The hidden costs of cryptocurrency: is Bitcoin’s huge power demand too high a price to pay?

Bitcoin is an increasingly mainstream topic of conversation in the financial press.

The long-term viability of the cryptocurrency, the lack of transparency inherent to the process, and its investment potential are now discussed in publications as austere as the Financial Times and the Daily Telegraph.

Even the Governor of the Bank of England has felt compelled to weigh in with his view.

What has garnered little attention, however, are the energy implications of cryptocurrency.

The Bitcoin concept is of a digital IOU, usable to buy goods and services, primarily online (although Bitcoin is starting to make some purchase on the physical world, with some Subway outlets accepting Bitcoin as payment).

The process that undergirds the concept uses blockchain technology to create a digital record of all Bitcoin transactions, which is then checked against records held by other participants in the framework using an agreed set of rules, or protocol, contained in Bitcoin’s code to validate new transactions.

The algorithm contained within Bitcoin’s system becomes more and more complicated with each transaction. Bitcoin is, therefore, about solving of an exponentially more complex algorithm in lightning-quick time – sometimes measured in the mind-boggling quintillions of a second – using computers.

With the ever-increasing complexity of the procedure, more and more processing power is required.

This means that the energy usage of the process is enormous.

There are various ways to conceptualize the scale of the energy consumption and environmental impact of the cryptocurrency:

More CO2 generated in a year than a million transatlantic flights,
Greater overall power usage than the Republic of Ireland
30 megatonnes of CO2 and 60 TWh of electricity a year.

However you think of it, the energy consumption and carbon footprint of Bitcoin transactions is enormous, and growing.

More than that, the rate of growth of that consumption is increasing.

The competitive process inherent to Bitcoin mining exacerbates this consumption problem.

As discussed above, anyone who uses the Bitcoin process must utilise blockchain technology, which is a record of all transactions that have already taken place using Bitcoin.

Each transaction forms a ‘block’ on the chain, which can then be added to by future users.

To form a new block, users must use an agreed protocol to solve a highly complex mathematical equation.

This is done in a competitive process known as mining, where the previous records on the blockchain are validated by the network using the accepted protocol before the equation is solved.

This leads to the equation being exponentially more complex, and, therefore, requiring more and more energy to be solved.

The miner that solves the equation first receives a set number of Bitcoin and a transaction fee of roughly £2,500, before the most recent solution to the equation is communicated to all the other users and the process starts anew.

This means that Bitcoin incentivises vast energy consumption as the greater your processing power, the quicker you can solve the algorithm contained in the Bitcoin protocol, the more likely you are to ‘win’ each competition.

As Alex Hearn described it in the Guardian:

“The more electricity you burn, and the faster your computer, the higher your chance of winning the competition…This is a winner-takes-all game, where the prize is guaranteed to be paid to one, and only one, miner every 10 minutes. Burning more electricity increases your chances of winning, but correspondingly decreases everyone else’s – and so they have a motivation to burn more electricity in turn.”

What does this mean for renewables?

Credit Suisse has calculated that a fivefold increase in Bitcoin’s value would increase the already huge electricity capacity needed to run the cryptocurrency by 1,000%. In fact, the Bank also estimates that 80% of the expenses of Bitcoin miners are spent on electricity.

Katie King on Mitsubishi Electric’s Blog calculated that a single Bitcoin transaction uses approximately 750kWh of energy – the equivalent of boiling 7,500 kettles. In comparison, 100,000 VISA transactions use around 180kWh.

Such vast energy consumption could present opportunities.

Most notably, Enel SpA is reportedly in talks to sell renewable energy directly to a consortium of Bitcoin miners, and some miners are using solar power in Australia.
But the viability of such projects remains a huge unknown.

Many investors and analysts regard Bitcoin as a speculative bubble that will inevitably burst, rendering any revenue streams to renewable projects moribund.

Others think that Bitcoin is either here to stay, or is a harbinger of the future.

In any event, in the short and perhaps medium term, Bitcoin’s energy consumption is likely to continue to put a strain on the energy markets of countries around the world.

Iceland, for example, is set to use more electricity mining Bitcoin than powering its homes in 2018.

The scale of projected growth of Bitcoin’s energy consumption will mean that the grid and other aspects of energy infrastructure will have to consider the potential changes to energy consumption patterns that cryptocurrency and other innovations present.

Ultimately, whether Bitcoin miners represent a viable long-term funding mechanism for renewable projects hinges on the vexed question of whether Bitcoin is a mere bubble.

The broader point is that the rate of economic change and innovation means that future energy consumption is unpredictable, and those in the renewables industry must be flexible and nimble in reacting to changing market conditions.

Bitcoin and its enormous energy consumption may or may not be here to stay, but innovation-led energy market volatility is likely to remain a constant.