Everyone’s favorite cryptocurrency is turning out to be a massive energy sink. According to a new study, in 2018, Bitcoin will soon account for 0.5% of the planet’s electricity — more than the consumption of many sizeable countries.
Cryptocurrency promised to revolutionize how we pay and receive money, and while they haven’t really done that, they did make a few people very rich. Aside from that, the social promises made by cryptocurrencies have yet to be fulfilled, and we’re starting to see some of the downsides of cryptocurrencies — in this case, energy consumption.
Most of the Bitcoin-related energy is consumed in the “mining” process. Mining is essentially a record-keeping service done through the use of computer processing power. Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which consumes a massive amount of energy (the blockchain itself is a list of records linked and secured using cryptography).
The problem is that you can’t really have Bitcoin without immense computation, and this level of computation will always require vast amounts of energy. Miners are incentivized to use more and more processing power and even those who don’t get anything expend electricity.
If Bitcoin miners were a country, they’d rank somewhere between the 60th and 70th for consumed electricity — that’s more than half the countries in the world.
In a Commentary appearing on May 16 in the journal Joule, financial economist and blockchain specialist Alex de Vries analyzes this energy consumption using a new methodology.
“The electricity that is expended in the process of mining Bitcoin has become a topic of heavy debate over the past few years. It is a process that makes Bitcoin extremely energy-hungry by design, as the currency requires a huge amount of hash calculations for its ultimate goal of processing financial transactions without intermediaries(peer-to-peer). The primary fuel for each of these calculations is electricity.”
His estimate put the minimum current usage of the Bitcoin network at 2.55 gigawatts annually, though the real figure is likely much higher. That’s about as much as Ireland, and two times more than countries like Paraguay and Lithuania. A single transaction uses as much electricity as an average household in the developed world uses in a month, and to make matters even worse — things are only going to get worse as Bitcoin-related energy consumption increases.
“To me, half a percent is already quite shocking. It’s an extreme difference compared to the regular financial system, and this increasing electricity demand is definitely not going to help us reach our climate goals,” he says. If the price of Bitcoin continues to increase the way some experts have predicted, de Vries believes the network could someday consume 5% of the world’s electricity. “That would be quite bad.”
This raises two important questions. First, is Bitcoin really adding any value to society? Sure, you can speculate around it, maybe make some money, maybe lose some money. But at the end of the day, for mankind, is Bitcoin really adding anything of value — especially considering how you spend electricity (and therefore money) to generate it? Secondly, there are important externalities associated with Bitcoin. It’s not just the money, but also the emissions generated in the electricity-producing process — who will account for that? Some states are already taking the first steps towards Bitcoin regulation, and that’s really important, not just for what’s happening now, but for what will undoubtedly happen in the future.
“But you need to base your policy on something. And I think that my method is important in that regard, because it’s very forward-looking. It’s focused not on the now, but on where we’re headed. And I think that’s something you really need to know if you’re going to draft policy about it,” he says.
Mining Bitcoins gets harder and harder, so at one point, the cost of electricity will outweigh the Bitcoin revenue. But we’re still a long way from reaching that equilibrium, and it doesn’t make much sense to wait for that to happen — after all, a new currency could come up and take Bitcoin’s place, and then we’re back to square one. As de Vries concludes:
“For now, however, Bitcoin has a big problem, and it is growing fast.”