Looking behind the headlines of its hunger for power
Bitcoin continues to reach new highs in its valuation having recently exceeded $50,000. New reasons emerge daily, each pushing its price up. In recent weeks these have included:
- Mastercard announcing it will be putting in place infrastructure to facilitate cryptocurrency payments across its network;
- BNY Mellon, America’s oldest bank announcing that it will hold, transfer, and issue cryptocurrencies on behalf of its asset-management clients;
- Deutsche Bank and Morgan Stanley announcing plans to actively enter the cryptocurrency space.
It’s becoming more mainstream and less a preserve of internet renegades.
The most significant of all these moves in terms of the impact on the price of Bitcoin has undoubtedly been Tesla investing $1.5 Billion of corporate treasury in Bitcoin, and announcing plans to accept payments in BTC from their customers in the near future.
The widespread corporate embracing of Bitcoin is a really positive sign for those (like me) who are enthusiastic about it and who have invested in it.
What the Tesla investment does bring to the fore is a potential conflict around the cryptocurrency’s environmental credentials.
How do we reconcile that Tesla, whose mission is “to accelerate the world’s transition to sustainable energy” has chosen to invest a significant amount of its corporate treasury in Bitcoin, which the BBC recently claimed ‘uses more energy than Argentina’?
As you might expect, it’s not a simple debate to unravel.
The ‘Bitcoin is killing the environment’ FUD
There’s an expression in Bitcoin circles — a FUD.
It stands for Fear, Uncertainty and Doubt — the emotions commonly expressed in response to one of the many perceived downsides of Bitcoin, by those who don’t believe in it or understand it. I’ve tried to empathise with those affected by FUD, by objectively exploring their concerns rather than overruling or overpowering them with arguments or reasoning.
When you look online you'll find various estimates of the power usage of Bitcoin and the decentralised network infrastructure that is responsible for mining it, storing it and facilitating its exchange. Depending on which source you believe, Bitcoin uses:
- The same energy as Switzerland or Argentina (according to the BBC) or
- 1% of the world’s energy (The US Senate Committee on Energy and Natural Resources)
An alternate perspective was offered in this 2019 tweet:
No matter what comparative measure we consider accurate, there’s little doubt it's energy-intensive.
Is that energy use worthwhile or legitimate?
The fundamental question to answer is whether or not the energy usage is legitimate given the benefit that Bitcoin offers? Can it be justified? Is it worthwhile when offset against the side effects of such usage?
The answer will vary from person to person. It comes down to whether you believe the ends justify the means.
Energy is used the world over for various purposes — some that seem necessary and universally beneficial and others entirely wasteful, frivolous or nefarious. It's impossible to debate each of these in strict isolation as very few systems exist like that.
Consider the manufacturing industry in China that provides the vast array of products and components that feed our appetite for cheap technology and fast-fashion.
We can debate morally whether these products are of genuine worth and value to humanity. We can consider the environmental impacts of their manufacture and distribution around the globe, and their disposal when cheap and disposable products are discarded. Each side of the discussion is valid and relevant.
Things become even more complex when you consider the potential side-effects of closing down such manufacturing operations.
- What might the societal impacts be from such closures?
- Could the employees of those factories find new work or would they be consigned to poverty?
- What about the suppliers of their raw materials and their employees?
- And the logistics firms downstream from them?
It becomes almost impossible to debate their energy worthiness, no matter how trivial the products are that they produce.
The debate becomes even more morally and emotionally charged when we consider the manufacture of weapons, cigarettes, alcohol, chemicals and so-on. The debate over worthiness of energy consumed merely scratches the surface alongside other considerations.
How do you judge what's worthy of the energy and what isn't?
When it comes to Bitcoin things are made easier for those who are critical or skeptical of it. Bitcoin is self-identified as decentralised and fundamentally stand-alone. The network is ostensibly Bitcoin — the two are synonymous. The network comprises the entire ‘supply chain’ from Bitcoin mining to the end-users. This makes it easier to conceptually ringfence the network and to then determine its energy usage.
I don’t have definitive answers, but how each person feels will determine their perspective.
How bad is it, really?
The question of severity needs to be contextualised. If we consider Bitcoin as a potential future replacement (or at least, competitor) to a payment processor like Visa then it’s possible to make a relative comparison of its energy usage. Statista.com estimates the average energy consumption per transaction for Bitcoin to be 720kWh compared to 149kWh for 100,000 Visa transactions.
I originally thought that the apples-for-apples comparison between Bitcoin and Visa would consider the power usage of the network and processing power associated with each. This might encompass data centres (for Visa) or the Bitcoin Mining rigs and the network nodes for Bitcoin (or an estimation of these). As Nic Carter points out in this definitive piece published recently by Coindesk, such a comparison would be like comparing apples with koalas.
Carter points out that the two networks are fundamentally different in nature. As he puts it:
“Bitcoin is a complete, self-contained monetary settlement system; Visa transactions are non-final credit transactions that rely on external underlying settlement rails. Visa relies on ACH, Fedwire, SWIFT, the global correspondent banking system, the Federal Reserve and, of course, the military and diplomatic strength of the U.S. government to ensure all of the above are working smoothly.”
As with the earlier example of the manufacture and global distribution of cheap electrical components, the question over relative energy usage demands a common agreement about where we draw the line.
The cost of a single Visa transaction may be infinitesimally smaller than that of a Bitcoin transaction if you look only at the Visa network itself. But what if, as Carter proposes we include the energy usage of everything else that’s needed to make Visa work, such as the might of the US military also relise upon the “11 aircraft carriers patrolling the world’s oceans and enforcing dollar hegemony”? The energy used by these alone must also be significant?
The comparison starts to seem less black and white when such factors are included in the debate. It doesn’t change whether or not Bitcoin consumes a great deal of energy but does it raise a question-mark over whether the true energy cost of conventional financial systems is inconsequential either?
How can the situation be improved?
Those who are skeptical of Bitcoin are unlikely to believe its energy usage is valid. Debates over its energy consumption relative to other elements of the conventional financial infrastructure are also likely to fall on deaf ears.
Taken those assumptions into consideration, a more helpful and persuasive response to concerns over Bitcoin’s energy usage may be to address how its energy needs can be fulfilled in environmentally friendly ways. This is where a genuine opportunity exists.
In the Stone Ridge Investments’ 2020 shareholder letter, CEO Ross Stevens tackled the issue of Bitcoin and it’s potential environmental impact. It was the first time I’d considered that Bitcoin has an opportunity to exploit green technology and renewable sources of energy to power the network. This isn’t solely an opportunity for the future either — a 2020 study by the University of Cambridge highlighted that around 39% of energy used in Bitcoin mining already comes from renewable sources.
Thanks to Bitcoin as an entity being entirely decentralised and without a need for its infrastructure to be geographically located near population centres, nodes and mining operations can easily be sited near to sources of green energy such as waterfalls, or in areas where wind or solar energy can be readily and cheaply harvested.
The energy doesn’t need to be transferred from where it’s generated to where it’s consumed either, since infrastructure can be added remotely to the Bitcoin network via high-speed internet connections or satellite links. This too makes it viable for renewable sources of energy to be utilised more easily to run the infrastructure.
The potentially lower cost of generating energy may also make mining and network operations cheaper for those funding these. Such savings could ultimately contribute to the lowered transaction costs that are already significant to Bitcoin’s appeal for rapidly transmitting currency across the globe.
Such measures don’t reduce the energy usage (in the short term at least) but it illustrates that there are clear opportunities to make this usage less impactful from an environmental perspective. Once again drawing the comparison with the conventional world of finance and its multiple touch-points and components — to adress energy usage in the complicated network of institutions and technology of the financial establishment starts to seem less straightforward a problem to address holistically than it is with the Bitcoin network.
We cannot afford to be complacent about any environmental issues. It’s easy to see why the environmental FUD around Bitcoin captures attention. The energy usage of Bitcoin is undoubtedly significant, whichever measure we choose to believe is accurate.
Like all such considerations the value and merit of this needs to be traded off against its potential benefit and utility. The opportunities for Bitcoin’s adoption in replacement of significant parts of the financial establishment are significant, as is the opportunity to reduce its energy usage over time, and to obtain more energy from environmentally-friendly sources.
Having such significant interest and involvement from Elon Musk and Tesla may also offer opportunities for cross pollination of ideas and innovation in terms of powering the network in the longer term.
It will be interesting to see how this side of Bitcoin unfolds.
Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.