Misconception: Bitcoin is Bad for the Environment
An overview of Bitcoin's energy use
Let's start with this — Bitcoin uses a lot of energy. It would be intellectually dishonest to try and position my argument without first acknowledging that fact.
The statement that Bitcoin consumes more energy than some small countries is true. Bitcoin is estimated to consume approximately 100 Terawatt Hours per year1. This would be higher than small countries like Colombia, Algeria, Portugal, and Chile.
But remember, everything we do requires energy: using our smartphones, driving automobiles, producing electric batteries, heating and cooling your home, watching TV, powering hospitals and homeless shelters, etc. When the benefits to society outweigh that energy use, this is a good use of energy (more on this later).
Looking at energy use in a vacuum would make everything we do look reckless. The annual energy consumption by Christmas lights — just in the U.S. — is greater than that of some small countries like El Salvador and Ethiopia. I don't recall journalists and politicians demanding we ban Christmas lights as they have for Bitcoin.
How Much Energy Should Bitcoin Use
The answer to the question — how much energy should Bitcoin use? — will vary widely based on who you ask. Those who think Bitcoin has no intrinsic value or that Bitcoin is used primarily for things like money laundering, drug trafficking, and tax evasion would probably say Bitcoin's energy use should be zero. No amount of energy use would be justified if those ideas were true.
For those of us that believe in Bitcoin as a modern monetary system that brings financial inclusivity to all, Bitcoin's energy use is justifiable. For those aware of Bitcoin's ability to bring an incorruptible money to nations who've experienced double or triple-digit inflation, Bitcoin's energy use is justifiable. For those of us that are deeply concerned about the fact that a small group of unelected central bankers make decisions every day that deflate our purchasing power and implement monetary policies that disproportionally benefit the rich while keeping poor citizens and countries in their place, Bitcoin's energy use is justifiable.
For the sake of this article, we're going to assume Bitcoin's energy use should be more than zero.
Most of the energy used by the Bitcoin network comes from Bitcoin mining. Bitcoin mining is designed to encourage the most efficient energy use, otherwise, it would be cost-prohibitive to miners. The difficulty of mining Bitcoin goes up over time, which therefore will require more energy use. If miners use the same methods today to mine Bitcoin a few years from now, they'll likely lose a lot of money. Setting up a mine in the middle of a metropolitan city and flooding the electrical grid during peak consumption hours would be a terribly inefficient way to mine Bitcoin, so miners don’t do that.
“I call this category of energy nonrivalenergy, because its use doesn’t deprive anyone anywhere of energy nor does it drive up their costs” — Nic Carter
It is estimated that the world wastes about 2,205 TWh (Terawatt-hours) per year of energy. That number is staggering, but let’s put it into context to help drive the point home. If we go back to our country comparison, that would be enough energy to power any country in the world outside of the U.S. and China. That number is more than 20x greater than the total energy consumption of the Bitcoin network.
Many people don’t realize that Bitcoin miners can, and do, switch their equipment on and off frequently. This is one of Bitcoin mining’s greatest advantages — economically and environmentally. When Bitcoin miners are co-located with an energy production facility, miners can monetize excess energy that has already been produced and will otherwise go wasted. In these instances, Bitcoin is using energy, but it is not adding any incremental energy production. Then, when needed, miners can ‘power down’ their equipment and allow energy to be put towards other uses.
Renewable's Inefficiencies: Solar and Wind
Environmentalists for a long time have been advocating for a greater mix of renewable energy. Solar, wind, and hydro are the most common clean, renewable energy sources. So why not just use more of those? Well, there's a big problem with each of these energy sources. For solar and wind, that problem manifests itself in the Duck Curve.
The image above illustrates the example of the demand for energy by time of day. If you look hard enough, the shape resembles a duck, hence the name. Demand for energy is fairly high early in the morning, then it falls into a trough from mid-morning through the afternoon, ultimately peaking in the evening when everyone is home watching TV, cooking, turning up the heat or A/C. If we plotted solar and wind's energy supply, it would not match up well with the demand illustrated above. The below quote from Square's analysis around Bitcoin and clean energy succinctly captures solar and wind's inability to solve the duck curve demand problem:
"In essence, the sun shines during the day, but not at night. Wind is more unpredictable, but tends to blow more heavily at night. Energy supply, therefore, is either abundant or nonexistent. Demand, however, peaks around the late afternoon or early evening when people arrive home and turn on appliances, at which time neither solar nor wind are abundantly available. The end result is significantly more power than society typically needs for a few hours per day and not nearly enough when demand spikes."
Renewable's Inefficiencies: Hydro
Hydropower is a similarly clean and renewable energy source. The good part about hydropower is — it doesn't share the same duck curve problem that solar and wind struggle with. Think about a waterfall in the most remote part of Africa. It runs continuously, providing constant energy. No problem with the demand curve. So why not use more hydropower?
The primary problem with hydropower is transmission. Many sources of abundant, clean, renewable hydropower are simply not close enough to human settlement to be utilized as energy. Electric power transmission can only span about 500 miles. If we go back to our remote waterfall in Africa, there might not be human settlement for hundreds or even thousands of miles. In this situation, harnessing hydropower into electricity is rarely economical, if possible at all.
Bitcoin Incentivizes Renewable Energy Use
Many within the Bitcoin community argue that Bitcoin's energy mix is relatively green. If we use the below data to compare Bitcoin's energy mix to that of the broader U.S. electrical grid, that puts us at nearly twice as much renewable energy consumption for Bitcoin.
We could point to the data above when skeptics attack Bitcoin's energy use. The argument I prefer to lean on though is what Bitcoin will enable in the future. Since Bitcoin mines are interruptible, highly energy-dense, and very mobile, Bitcoin will encourage more and more uses of renewable energy. Over time, the percentage of the global electrical grid coming from renewables such as wind, solar, and hydro will grow exponentially as Bitcoin mining becomes more prevalent. Mines can be set up alongside each of these renewable energy production facilities and address their inefficiencies.
Solar and wind facilities can monetize their wasted energy by 'turning on' Bitcoin mines when demand for their energy is low, but energy output is high — seamlessly switching back when supply and demand more closely align. Hydropower can be harnessed to mine Bitcoin that will be sold back to subsidize the electrical grid during peak consumption hours. This would decrease our reliance on coal and natural gas to generate electricity to power our lives. Hydro-Bitcoin mines might even incentivize the building out of human settlement in more remote areas of the world. Human settlement closer to hydropower would result in a much cleaner use of energy and a decreased carbon footprint.
“Historically, our challenge with energy has been to move the power to the people; Bitcoin will allow us to move the people to the power." — Ross Stevens
How is Bitcoin Reducing our Carbon Footprint Today
Aside from the renewable energy examples discussed above, Bitcoin mining has other ways of helping the environment.
One of my favorite examples is by capturing methane flares in oil fields. Oil fields produce a large sum of the world’s energy and throw off methane gas which is highly environmentally damaging. This quote from a Galaxy Digital research report sums it up perfectly:
“Companies like Great American Mining, Upstream Data, and Crusoe Energy Systems are building infrastructure to capture this methane at the wellhead and use the otherwise-wasted gas to mine bitcoin. This means that oil producers can ensure a 24x reduction in emissions compared to venting that methane into the atmosphere."
This situation is a win-win-win:
Oil producers get to reduce downtime as they need to halt production when surpassing a certain threshold of methane flaring
Bitcoin miners can harvest that excess energy and mine Bitcoin with it
The environment in this situation is the biggest winner, with 24x reductions in methane emissions going into the atmosphere
So why do politicians and journalists avoid such references when talking about Bitcoin? Environmentalists everywhere should be pro-Bitcoin, not the other way around.
Bitcoin vs. Banks, Gold, and Google
Even if we set aside the information above about Bitcoin utilizing wasted energy and incentivizing renewable energy, what are good points of comparison for Bitcoin’s energy use? Simply tossing a really high aggregate energy consumption number out there without context is sensationalism. Analysis without a point of comparison is not sound analysis.
Many contend that Bitcoin primarily competes with two industries: the legacy banking system and gold. Bitcoin’s efficient use of energy aside, how does Bitcoin’s overall energy use fair next to that of the banking system? And what about gold? Referencing the same Galaxy Digital research report from earlier, the Bitcoin network uses less than half of the energy used by the banking system. This stat holds true for gold as well. Another statistic that is a good point of comparison can be found in the tweet above from Bitcoin Magazine comparing Bitcoin’s carbon emissions to a few different industries2.
We've talked a lot about Bitcoin's environmental efficiency, but what about economic efficiency? Does investment in Bitcoin's energy use result in a greater return on the other end? The answer is yes. See the above analysis from Michael Saylor, Founder and CEO of business intelligence company, MicroStrategy. Per this analysis, about $4B worth of energy is spent on an $800B asset3. That's 20x Google's return and nearly 65x JP Morgan's return. So we just checked another box. Bitcoin is certainly economically efficient.
Sound Money and Energy Use — My Take
The last point I want to make is this: a monetary network should inherently be linked to energy use. Money is our highest form of energy output. Money is what allows us to transact one consumable good for another. Money allows for capital investment in the future. Money is a reflection of our time exerted in hopes of living a good life, and the most energy-dense societies are the ones that live the highest quality of life.
Sound money will make the world a better place. If money is a reward received for investing our time, unsound money — money which can easily be manipulated — can be seen as a tool to steal our time from us. Bitcoin is sound money. Government-controlled currencies are not.
The poorest people from the poorest countries are all too familiar with the impact of the continual debasement of government-mandated currencies. The cautionary tale of the Venezuelan Bolivar is just one recent example of how hyperinflation can destroy the economic fabric of an entire country. Throughout history, examples of currency collapses are not nearly as infrequent as you might think.
Bitcoin offers sound money — via a decentralized monetary network — to billions of people without access to a stable currency. It can free people from corrupt governments and protect the purchasing power of hard-working men and women who have become accustomed to having their economic freedom stolen from them. Let me circle back to a question posed earlier. How much energy should Bitcoin use? It should use a lot.
Many of the world’s problems today — in one way or another — stem from unsound money. Governments all around the globe implement irresponsible monetary policy aimed at short-term gains and political aspirations, sacrificing long-term stability and the well-being of their citizens. Market manipulators put into place policies that keep the holders of assets (the rich) rich and the holders of only fiat currencies (the poor) poor. A ledger that is transparent and immutable, as well as decentralized and secure, from which our money stems might just be the single greatest use of energy in human history.
"Put a price on economic stability and the economic freedom a stable monetary system provides; that is the true justification for the amount of energy bitcoin should and will consume." — Parker Lewis
And that wraps up the discussion around Bitcoin's energy use. Thanks so much for tuning in.
As you can see, there's a lot of data out there that suggests Bitcoin is far more environmentally friendly than most realize — and Bitcoin's incentive structure should lead mining toward low-cost, clean energy sources at a greater rate in the future. We've only scratched the surface of this topic. In a future newsletter, I'll discuss the idea of using nuclear and geothermal energy to mine Bitcoin. For now, if you want to learn more, see the below great pieces of content that have helped me along the way.
3 Things to Read:
Harvard Business Review: How Much Energy Does Bitcoin Actually Consume by Nic Carter
Unchained Capital: Bitcoin Does Not Waste Energy by Parker Lewis
Bitcoin Magazine: Square Makes the Case for Clean Energy Bitcoin by Peter Chawaga
3 Things to Listen to:
Bitcoin Macro Strategy with Michael Saylor and Ross Stevens (Energy discussion around 25:30-32:00)
What Bitcoin Did Podcast: ESG, Tesla and Energy FUD with Lyn Alden
The Investor's Podcast: Bitcoin Mining and Energy with Marty Bent and Harry Sudock
Next week, I'll tackle the misconception that Bitcoin is used primarily for illicit activity and speak to the ridiculous notion that it has no intrinsic value. The statement “Bitcoin is used primarily for illicit activity” is categorically false and the idea that Bitcoin brings no value to the world is largely spun up by financially privileged elites from the wealthiest countries. My newsletter about El Salvador adopting Bitcoin as legal tender provides just a few examples of the benefits Bitcoin can bring to those who need it most.
Remember to subscribe if you don't want to miss out on next week's topic. You can check out the Why We Bitcoin archive for previous posts and follow me on Twitter for more takes on all things Bitcoin.
As this writing (late June 2021), that number has dipped a bit due to hash rate going offline in China due to their recent ban on Bitcoin mining; this topic will be subject to a future newsletter
As of this writing (late June 2021), Bitcoin’s market cap is closer to $650B. Still, the reference holds up. Even with a $150B decrease in returns, Bitcoin is far more economically efficient than each comparison made in this paragraph.