When Satoshi Nakamoto introduced Bitcoin (BTC) to the world in 2009, he had in mind a peer-to-peer cash system that would re-shape the traditional financial landscape. However, the crypto development took a different route from the original vision. It has become an attractive speculative asset and a precious store of value, with a leading, gold-like role in the virtual realm.
However, that’s not the main reason experts say Bitcoin is an expensive and energy-consuming business. Yes, the BTC price keeps reaching jaw-dropping heights, but the buy-and-sell process is pretty cheap and flexible nowadays. There is a myriad of user-friendly crypto exchanges like Coinbase (NASDAQ: COIN) that enable you to make a USD-to-BTC transaction directly from your iPhone (NASDAQ: AAPL).
Instead, the energy-consuming nature of Bitcoin lies in its decentralized technology that maintains the lifecycle of the coin and prevents any type of double-spending manipulation.
How Does Bitcoin Consume Energy?
Despite the mainstream narrative, Bitcoin is a virtual-only currency that spends its “life” on a public, independent ledger or what we call the blockchain. The Bitcoin blockchain utilizes a Proof-of-Work (PoW) consensus mechanism that operates in a trustless way by allowing all network participants to verify the transaction legacy. The verification is synchronized with the process of minting new bitcoins, popularly called Bitcoin mining.
As Bitcoin’s value grew over time, the BTC mining fever gripped the world and became the most lucrative crypto field. You don’t have to meet any eligibility criteria to join the blockchain — but here’s the catch. The PoW system doesn’t increase the production of new coins in proportion to the demand but raises the minting difficulty instead. And, the criterion-measure for producing new coins is electricity. The more power you can provide, the higher the chances of earning coins.
Miners get a certain amount of bitcoins for every block of transactions they verify and add to the blockchain. The block is labeled with unique data and converted into a 256-bit string. The first miner to un-convert the block data into its initial format earns the right to verify the transaction, so there is quite fierce competition. Since the SHA-256 hash function is irreversible, the only way for miners to solve this equation is through guessing. Each attempt or hash requires a certain amount of computing power and, by extension, energy.
For illustration, the first Bitcoin was mined in 2009 by Nakamoto himself from a computer for personal use. After 2010, when BTC got a monetary value, first-gen miners started using GPU-enhanced computers for a better competitive edge. Soon afterward, the original Canaan (NASDAQ: CAN) ASIC mining rigs appeared and placed Bitcoin mining on an industrial level. For instance, a mining farm in Kazakhstan runs 50,000 mining rigs.
How Much Energy Does Bitcoin Use?
Now, let’s convert the transaction units into kilowatt-hours. On average, the blockchain needs 707 KWh to process a Bitcoin transaction, with a strictly defined capacity of 2.58 transactions per second. Thus, we can calculate that the annual rate of Bitcoin electricity use is nearly 127 TWh.
If you’re wondering whether this is a high or a low rate, let’s put it this way — the annual electricity consumption of Bitcoin exceeds the entire consumption of Argentina. Compared to other industries, Bitcoin ranks in energy consumption after banks (650 TWh) and gold mining (200 TWh).
Does the Bitcoin Electricity Consumption Affect the Environment?
While we can easily calculate the electricity consumption rate, the environmental impact depends on multiple inconsistent parameters like local power distribution, energy sources, etc. Experts’ opinions and data analysis also vary to a great extent on whether Bitcoin mining is an environmentally-unsustainable industry. For example, the Cambridge Centre for Alternative Finance (CCAF) estimated that 39% of the BTC energy consumption was carbon neutral in 2020, while the CoinShare research of 2019 suggests a much higher number — 73%, based on the fact that the largest mining plants rely on hydropower.
Final Words — The Electricity Consumption Future of Bitcoin
Bitcoin (BTC) has gone quite a way ahead of itself in a single decade. When it comes to electricity consumption, numbers are high but not necessarily concerning because:
- Unlike many other industries, you can mine Bitcoin everywhere and hence, adjust the production to all existing energy sources.
- Bitcoin has a limited supply, which is getting closer to its endpoint of 21 million units
- Bitcoin can replace the current PoW mechanism with a more sustainable one — Proof-of-Stake (PoS).
Finally, in the same CCAF study, avid crypto miners claim that asset profitability, not electricity costs, is the deciding factor when choosing a mining arena.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.