Just How Bad is Bitcoin for the Environment?

Tesla at the Center of Criticism for Buying Bitcoin

Critics of Bitcoin are currently pointing to Tesla’s seemingly counterintuitive purchase of Bitcoin. Tesla is considered to be one of the major businesses leading the green energy movement. So why did the company decide to buy $1.5 billion worth of Bitcoin? Doesn’t Elon Musk and the Tesla board know how much electricity the Bitcoin network uses?

It turns out that Bitcoin’s electricity usage might require a little more nuance and context.

Bitcoin is Efficient at What it Does

If we are to make the case that Bitcoin is efficient, we need to define what Bitcoin does. The bitcoin network does two things, and it does them perfectly.

1. The network keeps track of bitcoin on the network (“where” they are)
2. The network regulates the supply of Bitcoin (How many Bitcoin exist in circulation)

So now we need to make the case that Bitcoin is doing these two things efficiently.

How to Measure Electrical Usage

Exact figures on how much electricity the bitcoin network uses is not actually known. It must be calculated and estimated. In order to estimate this number, you need to use the block time (the rate at which new blocks are produced).

New blocks are produced on average, every 10 minutes. If the block time is consistently less than 10 minutes, the network will adjust the “difficulty” of the mining problem, so that the network keeps producing blocks on schedule (every 10 minutes). So the estimated hash power of the network is derived from the difficulty. The estimated electrical usage of the network is derived from the estimated hash power.

Value on the Bitcoin Network

The current value of all the bitcoin on the network is about $1 trillion dollars. To put this into perspective, Bitcoin is the 14th largest currency in the world (Feb 22nd, 2020). The bitcoin network processes more than $5 billion dollars worth of value on a daily basis. What this electricity is ultimately being used for, is securing the past, present, and future value transacted with on the network.

As we covered earlier, the “difficulty” and resulting hash power of the network is the main metric that analysts use to determine the electrical consumption of the bitcoin network. We can therefore say that the main reason for the electrical consumption is to secure the network. As the network grows in size, and value, it is that much more important to make sure that the network retains its integrity. If the bitcoin network were to be compromised, millions of people would face billions of dollars of losses.

Regulate the Supply, at all Costs

One of the most important things that the bitcoin network does, is regulate the supply of Bitcoin. One core reason for the bitcoin network existing in the first place, is to fix a major problem that has plagued economies since the beginning of history. That problem is the ability for centralized groups, entities, and individuals to manipulate the supply of money.

Until Bitcoin, we have not had a system of money that is impervious to the woes of inflation and currency manipulation. It is simply too tempting for humans to fix problems faced today, with borrowing money from the future (inflation). The electrical consumption of the bitcoin network is justified, as it has near perfectly stuck to its initial supply schedule set out in 2009. In other words, it completely and absolutely fixes inflation.

Infinitely Recycle the Supply

All Bitcoin on the network are infinitely recyclable. The one caveat being Bitcoin that has been lost forever due to mismanagement of keys. This infinitely recyclable feature is huge for the efficiency of Bitcoin.

Unlike paper money, which needs to be reproduced every so often, Bitcoin can be used, and used again indefinitely. Furthermore, less and less bitcoin is becoming worth more and more value as time goes on. So the absolute amount of value transacted on the network increases over time, furthering the purpose, and value of the network as a whole.

Proof of Work vs Other Systems

Proof of work is the name of the system (algorithm) that actually does the regulation of the supply. Since Bitcoin began in 2009, other methods of securing cryptocurrency networks have been devised. Proof of Stake, and Delegated Proof of Stake to name a couple.

Whether or not one algorithm does a better job at securing the network than others is a huge point of debate in the blockchain world. At the end of the day, avid Bitcoiners will point to a number of factors in Bitcoin’s favor as to why Proof of Work is superior to other systems.

It Should Be Costly to Produce Bitcoin

There is a correlation between the value of 1 Bitcoin, and the amount of electricity used on the network. This is because as Bitcoin rises in price, new miners have more incentive to join the network in pursuit of reward. As new miners join the network, the difficulty goes up, and the amount of electricity used on the network rises with it. Miners are incentivized to hold onto newly mined bitcoin in hopes to sell it at a higher price later on. This is a self perpetuating cycle that makes it more costly to produce bitcoin in the future  (in terms of energy) .

This system is analogous to mining gold. As gold rises in price, gold mining companies are incentivized to mine more gold. There is one exception to this analogy. No matter how many computers are mining Bitcoin, the network will always produce the same amount of bitcoin every 10 minutes, adhering to the schedule. In effect, the bitcoin network maintains its production schedule regardless of what is happening in the external world.

Bitcoiners like the fact that it costs money to produce Bitcoin because it imbues Bitcoin with value. It can therefore be said that the bitcoin network converts energy into Bitcoin. Value is simply stored energy, time, or work, that can be used at a later date. This is the core reason for money existing in the first place; money exists to transport value across time, and space.

Miner Profitability is Based on Cheap Electricity

The last point that bolsters the argument that the bitcoin network is efficient is that Bitcoin may actually lead humanity into a greener future. For some, this may be a leap they’re not yet willing to take. For others, it makes perfect logical sense. If miner profitability is dependent upon access to cheap electricity, then miners will seek the cheapest electricity available to them.

The cheapest energy is energy that would otherwise be discharged into the ground. One fact of electricity grid management that is not well understood, is that grids MUST produce an excess of electricity to sustain a grid. However, whatever energy not used by the grid is often discharged into the earth. In other words, we produce more electricity than we need, and then waste it.

Bitcoin is a solution to this problem, because miners can approach producers of electricity and purchase the excess electricity at a reduced price. Instead of discharging electricity into the ground and taking a total loss on the energy, energy companies can make a margin on otherwise lost energy production. This is good for the economy, and good for the environment, because we are making use of energy that would have otherwise not had productive value. Instead, it is being used to produce, maintain, and regulate the bitcoin network.

The Search for Cheaper Electricity

With solar energy being the cheapest form of energy, bitcoin could be a catalyst for humans to move faster towards a greener future. The bitcoin network actually generates more demand for cheap electricity by design. This increased demand will lead to market opportunities for energy producers.

The opportunity is to create green energy facilities such as solar farms. This again, is a self perpetuating system that accelerates our journey towards a 100% green economy.

Tesla Has Always Had Green Energy in Mind

If I were to venture a guess, it would be that Tesla had this exact conversation before they bought Bitcoin. Elon Musk stated on a recent Joe Rogan podcast that the mission for Tesla has, and always will be to accelerate the advent of a green energy economy.

Once Tesla and Elon understood the points outlined above, it only makes sense to acquire a money that furthers their mission. Furthermore, Tesla has extensive capital and intellectual investment in solar panel technology. By investing in bitcoin, they are signalling their support for the eventual main driver of the bitcoin network; solar energy.