Bitcoin's energy problem

Is Bitcoin’s energy intensive design an Achilles heel for cryptocurrency and other promising blockchain applications?

You cannot touch a Bitcoin. There is no asset underlying the cryptocurrency. It exists only in the virtual world – yet its impact on the real one is under growing scrutiny.

Critics have complained for years that Bitcoin guzzles too much power, producing climate-warming carbon dioxide in the process. As Bitcoin prices rise – they more than doubled this year, before a recent slide – so do its energy demands. Electricity use linked to Bitcoin (primarily related to “mining” for the cryptocurrency – an intensive computing process) is currently about 106 TWh annually. That's almost as much as than the Netherlands, according to the Cambridge Bitcoin Electricity Consumption Index, which keeps a running estimate.1

The problem is not only how much power Bitcoin uses, but where that energy comes from. With China having banned mining, United States, Russia and Kazakhstan now account for around two-thirds of all activity, and all three countries rely heavily on fossil fuels – such as coal and natural gas – for their energy needs. Renewable sources account for just 20 per cent of electricity production in the US, 21 per cent in Russia and 11 per cent in Kazakhstan.2

The problem has become financially material for holders of the currency. Bitcoin’s price plunged when carmaker Tesla announced it would stop accepting payments, owing to its energy use (it later stabilised when Tesla’s founder, Elon Musk, said that he was consulting with miners about improving Bitcoin’s sustainability). This comes on top of potential regulatory clampdowns that also send the price yo-yoing, most significantly when China declared all cryptocurrency transactions illegal. The US Treasury is also tightening its rules on tax and compliance.

Why bitcoin uses so much power?

The reason for Bitcoin’s immense energy usage is baked into the way that new coins are minted, through a system known as “proof of work”. To track every transaction securely, Bitcoin relies on an immutable ledger, called the blockchain, which is supported by massive networks of computers. Every time a coin is exchanged, miners validate the process by racing to solve an algorithmic puzzle. New Bitcoins are awarded to the winner. 

Rising prices encourage them to throw more firepower at those puzzles. “The higher the price, the more incentive miners have to join this network, and compete with each other,” explains Anton Dek, crypto asset and blockchain lead at the Cambridge Centre for Alternative Finance.

And Bitcoin’s energy consumption is destined to increase because, as with the old kind of mining, it gets harder to dig up new resources over time. To limit supply, its creators capped the number of “coins” at 21 million. Most are already in circulation. To produce the rest, the mathematical puzzles that miners must solve are getting harder. This demands more processing power – and more electricity.

“The beauty of Bitcoin is that you have this scarcity ... But that is also what makes it so energy intensive,” explains Peter Wall, CEO of Argo Blockchain, a London-listed Bitcoin miner that first set up mining facilities in Quebec, Canada, powered by cheap hydroelectricity generation.

A price worth paying?

These enormous energy demands do have one benefit – they make it almost impossible to steal Bitcoin, which is intentional. “It looks like a complete waste of resources,” Dek explains, “but it is designed to be inefficient, because [then] it is really hard to take over the network. To some degree, that’s the price we pay to secure transactions.”

To some of Bitcoin’s supporters, the environmental impact is simply the cost of progress – and a price worth paying. “Computers and smartphones have much larger carbon footprints than typewriters and telegraphs. Sometimes a technology is so revolutionary … that society accepts the tradeoffs,” tweeted Tyler Winklevoss, an American investor.3

Others go further. Research from ARK Invest, a fund manager, and Square, the payment processing firm led by Twitter CEO Jack Dorsey, claims that Bitcoin could help to fight climate change by driving more investment in renewable energy.4  

Bitcoin’s environmental footprint is much larger than other cryptocurrencies, partly because it is the biggest. But there are cleaner cryptocurrency protocols. Ethereum, the world’s second largest cryptocurrency, says that it is months away from reducing its energy consumption by a thousandfold. It will do this by shifting from a “proof of work” system to a more energy-efficient approach, “proof of stake” (PoS).

Unlike “proof of work”, PoS does not need ever-more power to ensure security. Instead, it limits participants to mining a percentage of transactions that is proportional to how much of the currency they already hold, rather than guzzling power to answer mathematical puzzles. Such an approach has a low computational complexity and is not impacted by the size of the network. This means that it can be run off a simple laptop, instead of requiring specialised computing gear.

“The proof of stake altcoins don’t use a significant amount of energy,” says Wall. “They're basically running off a computer node, and it's like any other kind of computer – they don’t need a huge amount of power.” 

Ethereum has been promising to make this transfer for years but has been blighted by technical difficulties. It says that when it finally takes the leap in the coming months, its energy needs will fall from about 5.13GW – roughly what Peru consumes – to 2.62MW, which would power only a small town. The PoS system is already working for other cryptocurrencies, like Cardano. 

Bitcoin’s energy problems do not apply to blockchains as a whole. Enterprise applications are known as “permissioned” blockchains, meaning that they involve a consortium of trusted participants, like entities in a supply chain, which does away with the need for such complex validation to ensure consensus over transactions. Blockchains may still require more energy to run than conventional IT architectures, but at nowhere near the same scale.

Moreover, plenty of blockchain initiatives are beneficial for the environment. In supply chains, for instance, blockchains can allow more targeted product recalls, cutting paperwork and reducing the weight of air cargo. They can also facilitate more transparent and secure data flows, contracts, trading and pricing, to enable smart grids and decentralised power generation.

Can bitcoin go green?

Unlike Ethereum, Bitcoin has no advanced plan to change its system. Yet not all of its mining relies on coal. Research from Cambridge University, published in 2020, estimates that almost 40 per cent of Bitcoin’s energy consumption comes from renewable sources.Reports suggest that share has risen since China banned mining.

Some miners power their computers with natural gas (a somewhat cleaner fossil fuel) that would otherwise be “flared”, or burnt off.6 Others, like Wall, are building new crypto mining facilities in places such as Texas, where wind power is abundant and cheap. In March, he signed a deal to launch the world’s first Bitcoin mining pool powered exclusively by green energy. “Bitcoin is a new technology, and it should be mined with new technology,” says Wall. “I think it is starting to move towards renewable energy because we don’t want emissions going up. It’s both a business risk, and a problem for the planet.”

A growing number of companies and mainstream investors own or facilitate the purchase of Bitcoin – the list includes BlackRock, Tesla, Square and Revolut, as well as MicroStrategy, an analytics company whose shareholders include the Norwegian Government Pension Fund and Vanguard, a UK-based asset-management firm. All of these entities are under pressure to report on their indirect emissions and may, in time, have to foot the bill if carbon pricing adjustments arrive. They may either turn away from Bitcoin or develop partnerships with green miners. 

For avowed optimists, Bitcoin mining could incentivise more investment in renewable infrastructure development. Square has argued that bitcoin miners could solve the “intermittency” problem of renewables. In essence, sunshine and wind are unpredictable and do not coincide with the geographical location, or time of day, that end users need power. This constant mismatch between supply and demand leads to under-investment by developers who want to avoid oversupply, which dilutes economic returns. Miners could be a flexible “buyer of last resort”, spurring more investment in renewable power assets. Not everyone is convinced by the argument – but it proves that the currencies’ cheerleaders want to ensure that this newfangled innovation does not get stuck in the coal-fired energy system of the past.

[1] CBECI, data as at 20.10.2021
[
2] Our World In Data, BP Statistical Review of World Energy & Ember 2020
[[3] https://twitter.com/tyler/status/1359576741686124544
[4] Bitcoin Clean Energy Efficiency Memorandum
[5] https://www.jbs.cam.ac.uk/wp-content/uploads/2021/01/2021-ccaf-3rd-global-cryptoasset-benchmarking-study.pdf
[6] https://www.bloomberg.com/news/articles/2021-02-10/bitcoin-is-red-hot-can-it-ever-be-green-quicktake