The Single Most Important Truth About Bitcoin Mining, Energy and the Environment

Greenpeace USA plastered Manhattan skyscrapers with laser-eyed animations of JPMorgan Chase and BlackRock CEOs Jamie Dimon and Larry Fink last week, along with shocking statistics about the energy use and emissions of bitcoin mining.

Bitcoin's advertising claims that it "WILL ONLY GET WORSE WORSE WORSE!" in terms of its environmental impact, citing statistics like the fact that it consumes more energy than many countries and releases more carbon than millions of automobiles. In case the first three WORSES weren't convincing enough, the remaining two were stacked vertically to fill the remaining building width.

This article is part of CoinDesk and Foundry's sponsored 2023 Mining Week. Professor of Philosophy and Humanities at Reed College, Bitcoin Policy Institute fellow, and co-founder of The Nakamoto Project is Troy Cross.

As a green activist who has researched bitcoin mining's energy consumption since 2011, I come at this topic from a very different angle. Bitcoin has great potential as a means of decarbonizing the grid, eliminating waste methane, and speeding up the electrification of heating systems, in my opinion. To the contrary, I expect that bitcoin mining's carbon footprint will shrink over time. And, contrary to popular belief, I think this will lead to lower energy prices.

How did my views become so diametrically opposed to those of Greenpeace USA?

The most crucial fact about Bitcoin's effect on energy systems is not yet understood by sceptics: bitcoin mining tends to use only the cheapest electricity in the world, wherever that may be. Currently, the average cost of electricity for miners is significantly lower than $0.08 per kilowatt hour (kWh), with some reporting rates as low as $0.02/kWh.

However, over the next few months and years, those figures will continue to drop until bitcoin mining is only profitable using free or nearly free power.

In the following, I will provide evidence in support of this assertion and then demonstrate that the use of bitcoin to acquire close to free energy has beneficial effects for both the energy sector and the environment.

Bitcoin miners can profit from both the block reward and transaction fees. We will ignore transaction fees because they currently contribute very little to miners' income. The block subsidy is the mechanism by which new bitcoins are introduced into circulation; approximately 900 new bitcoins are distributed daily to miners around the world in a manner roughly proportional to their hashrate.

Every four years, there is a phenomenon known as the halving, in which the rate of issuance is reduced by half. The daily rate at which bitcoin is created will decrease to 450 BTC in April 2024 and remain at that level until 2028, when it will drop to 225 BTC.

Bitcoin is a fungible good because it can be mined with the same specialised mining equipment (application-specific integrated circuit, or ASIC) at roughly the same rate no matter where it is located in the world because the input is the same (electricity). After being mined, bitcoins can be traded on exchanges around the world and "shipped" to their new owners in an instant by updating the bitcoin network's public ledger.

Bitcoin miners can be easily shut down and restarted, and their power consumption can be fine-tuned to maximise profits.

Firstly, there is a very low barrier to entry in this market due to the fungibility of the product and the standardisation and accessibility of the means of bitcoin production, namely ASICs. Your bitcoins will be just as valid as anyone else's, and you can use the same mining hardware. Therefore, someone, somewhere in the world will do it if it costs less than one bitcoin to mine one bitcoin.

Second, once the mining market is saturated, the most expensive miners will be sitting on the brink of profitability, with just enough profit to make it worthwhile to continue. This will discourage new entrants into the market unless they can reduce their own operating costs to below the marginal miner's. A marginally profitable miner will go out of business if a new entrant arrives on the scene during saturation and is successful.

Third, miners who have access to inexpensive energy have a distinct advantage. If energy accounts for 70% of your costs, and you can reduce that cost by 50%, you will have increased your profits by a whopping 35%. While other factors, such as firmware, cooling, taxes, staff, capital availability, uptime, etc., are important to a company's success, electricity costs are the 800-pound gorilla in the room. No matter how competitive your other costs are, if you have a huge disadvantage on a cost that makes up 70% of your expenses, your business is doomed; cheaper energy reserves will be tapped somewhere in the world until you give up and sell off your assets.

Bitcoin's issuance is halved every four years, and the next halving will occur in April 2024. This has the effect of violently shaking out less efficient miners. Without a doubling in bitcoin's price or a dramatic spike in the fee market, the global sum that bitcoin miners are expected to spend on energy is expected to decrease by nearly 50% in nine months, meaning that any miner with thin, or even moderate, margins will be forced to find cheaper energy or perish.

Consequences of being an energy miser

As a result, it appears that bitcoin is headed in the direction of the world's cheapest energy. So, what does that imply? The immediate implication is that utility rates will not be significantly increased due to bitcoin. It's impossible. It would be more profitable to mine in another region if the entry of bitcoin miners into that region's electricity market significantly increased prices for most users. Once the cost of electricity in the area becomes prohibitive for miners, their jobs will be at risk.

Since miners can be stopped at any time, they never add to the peaks of demand within a grid during times when electricity is the most expensive (when it costs more than a bitcoin just for the electricity to mine a bitcoin). The high cost of maintaining necessary infrastructure and satisfying peak demand is largely attributable to demand spikes. Miners may increase price floors (but not by much; otherwise, they'll be left behind), but they will never increase price ceilings.

A second, much more dire environmental conclusion is that the cheapest energy in the world is energy that nobody wants right now. This refers to energy that is either produced at the wrong time or left floating around in outer space. Such cheap surplus power is typically the result of generation that cannot swiftly respond to variations in load (nuclear, hydro, wind or solar).

If gas demand drops, the plant can simply reduce gas output. However, these non-fossil sources of power cannot reduce their production when demand drops during some part of the day or when heavy industry leaves a region, so prices fall. Such concentrations of excess electrical power are expected to grow in the coming decades as a result of ambitious plans to deploy renewable generation.

In local power markets with insufficient demand, the economics of intermittent renewables like solar and wind can be improved by having Bitcoin used to purchase excess electricity generated at the wrong time by nuclear or hydro facilities.

To better understand this, an analogy might be useful. Let's say a customer of a bakery made a commitment in advance to buy a certain number of pastries every day, with the caveat that if the day was particularly busy, the commitment would be voided. Let's say, too, that the client promised to buy up all unsold baked goods at the end of each day. That's the process of "mining" for bitcoins.

Like the ideal bakery customer, who buys frequently but is willing to give way their spot in line when demand is high, miners agree to buy a set amount of power in advance at a low price and then turn off their machines when demand is high. Bitcoin miners with older, less efficient machines wait for the only energy on which they are profitable: the free stuff, much like a bakery buyer waits for stale baked goods at the end of the day.

The seller, whether of baked goods or electricity, is able to satisfy the needs of the customer and, as a result, receives consistent income.

Bitcoin's frugal energy consumption has another benefit: it's perfect for recycling otherwise wasted energy. Flared methane generates no revenue, but it could power homes and even be used to mine bitcoin if put to better use. Flared gas is the "strongest lever we have to slow climate change over the next 25 years," according to the United Nations, and bitcoin miners will seek it out at landfills, wastewater treatment facilities, farms, and oil fields.

In the end, an ASIC converts all of the electrical energy it receives into heat. Those miners who figure out how to profit from selling this heat will have a leg up on their rivals. Spas, distilleries, and district heating systems are just a few examples of places where this practise is already commonplace. If it's successful, we can assume it will be repeated.

In conclusion, bitcoin mining is a nearly ideal market where margins are decreasing towards zero and where energy is the primary input. Since mining is decentralised, scalable, and time-independent, it will occur whenever and wherever electricity is cheapest. As a result, non-dispatchable generation will continue to result in non-rival consumption of wasted energy.

By improving the economics of non-dispatchable power generation, incentivizing the cleanup of waste methane, and electrifying heating, the consumption of what would otherwise be wasted energy promises to be good, not bad, for energy economics and for the emissions of our energy systems as a whole.

Challenges encountered in real life and unanswered questions

All the conclusions I've drawn above are subject to qualifications and exemptions. In the short term, it may be the case that miners who have access to capital, rather than cheap energy, thrive. Who wants a mining operation that can be seized at any moment by a corrupt government? The risk of operating in an unfavourable jurisdiction can outweigh the savings on electricity.

During bull markets, there may be a shortage of application-specific integrated circuits (ASICs) or other forms of power infrastructure, allowing miners to continue spending lavishly on energy despite slimmer profit margins.

It's also possible for the halving event to set off such a massive bull run that it doesn't force out inefficient players. Bitcoin's volatility makes it difficult to secure financing for new electrical generation projects based on promises of bitcoin mining. Mining using only renewable energy presents its own set of challenges, as cheap electricity from intermittent renewables comes with significant downtime while ASICs depreciate at a steady rate.

My regional Econ 101 analysis falls short when states subsidise energy and regulate energy markets; for example, when coal-fired power plants are subsidised, they become cost-effective ways to mine bitcoin. Bitcoin miners could game the electrical market by locking in low prices while other buyers are charged more to meet the higher demand.

These caveats are all genuine and help to clarify the circumstances that have fueled a flood of negative coverage of bitcoin mining in the media over the past two years. In the wake of China's ban on bitcoin mining—which occurred during the cryptocurrency's historic bull run—the industry scrambled for electricity at any cost, putting strain on local grids and keeping open fossil fuel plants that had been slated for closure.

However, the aforementioned caveats demonstrate the rule rather than the exception. Each one is a hiccup or market failure that will eventually give way to the relentless pursuit of cheap or free energy. The most mobile, scalable, flexible, and cost-conscious energy consumer in history will eventually find a way to take advantage of the surplus of unwanted energy that exists today. Ultimately, this is predetermined.

Of course, Greenpeace will keep insisting that bitcoin will destroy the world and demanding changes to the cryptocurrency's source code. They have demonstrated, over the course of a decade-long campaign against nuclear energy, that they are willing to attack a climate-saving but novel and frightening technology based on the most flimsy of evidence.

However, more needs to be done to have serious conversations about the effects of bitcoin mining on energy systems and the environment among policymakers and industry leaders. They need to dig into the nitty-gritty of this emerging technology, eventually reaching a consensus on what bitcoin mining actually is before diverging into competing theories about how the process works in the real, messy world.

Bitcoin mining's incessant pursuit of cheaper energy is that point of convergence, the basis of rational discourse.

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