Bitcoin and crypto networks as climate positive technologies
Civilisation and energy usage; Bitcoin's electricity consumption and carbon footprint; Bitcoin as demand response tech; Fiat money and excessive growth; Regenerative Finance.
A lot has been written about Bitcoin's energy consumption, environmental impact and societal value, yet critics and regulators often fall for misinformation and flawed arguments which are amplified by the media. This post is an attempt to provide a balanced perspective on (1) a civilisation and its energy usage, (2) how Bitcoin can become a driver of the renewable energy transition and (3) how crypto networks more broadly can contribute to a climate positive future.
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Some of the flawed assumptions and lines of argumentation go as follows:
Energy is scarce and we have to mindful about what we use our energy for.
Regulation and restricted energy access for certain industries or even emerging countries are a legitimate path forward.
Bitcoin consumes as much energy as [put in small country's name] and thereby pollutes the environment for no purpose other than crime and speculation.
With growing adoption and higher BTC prices in USD terms miners will consume even more energy until the oceans boil.
Bitcoin also competes with more useful energy consumers like heating or transportation.
Therefore we should ban Bitcoin mining.
The rise of a civilisation (in the sense of technologically advanced societies) is tied to its ability to capture energy. This energy is used to create the highest leverage outputs through efficiency gains. Once a technology commodities and becomes cheaper its applications and use cases broaden. Hence, over long time periods the electricity consumption of any civilisation will only increase, never decrease.
Bio mass and fossil fuels have been humanity's main energy sources in the past but in order to progress renewables will overtake fossil fuels because they are cheaper.
As a unique energy consumer of last resort that is mobile, price sensitive and interruptible Bitcoin is setting incentives to find the cheapest (aka renewable) energy on the planet. It targets stranded and wasted energy and can be used to reduce co2 emissions while stabilising energy prices and grids as a demand response technology.
Bitcoin's energy consumption is incredibly transparent. It consumes 0.16% of global energy - a negligible amount. Its co2 footprint is much harder to measure as all methodologies to estimate the sources of energy inputs rely on assumptions about strongly diversified, local energy mixes. Consensus is that Bitcoin's energy mix is heavily skewed towards renewables with a share of 40-73% which is 2-3x higher than that of any other industry.
Fiat money systems are debt based; hence they have an imperative growth mechanism baked into the money itself as every unit of currency is another person's debt which needs to be paid back plus interest (= economic growth). Asset moneys like gold or Bitcoin have been used as currencies for the longest periods in history and reduce a money’s systematic dependency on infinite growth.
Crypto networks are coordination technologies which can be used to create alternative economic and financial systems taking into account market externalities. Regenerative Finance is a nascent yet promising category.
The big picture: of energy and civilisation
The ability to harness and consume energy is closely related to the progress of a civilisation. The Kardashev Scale is a method of measuring civilisation's level of technological advancement based on the amount of energy it is able to use. A type 1 civilisation is able to access all energy available on its planet (fusion, hydrogen, helium, wind, solar, nuclear) and store it for consumption. Type 2 civilisations can directly consume the energy of a star (black holes, star lifting) while Type 3 is able to capture all energy emitted by its galaxy.
The more energy a civilisation is able to capture and consume the more advanced it can become. This becomes clear by realising that energy is the major input of everything humans - or even nature - ever created. Without the energy of the sun there would not be any life on planet earth. Every technology, every object surrounding us is derived from energy. Transportation, manufactoring, communication, food production - all of those systems have their roots in the physical world, bits and atoms.
The internet consumes energy, approximately 10%+ as of today with expectations of 20% of global energy by 2025. Bitcoin also consumes energy - about 127 terrawatt hours which is approximately 20x the energy used for Christmas lights in the US or 0.5% of global energy.
A common believe is that with better, more efficient technologies humanity would consume less resources and less energy. But that is not the case: human nature is to explore, to research and to improve new technologies - tools, fire, wheels, language, gun powder, steam engines, electricity, internet, Bitcoin. Because of efficiency gains and technological improvements all of those goods and services have become cheaper over time (priced closer to their raw energy inputs) which ultimately has driven up demand thereby negating reductions in resource use. This phenomenon is described by the Jevons paradox in the context of coal mining and has been re-surfaced by energy economists more recently under the the term rebound effect.
Energy consumption is only a proxy for the progress of a civilisation. An underlying assumption would be that humanity is able to figure out what are the highest leverage outputs of such energy.
Assuming that energy consumption and the societal value of the respective outputs are growing - what does that mean for other scarce planetary assets like rare earth elements? If we have more and cheaper energy available to create machines which release co2 already within the production process, wouldn't this lead us into a parasitic vicious circle? Probably not. With increasingly abundant energy inputs we will be empowered to get rid of carbon intense technologies faster - e.g. we won't need batteries anymore, we could recycle materials or capture carbon in new ways which have been too energy-intense before. Infinite energy may never be fully solved. However, once we hit a certain level of energy efficiency, we can use that energy in nanotechnology and subatomic physics to solve seemingly impossible problems, including balancing environmental systems.
On a long term time scale of potentially centuries if not millennia the following conclusions can be drawn:
Technology improvements lead to energy efficiency in any given activity which then increases energy consumption.
To progress towards a type 1 civilisation on the Kardashev Scale humanity will consume about 1 million times more energy than today.
Those realities reflect human nature. Neglecting them is pointless.
Energy abundance through renewables
The 21st century climate crisis is driven by the limitations and externalities of a fossil fuel powered energy economy: (1) High co2 emissions have severe effects for the earth's ecological systems, (2) the physical distribution and availability of fossil fuels is the root cause of many violent conflicts around the globe, (3) given their scarcity fossil fuels will be entirely consumed within a few centuries if not earlier - assuming growing energy demand.
Renewables don't face such limitations but most of them won't suffice to increase our energy supply significantly in the long run. To turn humanity into a type 1 civilisation we'd need to harness all the energy which is striking planet earth - what would be about 4 orders of magnitude more than what we have currently or a factor of 1 million based on 2017 levels.
Most renewables don't hold enough energy output potential to get us anywhere close to such numbers. Wind and wave energy are ultimately generated by the sun's energy warming up the atmosphere and creating thermal differences between regions. Hence, wind and wave energy will be a tiny fraction of solar radiation. Geothermal and and tidal sources are decoupled from solar but have even lower potential.
Current consumption: 17.3 terawatts
Type 1 Civilisation: 2e+17 terawatts
Nuclear Fusion: Type 1 Civilisation x 10,000 years (!)
Solar Radiation: 173,000 terawatts (10,000 times our current consumption)
Wind: 1,200 terawatts
Geothermal: 15.4 terawatts
Fossil Fuels: 14 terawatts
Tidal: 3.8 terawatts
Biomass: 1 terawatt
Besides the pure energy potential of the above sources, their ease and cost of extraction have to be taken into account - especially relative to fossil fuel sources. Regulation and incentive structures such as CAT markets will be driving factors alongside technology enabled efficiency gains.
In 2020 renewable power generation costs became cheaper to extract than fossil fuels: kWh cost range of fossil fuels highlighted in grey.
To summarise: Humanity will only consume more energy over time, not less. Over time the majority of energy supply will be provided by renewable power sources which already undercut the production costs of fossil fuel energy.
The idea of 'energy minimalism' through violent government enforcement will always be arbitrary, ideological and temporary. We can't defy human nature or the laws of gravity. To sacrifice the fate of emerging economies seeking to increase their access to energy appears inhumane and archaic. Yet, reducing carbon emissions very short term - say 20 years - might be a necessity to avoid some of the cascading effects of global warming under the assumption that we can't shift towards renewables fast enough.
Bitcoin contributes to the renewable energy transition and reduces co2 emissions
Bitcoin miners are an energy consumer of last resort. The Bitcoin network provides an attractive bounty for whoever is able to find the cheapest energy on the planet, no matter where or when.
Given that renewable energy - and not fossil fuels - are the cheapest form of energy currently available (see above) this promise sets an incentive to expand the availability of renewable energy around the globe.
Bitcoin miners are a special breed of energy consumers due to some unique properties:
Price responsive - Bitcoin miners are hyper price sensitive given that electricity costs represent 80%+ of a miner's operating costs.
Transportable - Bitcoin mining machines are of small size and weight. Tens of thousands of ASICS can be composed to large scale mining farms, yet the underlying design is modular. allowing. Therefore, Bitcoin mining operations can be transported to any place where energy is cheap and abundant. This has been observed in many (attempted) Bitcoin mining bans like in China and elsewhere in the past.
Interruptible - Given their simplicity Bitcoin miners can be switched on or off in a manner of a few minutes. This gives them an edge over most other energy consumers.
Through such properties the Bitcoin mining industry is contributing to the transition towards renewable energy dominated grids:
Bitcoin miners stabilise the grid and energy prices
The more wind and solar are part of a grid's energy mix, the higher is the grid's volatility in terms of energy supply. Demand response is needed to react. BItcoin miners are the first ever CLR (controllable load resource - rapidly adjusting energy use in a granular way) stabilising the grid's frequency. It can also be used as an ERS (emergency response service - reducing energy use within 10 minutes during a grid emergency like in storms or floods). Other than any other technology ASICs are hyper granular and can react very fast by being interrupted at $0 marginal cost. Single machines can be switched on or off within a few minutes. To expand the capacities of renewable energies we need to 10x the demand flexibility.
In times of high demand and high prices mining becomes unprofitable, so the ASICS are switched off. In times of low demand and high supply energy prices can even turn negative - Bitcoin miners capitalise on that and run full steam. Conclusively Bitcoin miners increase the baseload without lifting the peak load - thereby improving the economics of renewable energy and incentivising the buildout of additional capacity.
Bitcoin miners improve renewable energy economics
The more excess energy is provided through wind and solar, the less profitable renewable energy investments are becoming - energy waste threatens the economics of renewable energy. Because of government subsidies energy prices do turn negatively what results in economic curtailment - wind and solar farms are shut down to reduce their output. This harms renewable energy economics as the plants cannot maximise the amount of electricity output. In 2021 this lead to the situation that more renewable energy was wasted in Texas than the electricity consumption of all the state's bitcoin miners!
Bitcoin miners don't compete with batteries or hydro
Nick Grossman's wrote a slightly confusing piece on Bitcoin as Battery. He is making the case that energy anywhere in the world is used to mine the digital commodity which can then be sent around the globe to be exchanged back into energy elsewhere. That is not in line with the actual function of a battery which is to move electricity - not an asset derived from electricity - across time and space, from where it can be cheaply produced to where it can provide the most utility. Batteries in the sense of temporary energy stores (think EV as batteries!) will play an important role in grid stabilisation but currently they can't be deployed economically at scale and they have limited storage capacity. Ideally, they'd be coupled with flexible electricity consumers that can consume excess energy when the battery is fully charged, like Bitcoin miners.
Bitcoin miners don't compete with hydrogen as another power-to-x technology. Other than Bitcoin miners, hydrogen requires local proximity of the energy source to the market (transport). It's not interruptible as producers have contracts to fulfil and physical products to ship. Finally, electricity costs are less critical for hydrogen businesses making it likely that hydrogen will outcompete bitcoin mining for energy demand, thereby forcing bitcoin miners to find the most stranded, cheapest energy.
Bitcoin miners reduce co2 emissions by mitigating natural gas flaring and by repurposing heat
On the surface oil depressurises into liquids and gas (methane) in oil extraction. As oil is worth more than gas by volume and gas is difficult to transport its perceived as a cost center. Where oil drilling occurs close to the gas demand it is transported, in other cases it is burned (flared) in the most cost efficient way. Gas flaring Co2 emissions equate to that of more than 100 million cars. ****If instead utilised, flared gas could produce 700 TWh a year - more than the electricity consumption of all but five countries in the world. The previously flared natural gas is pumped into a generator which produces electricity to mine bitcoins. The income is used to finance the infrastructure.
Gas flaring might be only one out of many other scenarios where energy waste creates co2 emissions. Another example is repurposed heat. Heating is accounting for 50% of the world's energy use. 3/4 of the energy mix are fossil fuel based. Bitcoin miners produce low grade heat of 40-80°C which can be used for district heating (Vancouver) or growing food in green houses (Sweden). Bitcoin mining is likely to finance expensive energy infrastructure for hydro and geothermal operations in developing countries with little local demand.
Bitcoin as asset money can slow down excessive economic growth
A big driver of co2 emissions and thereby global warming is the current fiat money system. The following passages are overly simplified but by and large correct. Our current monetary regime is debt based. Contrary to public opinion, banks do not lend out money which they hold in their reserves; money that would be stored in a vault for example or collected from other people's deposits. Banks do only hold about 10% of the money they lend in reserves, fractional reserve banking.
Banks loan money into existence what means that every unit of fiat money is someone else's debt. As every unit of debt has to be paid back plus an interest our money itself has a growth imperative baked into it. Excessive economic growth is eating up the scarce resources our planet provides.
A solution is to abandon debt based monetary systems to replace them with an asset backed monetary system run on gold or its 21st century version - Bitcoin. Asset backed money would not be dependent on excessive growth to function properly. It is also less prone to government manipulation and inflation derived from continuous debasement.
Bitcoin's energy consumption and carbon emissions in numbers
Hashrate refers to the total combined computational power that is being used to mine and process transactions on Bitcoin. Analysing the network's hashrate and required hardware producing it one can try to estimate the network's electricity consumption.
Just like any other technology Bitcoin consumes energy. Following the Cambridge Bitcoin Energy Consumption Index the Bitcoin network currently consumes about 0.41% of global electricity or 0.16% of global energy. This is negligible. For comparison - the internet currently consumes about 10% of global electricity and is expected to increase towards 20% by 2025 based on research provided by the KTH Royal Institute of Technology in Sweden. Other estimates provided by Huawei are a bit more conservative by putting current numbers closer to 3.5 - 6% while having a similar outlook for the late 2020s. Christmas lights in the US alone consume about 6.6 terawatt hours of electricity, globally it might be about 100 what comes close to Bitcoin's footprint.
Pure energy consumption data doesn't tell us anything about the planetary footprint of a technology - carbon emissions do. Given that the mining industry is incredibly competitive it's not an easy undertaking to get to precise estimates of its energy sources and operations. This led to various debates. One of the few data points from which some estimates can be derived for Bitcoin's energy mix are geo location data as provided by CCAF. The break downs are provided on a country and provincial level.
Alternative sources reference a given country's energy mix to derive an estimate what seems to be a flawed methodology as many countries and even provinces can have a highly diversified energy mix.
Conclusively, current estimates are fluctuating between 40% and 73% of Bitcoin's energy consumption being carbon neutral. In its Q2 2022 report the Bitcoin Mining Council surveyed a 59.5% renewable share - an increase of about 6% year over year - amongst Bitcoin Miners representing >50% of the Bitcoin network. Despite the high variance across different estimates consensus is that Bitcoin mining has one of the cleanest energy mixes compared to other industries and the global grid. E.g. the US grid had only 12.6%, the EU grid had 22% of renewables in 2020. This is how the global energy mix looks like:
A common misconception around Bitcoin's future energy demand is the extrapolation of the mining industry's historic growth and electricity consumption into the future. The reality is that Bitcoin mining follows a pre defined issuance schedule with mining rewards being cut in half every four years. Unless the $ price of Bitcoin doubles every two years the mining rewards will be compressed over longer time periods. Transactions fees will compensate for some of the delta but given the limited block space on the base layer the incentives to mine will decrease over time.
Climate initiatives with hundreds of membership companies such as the Crypto Climate Accord aim to get the global crypto industry to net zero by 2030.
Bitcoin's societal value
The question of wether or not a technology or industry uses 'too much' energy can only be answered on a subjective level. For those who believe that centrally planned monetary systems coming with politically induced currency debasements and a growth imperative are a better money than asset moneys won't find Bitcoin very appealing. The same is true for people who don't see value in a technology that empowers every individual in the world to store their wealth in the cloud, to transact with others freely and shield their wealth from criminals and aggressors, particularly in times of war.
Some other benefits of Bitcoin go far beyond monetary or financial contexts - they are rarely graspable for outsiders. Bitcoin can be perceived as an apolitical clock which can be used to attach any kind of data to. By design it allows anyone to make claims about the occurrence of specific events at a specific point in time - e.g. by referencing a picture, a text, IP rights etc. on chain. Such mechanism can be used as a truth anchor for future generations. It could enable a paradigm shift from 'the history is written by winners' towards 'what isn't on chain didn't happen'. These concepts are enormously powerful, yet under explored at the moment.
Crypto powered regenerative finance
The utility of crypto networks goes far beyond money. As coordination technologies they empower us to orchestrate labor and resources at global scale in a verifiable, transparent fashion. We can use them to design economic systems.
Like very few other technologies crypto empowers individuals over institutions in terms of data ownership, control and the free flow of funding. This paradigm shift is driving innovations across markets which often share some of the following patterns: over regulated, bureaucratic, opaque, inefficient, large and dominated by gate keeping intermediaries.
Thus far we’ve seen innovations in finance (DeFi), the creator economy (NFTs 1.0) and now in science (DeSci) as well as regenerative science (ReFi). The latter is a movement which explores new funding and economic models to mitigate the climate crisis. An ecosystem map can be explored here. The category is very nascent but we hope that the hostility against crypto from many climate activists will fade over time once some of these projects start driving results.
Proof of work based crypto technologies (ie. Bitcoin) are perceived as having a negative impact on the environment. This is a simple and unfounded statement, that takes a complex problem and tries to find a scapegoat. In reality energy consumption and the environmental impact associated with consuming fossil fuel based energy is a complex problem. Bitcoin plays a positive role by encouraging the use of renewable energy. It does so by being an indicator of efficient energy production, strengthening the economics of renewables and by consuming stranded and wasted “bad” energy which has a large environmental price tag.
Instead of jumping to conclusions without having studied the subject matter in depth and banning an emerging technology which can play an important role in the transition towards renewable energy we should be curious, explore the facts and be intellectually honest. This is the very least we should expect from democratically elected governments.
If you’re an innovator breaking open open energy markets - please don’t hesitate to reach out.
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