Cryptocurrency and Energy Consumption: A Deep Dive

The Energy Debate Surrounding Cryptocurrency

Energy consumption has recently become a central point of contention within the cryptocurrency sphere. While some critics denounce it as excessively energy-intensive, proponents argue that its demands are less substantial than those of the existing global economy.

Criticism and Counterarguments

Alex de Vries, founder of DigiEconomist, has expressed strong concerns, stating he has “never seen anything that is as inefficient as bitcoin.”

However, research conducted by ARK Investment Management suggests the Bitcoin ecosystem utilizes less than 10% of the energy needed to operate the traditional banking system. Although the banking system serves a significantly larger population, cryptocurrency is still in a developmental phase, and initial infrastructure often requires considerable energy input.

Environmental Impact Assessment

The cryptocurrency mining industry, which generated nearly $1.4 billion in February 2021, isn't necessarily more detrimental to the environment than other facets of modern, industrialized life. Even de Vries acknowledged to TechCrunch that comprehensive regulatory action against Bitcoin would likely face resistance from numerous governments.

“Ideally, change originates from within,” de Vries stated, expressing hope that Bitcoin Core developers will modify the software to reduce its computational energy requirements. He estimates that Bitcoin currently consumes approximately half as much energy as all of the world’s data centers.

Global Energy Consumption Figures

The University of Cambridge’s bitcoin electricity consumption index projects that bitcoin miners will consume roughly 130 Terawatt-hours (TWh) of energy, representing around 0.6% of global electricity consumption. This places the bitcoin economy on par with the carbon dioxide emissions of a smaller developing nation, such as Sri Lanka or Jordan.

Jordan, with a population of 10 million, provides a point of comparison. Determining the exact number of monthly bitcoin users is challenging, and their usage frequency is likely lower than that of Jordanian dinar usage among Amman residents. Nevertheless, CoinMetrics data indicates over 1 million bitcoin addresses are active daily, out of a total of up to 106 million accounts active over the past decade, as recorded by Crypto.com.

User Base and Mining Practices

According to a Crypto.com spokesperson, the total number of unique bitcoin (BTC) and ether (ETH) users is calculated by counting addresses from listed exchanges, subtracting those owned by the same users across multiple exchanges, and accounting for users holding both ETH and BTC.

A substantial number of individuals are utilizing these financial networks. Furthermore, many bitcoin mining operations are increasingly reliant on environmentally friendly energy sources, including hydropower and the capture of natural gas leaks from oil fields.

Renewable Energy Sources in Mining

Thomas Heller, COO of Compass Mining, a veteran in the mining industry, noted that Chinese hydropower mines in Sichuan and Yunnan benefit from cheaper electricity during the wet season. They continue to utilize hydropower throughout the year, although profitability decreases during the dry season.

“The electricity price outside of May to October [wet season] is considerably more expensive,” Heller explained. “However, some farms maintain water supplies for use during other times of the year.”

Cryptocurrency mining doesn’t inherently increase carbon emissions, as computers can utilize power from any source. A 2019 study by CoinShares estimated that up to 73% of bitcoin miners incorporate at least some renewable energy into their power supply, including hydropower from China’s extensive dams.

Geographic Distribution of Mining

All of the top five bitcoin mining pools, collaborative groups of miners seeking improved profit margins, heavily depend on hydropower. However, this statistic doesn’t resonate with de Vries, who pointed out that Cambridge researchers found renewable energy accounts for only 39% of miners’ total energy consumption.

“I could install one solar panel on my power plant and claim a mixture of renewable energy,” de Vries remarked.

Cambridge data reveals that Chinese bitcoin mining operations account for approximately 65% of the network’s hashrate, or processing power. In certain regions, like Xinjiang province in China, bitcoin miners also utilize coal-fired power. This province is also associated with human rights concerns regarding the Uighur population, who are facing suppression as part of China’s efforts to exploit the region’s natural resources.

Regional Mining Trends

Critics often express concern about this dynamic when raising alarms about cryptocurrency mining and energy consumption.

North American miners contribute roughly 8% of the global hashrate, followed by miners in Russia, Kazakhstan, Malaysia, and Iran. In 2020, Iranian President Hassan Rouhani advocated for a national bitcoin mining strategy to enhance the Islamic nation’s influence over this financial system, despite banking sanctions imposed by the United States.

Bitcoin mining will flourish in locations offering the most profitable mining regulations. China and Norway, for example, provide subsidies that incentivize miners to utilize local hydropower sources.

Economic Incentives and Energy Usage

As highlighted in a research report by Aker ASA, a $6 billion public company based in Norway, “The financiers of mining operations will insist on using the cheapest energy and so by definition it will be electricity that has no better economic use.”

Supporting lawmakers who promote mining in regions with underutilized energy sources is the most effective way to make cryptocurrency mining more environmentally sustainable.

Innovative Approaches to Sustainability

Adam Back, CEO of Blockstream, stated that his company’s mining facilities, with 300 megawatts of mining capacity, rely on a combination of industrial power sources, including hydropower. Blockstream is also exploring solar-powered bitcoin mining options as a potential “retirement home” for older machines.

“With solar energy, if you’re only online 50% of the time, that’s a factor in the cost analysis,” Back said. “That’s a better option for older machines, after you’ve already recouped the equipment costs.”

Supply Chain Challenges

Due to rising cryptocurrency prices, there is currently a global shortage of bitcoin mining equipment, with demand exceeding supply and production times reaching up to six months per machine. Emma Todd, founder of MMH Blockchain Group, noted that this shortage is driving up the price of mining machines.

“For example, a Bitmain Antminer S9 mining machine that cost $35 – $55 in July 2020 on the secondary market now costs about $275 – $300,” Todd said. “This means that most, if not all mining companies looking to purchase new or secondary equipment, are all experiencing the same challenges. As a result of the global chip shortage, most new mining equipment that is scheduled to come out in the next few months, will almost certainly be delayed.”

Efficiency and Market Dynamics

Critics like de Vries argue that industrial miners are unlikely to reduce their power consumption with more efficient machines due to market forces.

“If you have more efficient machines but earn the same money, then people just run two machines instead of one,” de Vries said.

However, Back contends that “retiring” older machines with renewable energy sources becomes more profitable as cryptocurrency prices rise faster than new miners can be constructed. Furthermore, robust bitcoin mining infrastructure can support communities by storing and arbitrating energy flows.

Emerging Trends in Mining

“You can turn miners on and off if you get to a surge prices situation, you can use the power for people to heat their homes if that’s more urgent or more profitable,” Back said. “Bitcoin could actually support power grids.”

Steve Barbour, president of Upstream Data, reports that a growing number of traditional oil and gas companies are quietly expanding their bitcoin mining operations. These companies are leveraging waste and low-quality gas, which previously had no market value.

“Right now it’s hydro and coal. That’s the majority of the big industrial mining. But on the global scale, that’s going to shift more toward any cheap power, including natural gas,” Barbour said. “Oil fields already have cheap energy with the venting flares, the waste gas, there’s potential for approximately 160 gigawatts [of mining power] this year.”

Confidential Operations and Industry Growth

Upstream Data assists oil companies in establishing and operating bitcoin miners to capture waste gas, completing 100 deployments across North America. These companies generally avoid publicizing their bitcoin mining activities due to concerns about negative publicity from Bitcoin critics.

“They are definitely concerned about reputational risk, but I think that’s going to change soon because you have big, credible companies like Tesla involved with Bitcoin,” Barbour said.

Alternative Mining Models

Within the cryptocurrency industry, many individuals are critical of the energy intensity of bitcoin mining and are exploring alternative mining methods. For example, the Ethereum community is transitioning to a “proof-of-stake” (PoS) mining model, which relies on locked-up coins rather than Bitcoin’s energy-intensive “proof-of-work” (PoW) model.

Comparing Proof-of-Work and Proof-of-Stake

PoW requires substantial computational “work,” involving complex mathematical problems that demand significant electricity. Ethereum, currently operating on PoW but slated to switch to PoS in the coming years, has hundreds of thousands of daily active addresses, sometimes half as many as Bitcoin. A few large mining projects in China generate more than half of the Ethereum network’s power. Each Ethereum transaction consumes nearly as much energy as two American households use per day.

“What I like about the Ethereum community is at least they are thinking about how to solve the problem,” de Vries said. “What I don’t like is they’ve been talking about it for a few years and haven’t been able to actually do it.”

Energy Consumption and Network Value

The Ethereum ecosystem consumes enough energy annually to power the nation of Panama. Both Bitcoin and Ethereum transactions require enough power that the cost could alternatively cover a substantial meal. These networks demand energy comparable to that of small countries, although Ethereum typically has fewer than half the million daily users that Bitcoin does.

Cryptocurrency transactions require more power than Visa transactions. However, a cryptocurrency is more than just a payments company; it represents an entire currency system.

If the bitcoin market capitalization were ranked as a country by the value of its money supply, Bitcoin would rank fifth, behind Japan. This doesn’t even include related ecosystems like Ethereum. In conclusion, power consumption within the global Bitcoin economy is comparable to that of other industrialized financial systems. While inefficient, as de Vries points out, many systems in emerging economies share similar characteristics. Millions of users worldwide rely on cryptocurrency for income and remain optimistic about its future, believing it will become more efficient as the technology matures.

“I see Bitcoin mining increasingly playing a role in the transition to a clean, modern and more decentralized energy system,” said Magdalena Gronowska, a Canadian business consultant. “Miners can provide grid balancing and flexible demand-response services and improve renewables integration.”