Is Bitcoin Sustainable?

energy consumption

Bitcoin’s sustainability has been hotly debated since Tesla’s decision to stop accepting it as a payment method last month. The announcement, which cited an increase in fossil fuel usage, is considered by many to have caused the largest crypto crash since 2013. Are these concerns justified? Or is Bitcoin truly sustainable?

Last week, Karan helped set the context around how proof-of-work actually works. Today we’re going to dig deep into one of Bitcoin’s most long-standing criticisms. Do the benefits of Bitcoin outweigh its environmental impact?

At first glance, this question depends more on how you feel about Bitcoin. If you’re pro-Bitcoin, then learning that it consumes approximately 0.55% of annual global electricity production sounds like a great deal. However, if you’re anti-Bitcoin, is it really fair for a glorified Ponzi scheme to consume as much energy as Malaysia or Sweden?

Just a little observation in how much context matters when presenting statistics. 

This is an incredibly broad question, with multiple touchpoints to consider. For the sake of clarity, let’s break these down into segments – and tackle each of them in turn. 

(Our readers in management consulting will recognise the fundamentals of the MECE approach 😁)

Our goal is not to “win” an argument, but to introduce more nuance to this debate.

How much energy does Bitcoin consume?

The transparent nature of a blockchain network makes it fairly easy to estimate Bitcoin’s energy requirements. You do this by looking at the Bitcoin hashrate, which is the total combined computational power used by the network. You can then use this information as a reference to estimate the energy requirements of the hardware miners are using. 

A May 2021 report by Galaxy Digital states that the Bitcoin network consumes an estimated ~113.89 TWh/yr in total. A terawatt hour (TWh) is a measure of electricity that represents 1 trillion watts sustained for one hour.

For context, Bitcoin consumes 0.09% of the global annual energy supply of ~166,071 TWh/yr. 

This sounds like a lot, and very little at the same time. Schrödinger’s energy consumption, if you will.

Introducing a related industry as a comparison would help make more sense of this statistic. But which industries? Bitcoin is novel, and no existing systems fit perfectly as a 1:1 comparison. However, it would be appropriate to benchmark its energy consumption against gold and the traditional banking system – the with which spaces it is most often compared.

The Galaxy report estimates the banking system uses 263.72 TWh of energy annually, while gold uses ~240.61 TWh/yr. Do keep in mind that these estimates are less informed, due to their significantly opaque systems relative to Bitcoin. You can find their methodology here.

Energy Consumption ≠ Sustainable Consumption

Next, we need to keep in mind that there is a difference between how much energy a system consumes and how much carbon it emits. This is due to the difference in precise energy mix – the share of different energy sources used. For example, one unit of hydro energy will have much less environmental impact than the same unit of coal-powered energy.

As we’ve seen, estimating Bitcoin’s energy usage is the easy part. Which is probably why the narrative often stops there. 

Bitcoin mining is immensely competitive, and miners are rarely keen to share details on their setup. This makes estimating the environmental impact much more difficult. The best estimates for energy mix can be made using studies from the Cambridge Centre for Alternative Finance (CCAF). The CCAF has worked with major mining pools to put together an anonymized dataset of miner locations. However, there are plenty of limitations to this data, which still leave us in the dark about Bitcoin’s energy mix. 

Consequently, we see large variance in estimates for the use of renewable energy in Bitcoin mining. One December 2019 report stated 73% of Bitcoin’s energy consumption was carbon neutral. Compare this to CCAF data which estimated the figure to be closer to 39% in September 2020.

Even if we take the lower bound, we’d be seeing that Bitcoin used twice as much renewable energy compared to a country like the US.

It is also worth noting that Bitcoin’s energy requirements are much more versatile than most. Nearly all energy produced worldwide is placed relatively close to its end user. Bitcoin has no such limitation. 

Where do Bitcoin’s energy requirements come from?

Bitcoin’s direct energy consumption comes from three sources: 

  • the nodes that validate and relay transactions, 
  • the pools that coordinate miners’ activity across the world
  • the mining machinery, which introduce fresh Bitcoins into supply

Plenty has been said about the energy cost per-transaction, which is a misleading metric. 

Consumption is not evenly distributed among these sources. In fact, almost 99% of energy consumption stems from the mining process. Once new Bitcoins have been introduced into supply, the energy required to validate transactions is minimal. 

With this in mind, it becomes difficult to point to the past trend in Bitcoin’s energy consumption to predict future growth. The Bitcoin halving system means that it is economically unviable for a miner to continuously expand their operations.

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