The truth about Bitcoin's power consumption
It all started with a report in The New York Times that stated Bitcoin consumes more power than that of certain countries. The alarm bells started ringing when The New York Times highlighted that, “A single bitcoin transaction now requires more than 2,000 kilowatt-hours of electricity or enough energy to power the average American household for 73 days.”
Source: Forbes and Statista
There is more to these numbers than meets the eye. Bitcoin presently consumes about 110 Terawatt Hours each year, or 0.55 percent of world power production, or roughly similar to the yearly energy demand of small nations like Malaysia or Sweden, according to the Cambridge Center for Alternative Finance (CCAF). This appears to be a high-intensity activity. But how much energy does a monetary system need to operate? Let’s take a closer look.
Playing Devil’s Advocate
For advocates of bitcoin, this energy outlay is a tiny price to pay for the various benefits that the cryptocurrency confers: Censorship-resistant decentralized digital bearer asset that allows people all around the world to leave a flawed centralised monetary system. Bitcoin is the sixth largest base money on Earth (excluding gold and silver), according to The Crypto Voices’ newest report on the global monetary base, trailing only the Eurozone, Japan, the United States, China, and the United Kingdom. As miners contribute fresh blocks of transactions to the ever-expanding bitcoin network, such lofty rank necessitates a great amount of energy.
In an uncertain world, a decentralized asset such as Bitcoin offers insurance against untoward geopolitical events: Like the recent Russia-Ukraine crisis where Russia’s local currency is experiencing sporadically high inflation or the economic collapse seen in Sri Lanka, wherein the government has foreign exchange reserves that could last them only a month. Bitcoin’s low transaction fees, decentralized network, and anti-inflationary nature add to its appeal.
However, it also depends on how one perceives the advent of cryptocurrencies such as Bitcoin? Do you perceive it as something that offers no real-world utility, a bubble, and a haven for money laundering as well as other nefarious activities or are you among the millions using cryptocurrencies to escape inflation, capital controls, and monetary repression? It all boils down to whether you think Bitcoin creates tenable value for society and has a legitimate claim on society’s resources.
What about gold?
Bitcoin does not compete with countries; instead, it competes with alternative assets such as central bank-issued fiat currencies or, more comparably as a store of value, gold, a precious metal that is produced on a large scale every year.
Gold mining is estimated to be 50 times more expensive than bitcoin mining and administering the bitcoin network. The production of gold for a wedding band alone could produce 20 tonnes of garbage.
To put things into perspective, the gold mining sector, which generates between 2,500 and 3,000 tonnes of new gold each year, uses 475 million gigajoules of energy, or around 131.9 TWh. The energy production of the banking system, which includes brick-and-mortar branches, printing facilities, computer servers, ATMs, and transportation, is far more difficult to assess, however one estimate puts the total at 140 TWh.
What about Bitcoin’s actual carbon footprint?
It would be sheer folly to assume that Bitcoin’s power consumption is a direct measure of its carbon footprint, and much has to do with the energy mix powering Bitcoin. Of course, gold mining is primarily reliant on grid power and direct fossil fuel-generated energy. According to a World Gold Council (WGC) research released last year, gold industry emissions must be lowered by 80% by 2050 to meet the Paris Agreement’s “well-below” two degree Celsius scenario.
The recent Global Cryptoasset Benchmarking Study is also revealing: Renewables, primarily hydroelectric energy, power 39 percent of Proof of Work mining. More than three-quarters of hashers also use renewable energy into their energy mix. In response to the rising trend of clean mining, a measure recently introduced in the Kentucky Senate intended to provide crypto miners with the same tax breaks as clean-energy plants. Low costs and quick confirmation periods make crypto-based transfers popular. According to the World Bank’s Migration and Development Brief, the amount of fiat cash sent home by migrant workers would drop 14% this year compared to pre-COVID-19 levels in 2019.
Ergo, cryptocurrency mining does not deserve the flak it receives upon a closer examination. It’s true that gold is an established store of value and has far more use cases. However, the modern banking system is also likely to be far more energy-intensive than Bitcoin. It is thus not prudent to take Bitcoin’s energy consumption at face value alone.
