How Bitcoin’s vast energy use could burst its bubble in 2021
We have all heard the stories of Bitcoin millionaires.
Elon Musk is the last.
His electric car company Tesla made a paper profit of more than $ 900 million (£ 646 million) after buying $ 1.5 billion (£ 1 billion) of the cryptocurrency in early February.
High-profile support from him helped drive the price of a single Bitcoin to over $ 58,000.
But it’s not just the price of the digital asset that has hit an all-time high. So has his energy footprint.
And that caused a setback for Musk, as the scale of the coin’s environmental impact becomes clearer.
He also helped spur a number of high-profile critics to include digital currency this week, including US Secretary of the Treasury Janet Yellen.
President Biden’s chief economic adviser described Bitcoin as an extremely inefficient way to transact and said, the amount of energy consumed in processing those transactions is staggering.
- From buying a Bentley to losing it all
- Bitcoin continues to hit new highs after Tesla endorsement
- Bitcoin hits a new high of $ 50,000
It is unclear exactly how much energy Bitcoin uses. Cryptocurrencies are, by design, difficult to track. But the consensus is that Bitcoin mining is an energy-intensive business.
The Center for Alternative Finance at the University of Cambridge (CCAF) studies the burgeoning business of cryptocurrencies.
He estimates that Bitcoin’s total energy consumption is between 40 and 445 annualized terawatt-hours (TWh), with a central estimate of around 130 terawatt-hours.
The UK’s electricity consumption is just over 300 TWh per year, while Argentina uses roughly the same amount of power as the CCAF’s best estimate for Bitcoin.
And the electricity used by Bitcoin miners comes largely from polluting sources.
The CCAF team surveyed the people who run the Bitcoin network around the world about their energy use and found that around two-thirds come from fossil fuels.
The enormous computing power and therefore energy use is built into the way the blockchain technology that underpins the cryptocurrency was designed.
It is based on a vast decentralized network of computers.
These are the so-called Bitcoin miners that allow the creation of new Bitcoins, but also independently verify and record each transaction made in the currency.
In fact, bitcoins are the reward miners get for keeping this record accurately.
It works like a lottery that runs every 10 minutes, explains Gina Pieters, an economics professor at the University of Chicago and a researcher on the CCAF team.
Data centers around the world are racing to compile and submit this transaction log in a way that is acceptable to the system.
They also have to guess a random number.
The first to submit the registration and the correct number wins the prize; this becomes the next block in the blockchain.
At the moment, they are rewarded with six and a quarter Bitcoins, valued at about $ 50,000 each.
As soon as a lottery ends, a new number is generated and the whole process starts over.
The higher the price, says Professor Pieters, the more miners will want to get into the game.
They want to get that income, he tells me, and that is what is going to encourage them to introduce increasingly powerful machines to guess this random number and therefore you will see an increase in energy consumption, he comments. he.
And there is another factor driving the increasing energy consumption of Bitcoin.
The software ensures that it always takes 10 minutes to solve the puzzle, so if the number of miners increases, the puzzle becomes more difficult, and more computing power is needed.
Therefore, Bitcoin is designed to encourage greater computing effort.
The idea is that the more computers compete to maintain the blockchain, the more secure it becomes because anyone who wants to try to undermine the coin must control and operate at least as much computing power as the rest of the miners put together.
What this means is that, as Bitcoin becomes more valuable, the computing effort invested in creating and maintaining it, and therefore the energy consumed, inevitably increases.
We can track how much effort the miners are making to create the coin.
Currently, it is estimated that they are doing 160 quintillion calculations per second, that is, 160,000,000,000,000,000,000, in case you were wondering.
And this vast computational endeavor is the Achilles heel of cryptocurrency, says Alex de Vries, founder of the Digiconomist website and a Bitcoin expert.
All the trillions of trillions of calculations that are needed to keep the system running are not really doing any useful work.
They are calculations that serve no other purpose, says De Vries, “they are thrown away again immediately. Right now we are using a lot of energy to produce those calculations, but most of it is also coming from fossil energy.
The sheer effort it takes also makes Bitcoin inherently difficult to scale, he argues.
If Bitcoin were to be adopted as a global reserve currency, he speculates, the price of Bitcoin will probably be in the millions, and those miners will have more money than the entire [US] federal budget to spend on electricity.
We would have to double our global energy production, he laughs. For Bitcoin.
He says it also limits the number of transactions the system can process to about five per second.
This does not make it a useful currency, he argues.
And that opinion is shared by many eminent figures in finance and economics.
The two essential characteristics of a successful currency are that it is an effective form of exchange and a stable store of value, says Ken Rogoff, a professor of economics at Harvard University in Cambridge, Massachusetts, and a former chief economist at the International Monetary Fund. . . (IMF).
He says that Bitcoin is neither.
The fact is, it’s not used much in legal economics right now. Yes, a rich person sells it to someone else, but that is not end-use. And without that, you really don’t have a long-term future.
What he is saying is that Bitcoin exists almost exclusively as a vehicle for speculation.
So I want to know: is the bubble about to burst?
That’s my guess, says Professor Rogoff, and pauses.
But I really couldn’t tell you when.