miners congregate in one area.
This doesn’t just decentralise the network geographically, which has benefits of its own (resilience against natural disasters, multiple jurisdictions etc.) but also increases the likelihood of small, independent mining operations popping up to take advantage of localised opportunities.
Censorship
Censorship refers to the ability of regulatory bodies, governments, or institutions to block or ban certain transactions.
PoS is inherently less censorship resistant than PoW. Bitcoin has never been censored since its inception in 2009. Ethereum Classic (still PoW) has been running since 2015 and has never been censored. Ethereum was censored as soon as it moved from PoW to PoS.
Currently, just under half of all transactions on the Ethereum blockchain are OFAC compliant. This means transactions that the US government has sanctioned are excluded. This is massively down from a high of 79% just two months after the move to PoS but is still much higher than Bitcoin’s rate of 0%.
Part of the reason that PoS networks are more prone to censorship is that there are two ways for transactions to be censored on PoS rather than just one on PoW.
On PoW, a transaction can only be censored if the original miner refuses to include it in their block. On PoS, a validator can do the same, but other validators can also refuse to attest (approve) the block once the original validator has produced it if that block contains transactions they wish to censor.
Things get worse for the cryptocurrency in general on a PoS network. As far as the SEC is concerned, anything that can be staked and profited from is a security, meaning the SEC can regulate it. For this reason, any cryptocurrency native to a PoS network is under the thumb of the US government.
That applies to ether but not to bitcoin. That is unless Bitcoin decides to move to a PoS consensus mechanism.
There are arguments that staked cryptocurrencies should not be considered securities, but for now, at least, the politicians don’t agree.
Scalability
If there’s one area that PoS definitely has the advantage over PoW, it’s scalability.
Scalability refers to the throughput of the network – how many transactions can be processed within a specified period of time.
PoS is more scalable because transactions can be approved without needing the huge computational work that a PoW network requires.
Scalability is important if a network wants to be used as a payments processor like Visa. It’s also important for networks like Ethereum, which have dApps (decentralised apps) and other programs running on them that require the use of ether.
Bitcoin is more of a settlement system and utilises layer 2 networks such as the lightning network to process individual microtransactions, only settling on the mainnet (the actual blockchain) in bulk.
The differences between PoS and PoW can be seen in how long it takes to confirm a transaction on Bitcoin vs Ethereum.
As of January 2023, the time taken to confirm a transaction on Bitcoin ranged from 7 to 91 minutes. On Ethereum, the average was 12 seconds.
The Blockchain Trilemma
The Blockchain Trilemma refers to the apparent necessity of prioritising a maximum of two of the three ideal characteristics of a blockchain.
- Security
- Decentralisation
- Scalability
The term was coined by Vitalik Buterin, one of the founders of Ethereum. Ethereum has the ambition to solve the trilemma, but so far, there have always been costs to trying to improve one of the three areas.
Bitcoin prioritises security and decentralisation; for that reason, it’s not very scalable and relies on layer 2 networks to provide the scalability whilst benefiting from the security and decentralisation of the main network.
Ethereum has prioritised scalability and security and, in doing so, has compromised the network’s decentralisation.
Ultimately, whilst the trilemma may be solved in the future, it doesn’t currently appear that all three ideals can be equally prioritised.
Should Bitcoin move to Proof of Stake?
Overall, whether a network should be PoW or PoS comes down to what you want to prioritise.
The general consensus (although this is all being heavily debated, and no clear answer exists that everyone agrees upon) is that PoW is best for:
- Security – fraudulent activity is harder to pull off
- Decentralisation – diseconomies of scale and individual miner autonomy make centralisation difficult
- Trust – Miners cannot be misled, and transaction history is immutable
- Censorship resistance – geographic decentralisation makes government control less viable
On the other hand, PoS is better for:
- Scalability – transactions can be processed much more quickly
- Energy efficiency – PoS does not require the vast electricity consumption of PoW
- Cost – it is much cheaper to run a PoS network due to lower electricity consumption and less hardware
Bitcoin is a layer 1 settlement system, a decentralised financial services platform, and a censorship-resistant globally liquid currency. Decentralisation and security are right to be its top priorities.
This doesn’t mean Ethereum is wrong for choosing to switch to PoS. Ethereum is an entirely different beast to Bitcoin, with different objectives and ambitions. As a network that requires massive throughput, PoS is probably the best consensus mechanism for their goals, even if it does present new problems.
As for Bitcoin, moving to PoS would fly in the face of its use cases and stated objectives: being a decentralised, censorship-free currency network to liberate people all over the world from the centralised, often corrupt, traditional financial system.
There are concerns that Ethereum will eventually become another kind of centralised, regulated financial institution, much like the traditional finance sector, due to censorship and government intervention.
This could never happen with Bitcoin as long as it stays a global PoW network.
The bottom line
We’ve established that Bitcoin, as a technology, a network, and a currency, is useful for people all over the world for a variety of reasons.
These include:
- Censorship resistance
- A store of value/hedge against inflation
- Banking the unbanked – available to anyone with internet
- Currency liquidity
We’ve also established that the Bitcoin network:
- Does not use more electricity than centralised data centres and data networks
- Uses less electricity than various other industries and technologies, in some cases much less (looking at you, ACs)
- Is not more harmful to the environment than its store of value competitor: gold
- Has a higher sustainable energy mix than any industry or country
And we’ve established that Bitcoin mining:
- Incentivises new renewable energy buildout
- Acts as a grid stabiliser
- Acts as a buyer of last resort
And that the PoW consensus mechanism that necessitates mining:
- Increases and incentivises decentralisation
- Maintains a high level of network security
- Makes the network resilient to downtime, as miners can shut down and move
The environmental effects of Bitcoin mining have been greatly exaggerated. Bitcoin mining is one of the most sustainable, green, planet-friendly industries in the world, if not number one.
This is only going to become more true.
The future
There are genuine concerns about how Bitcoin mining could progress.
Critics continue to argue that even when mining uses renewable energy sources, this places extra demand on the grid, which has to be made up with non-renewables. This could act as an incentive for non-renewable buildout.
Bitcoin mining also has no answer to the problem of electronic waste and noise pollution created by the ASICs both during and after their lifetimes.
Utilising renewable energy that would otherwise have been curtailed may incentivise new renewable buildout but could also disincentivise storage or transmission buildout.
There are still hurdles to overcome. And whilst it may seem unfair that the Bitcoin mining industry is being held to a level of scrutiny that other industries and technologies are not, we cannot discount these concerns out of hand.
The question is what should be done about them.
China banned Bitcoin mining due to environmental concerns. All this actually did was decrease the sustainable energy mix of the industry as they could no longer rely on China’s renewable hydropower.
Other countries following suit and banning mining may just push the miners to other countries that have even lower sustainable energy mixes, thus exacerbating the problem.
With the BMC finding that hashrate, sustainable energy mix, and efficiency are continuing to grow year on year, the EU putting out new regulations that will force cryptocurrency networks to disclose the environmental impacts of their tokens, and new innovations that increase the environmental efficiency of the network, there is no reason why Bitcoin mining cannot be a significant cog in the green revolution we desperately need.
