A lot of debate has been brewing around Bitcoin recently, with most of it centered around the cryptocurrency’s environmental impact and energy consumption. While always on the higher side, Bitcoin’s energy consumption was brought under increased scrutiny when Elon Musk tweeted that Tesla would not be accepting Bitcoin as payment, thanks to increasing climate concerns.
Musk went on to say that Tesla was concerned about the rapid increase in the use of fossil fuels like coal for bitcoin mining and transactions, with Bitcoin being described as an energy-intensive and energy inefficient cryptocurrency.
Why Does Bitcoin Require So Much Energy?
It’s no secret that Bitcoin is an energy-intensive cryptocurrency as its proof-of-work consensus mechanism requires a considerable amount of energy. Bitcoin mining, the process through which transactions are verified and added to the blockchain and new Bitcoins are created, requires miners and their machines to compete with each other to solve complex mathematical problems rapidly. The first miner to successfully solve the puzzle validates the transaction and is rewarded in Bitcoin.
Since miners are competing with each other, they have to solve the problem before others. This is the reason why mining pools, which are warehouses filled with powerful computers, are springing up all over the world. Why do miners need such massive resources? So that they can scale up their hashrate or the number of hashes per second. Higher hashrates need significant amounts of power, and in some cases, are known to overwhelm the infrastructure.
The majority of Bitcoin’s energy consumption happens during the mining process. When prices rise, so does energy consumption, with the rising prices giving the incentive to even more miners to join the mining process. According to Michel Rauchs, a researcher at the Cambridge Centre for Alternative Finance, Bitcoin consumes a high amount of electricity by design. He does not see that changing unless the price of the cryptocurrency goes down significantly.
Putting Some Perspective On Bitcoin’s Power Consumption
The University of Cambridge Bitcoin Electricity Consumption Index, an online tool to track power consumption by Bitcoin, has stated that Bitcoin uses an estimated 129 terawatt-hours (TWh). To put this consumption into perspective, Bitcoin consumes more electricity than Argentina (121 TWh), Netherlands (108.8 TWh), and the UAE (113 TWh).
Tech behemoths like Facebook (5 TWh) and Google (12 TWh) consume less electricity than Bitcoin. If we combine the power consumption of all the world data centers, it would stand at 205 TWh. That’s not too far ahead of Bitcoin.
The Other Side Of The Argument
It is clear that energy consumption has become a pressing issue for Bitcoin and other cryptocurrencies. Critics have been lambasting Bitcoin for being an energy hog. In fact, Alex De Vries, founder of Digiconomist, believes that he has “never seen anything that is as inefficient as bitcoin.”
However, does crypto mining deserve this criticism? There is another side to the argument, as research by Ark Investment has shown that Bitcoin actually consumes less than 10% of the energy that powers the current banking system. Furthermore, dig a little deeper and you will see that Bitcoin is not all coal and fossil fuels. In fact, Bitcoin could lead the push to switch to clean and renewable energy.
The Crypto Climate Accord
The Crypto Climate Accord is an agreement that is similar to the Paris Agreement. The agreement promotes industry wide decarbonization in the crypto space. The accord has two main objectives that it outlines,
- Net-zero emissions from the consumption of electricity by 2030.
- Net-zero greenhouse gas emissions by 2040.
So far, the accord has collected over 40 signatories, including some very prominent cryptocurrency companies.
Where Does Bitcoin’s Energy Come From?
A 2020 report by the University of Cambridge pointed out that 76% of miners rely on some form of renewable energy for their operations. Although there is room for significant improvement, this is a very promising development.
While coal energy is significant in the Asia-Pacific region, thanks to China being the largest consumer of coal globally, it is hydroelectric power that is the most common source of Bitcoin’s energy, with other clean energy sources like wind energy and solar power also gaining popularity. China is also encouraging miners to move to cleaner energy and take advantage of its excess hydroelectric power.
China’s Crackdown on Thermal Energy
The Inner Mongolia region and Xinjiang province of China have vast coal resources, providing cheap electricity for Bitcoin mining. As a result, mining activity in Xinjiang accounted for 36% of the country’s computational power. However, while these regions are very appealing to miners and mining pools, China’s commitment to the carbon emission target set by the UN General Assembly means that Thermal energy will be phased out. This also means mining operations will have to find alternatives.
Sichuan, The New Hub For Mining Operations In China
Earlier we mentioned that Hydroelectric power was the most common source of Bitcoin’s energy. One province has an abundance of hydroelectricity, and that is Sichuan. With the push for clean and renewable energy, Sichuan is the perfect destination for mining operations.
Sichuan receives abundant rainfall, has many rivers, and an abundance of hydroelectric projects, giving the region an excess of power generated by hydroelectricity, making it an enticing option for the mining industry. In addition, Sichuan’s local administration is also taking steps to ensure that it becomes the next mining hub in China. They are doing so by reactivating abandoned hydroelectric projects for mining operations.
Bitcoin Mining Could Accelerate Global Renewable Energy Adoption
Despite all the brickbats, Bitcoin mining could end up quickening the push towards renewable energy. Why? Because you can mine bitcoin from pretty much any corner of the world. It is this property of Bitcoin mining that addresses a problem faced by renewable energy producers.
Because Bitcoin mining is not constrained by location, miners can better utilize renewable power sources. For example, crypto mining operations could be set up near wind and solar energy sites, ensuring clean energy for all mining operations.
Bitcoin Energy Consumption: Final Thoughts
Mining operations go hand-in-hand with low electricity costs. As a result, mining operations have plenty of incentive to transition to clean energy. Mining operations can also open a new avenue of demand for clean energy, allowing companies to expand production capacity.
With the rise of cryptocurrencies, it is no surprise that everyone is keeping an eagle eye on the carbon footprint of the industry. However, Bitcoin mining can actually help the world transition into renewable energy and address the problem of overabundance of electricity.
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