In today’s Money Morning…what is proof of work, and how does it operate?…a diverse energy mix…banking’s dirty secret…the copper rush…and more…
At the current time of writing, Bitcoin [BTC] is trading below the US$50,000 mark once more. Having fallen by roughly 15% or more in the past two days.
A hefty slide that is no doubt spooking crypto investors.
As for why, well the obvious culprit is Elon Musk.
The enigmatic entrepreneur has brought to the fore an old debate that has plagued bitcoin for years now. An argument that calls into question the usefulness of bitcoin due to its (perceived) high energy usage. And subsequently, its overall carbon footprint.
In other words, Musk has jumped on board the ‘bitcoin is environmentally unsustainable’ bandwagon.
Trouble is, despite the damage his public opinion may have wrought, he is wrong.
This isn’t the first time notable bitcoin critics have brought up energy use, and I’m willing to bet it won’t be the last. Because if recent history is any guide, this strawman argument always seems to rear its head when bitcoin does a little too well…
Granted, I’m not going to get bogged down in conspiracies or rumours.
There is no point in that, and it merely distracts everyone from the real discussion at hand.
So today, lets dispel a few myths about bitcoin’s energy use.
What is proof of work, and how does it operate?
First and foremost, let’s start by talking about how bitcoin actually uses energy. Because I’m sure there is still some confusion about even this most basic of subjects.
See, using bitcoin — the buying, selling, and storing — isn’t power intensive at all. It’s just like any other digital application. Which is why you can do it on any phone, tablet, laptop, or PC.
The energy-intensive part comes from ‘mining’ or the ‘proof of work’ process. An integral part of the bitcoin ecosystem that serves as the engine of its cryptographic brilliance.
To put it very simply, proof of work is how new bitcoins are made. Creating extremely complex mathematical problems that only specific hardware-intensive machines can solve. And when the first machine solves this problem, it is awarded some amount of bitcoin.
In turn, these problems serve as the cryptographic backbone of the blockchain. With the ‘complex problems’ acting as confirmation of transactions on the distributed ledger. Ensuring that no one can tamper with the blockchain or double spend any bitcoin.
People or groups who engage in this proof of work process are known as ‘miners’ — relying on expensive hardware, and many machines, in order to make a profit.
As you’d expect, running these machines requires energy.
And as the complexity of proof of work has gone up in tandem with the bitcoin price, energy usage has increased. Because the more complex the problem, the more intensive the mining process is.
This is where the concern about energy usage and sustainability comes into the mix.
Which in turn leads to reports like the one from the Cambridge Centre for Alternative Finance (CCAF). A study that posits bitcoin consumes roughly 110 Terawatt hours (TWh) of energy per year.
For context, that’s about 0.55% of global electricity production. About as much power used by a small nation.
On top of this, the CCAF estimate is just one of many and certainly represents the upper band of usage. With other metrics suggesting bitcoin’s energy consumption may be closer to just 39.3 TWh per year.
Here is the key distinction though; it is the type of energy that bitcoin miners use and when they use it that matters.
A diverse energy mix
Like any power source, bitcoin miners have options.
In fact, they have many more options than your typical household.
Coal, gas, solar, wind, hydro, geothermal, the list goes on. Bitcoin miners can use any of them if they choose so.
More often than not though, critics who raise this energy debate conflate ‘typical’ energy use with bitcoin. Associating the carbon emissions from an energy mix that is more typical of a household or business.
In reality, bitcoin miners often rely on totally different energy sources. Not having to restrict themselves to physical locations in cities or densely-populated areas. A limitation that often renders alternative energy sources useless for people’s everyday needs.
This is why remote and cheap energy sources are highly sought after amongst bitcoin miners. Because not only is it cheaper for them, but it is often more renewable/sustainable than many realise. Especially in areas where excess energy would otherwise go to waste.
For example, as Harvard Business Review reports:
‘In the wet season in Sichuan and Yunnan, enormous quantities of renewable hydro energy are wasted every year. In these areas, production capacity massively outpaces local demand, and battery technology is far from advanced enough to make it worthwhile to store and transport energy from these rural regions into the urban centers that need it.
‘These regions most likely represent the single largest stranded energy resource on the planet, and as such it’s no coincidence that these provinces are the heartlands of mining in China, responsible for almost 10% of global Bitcoin mining in the dry season and 50% in the wet season.’
Similarly, Iceland has long been touted as a bitcoin mining hotspot. Prized for its cold climate to cool mining hardware, as well as its abundance of cheap and sustainable geothermal energy.
Bitcoin critics who use this energy argument, though, rarely address this context.
Instead, they oversimplify and misconstrue the amount of fossil fuels bitcoin miners use. Exaggerating the carbon footprint of the overall ecosystem.
And perhaps most egregiously of all, they never talk about how energy intensive the current monetary system is…
Banking’s dirty secret
At the end of the day, what I hate most about this energy argument around bitcoin is how short-sighted it is.
Critics have simply distilled the energy usage of bitcoin down to a number with almost no context.
Because at the end of the day, even if bitcoin was as energy intensive as they say it is (which it isn’t!), its use is far more important than some other sectors.
I mean, if I were to use the same logic, why not just cut back on a lot of the garbage that is on TV nowadays? After all, that requires a tonne of energy as well, and has a far dirtier carbon footprint.
But no, you don’t see these people crying out in public to put a stop to that, do you?
Because these critics don’t actually care about energy use or cost. What they care about is the fact that bitcoin, and more specifically blockchain, is replacing the old monetary systems.
Systems, might I add, that are far more energy intensive than bitcoin has ever been.
Back in 2018, one crypto enthusiast put this argument to rest in my view. Because figuring out the entire global banking system’s energy use is no simple feat, but they did their best to estimate it. And this is the conclusion they came to:
‘So total consumption for banks during a year only on those three metrics [servers, branches, & ATMs] is around (I am rounding) 26 TWh on servers, 87 TWh on branches and 26 TWh on ATMs for a total of close to a 140 TWh a year.’
Far more than the likely usage of bitcoin mining currently. Which again, begs the question, where is the outcry over this?
There is none because it would be stupid.
Our society needs banks to ensure that the monetary system works. Which is why the energy required to keep it running is not seen as a waste, or pure pollution.
Now though, thanks to blockchain and bitcoin, it is a waste.
Because despite these lame and pathetic attacks, bitcoin has shown it is the future of money.
Not necessarily because it will replace fiat currency. But because the blockchain technology behind it will displace centralised finance.
And fortunately for our planet, it is far less energy intensive too.
Editor, Money Morning
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