Bitcoin’s reliance on energy is often misconstrued as a side effect of its design. On the contrary, it is an integral part of Bitcoin’s design.
Bitcoin’s reliance on energy is often misconstrued as a side effect of its design. On the contrary, it is an integral part of Bitcoin’s design.
One of the biggest criticisms of Bitcoin is that its network requires energy consumption to operate, contributing to the issue of climate change. However, this problem is a complex one. Although there are justifiable arguments against Bitcoin’s use of energy, there are also mitigating factors that must be considered.
In Proof of Stake networks, nodes, called validators, must put up a certain amount of their assets as collateral to secure the network and earn rewards in return for their service. Those collateral assets are called a stake and can be from validators (or slashed) if they do not act in the best interest of the network.
Although the vocabulary is different, miners in Proof of Work networks (like Bitcoin) also stake collateral. However, instead of locking up cryptocurrency, they use physical energy resources. Mining requires advanced computing hardware that works to solve a complex mathematical puzzle (called a hashing algorithm) to secure the network and create new blocks, and this process requires energy to power those computations. If miners do not act in the best interest of the network, the computing power associated with the activity is wasted, which serves as a deterrent against malicious activity.
The more computing power—and thus energy—that a miner dedicates to the network, the higher their chances of earning rewards. And, because energy costs can be high, miners are incentivized to use the most efficient equipment and cheapest energy to reduce their costs while earning profits.
The total amount of energy required by the Bitcoin network is related to the hashrate, which is the average speed that miners solve the hashing algorithm, such that as more computing power is added to the network, the higher the hashrate climbs. However, as more power is dedicated to Bitcoin’s network, the hashing algorithm increases in difficulty and thus requires more power for an individual miner to earn rewards. This keeps the creation of new blocks at a relatively steady rate of 10 minutes per block.
How much energy does Bitcoin use?
Measuring energy demand
Bitcoin’s use of energy is not constant, and it is thus hard to measure demand. As activity on the network oscillates and miners join and/or leave the network, the difficulty adjustment varies, and the hashrate and the energy used to drive it also change.
Historically, hashrate often rises with periods of increased Bitcoin adoption and price and drops when the opposite happens. This is because mining becomes more profitable as the price of Bitcoin increases.
The other issue with measuring Bitcoin’s energy consumption is that there is some disagreement among estimates. For instance, the University of Cambridge has developed a measure called the Cambridge Bitcoin Electricity Consumption Index (CBECI) that provides a slightly different power demand estimate than the Digiconomist platform. Many factors play into both models; however, both include mining revenues, hashrate, hashing algorithm difficulty, miner fees, cost of electricity, and equipment costs and efficiency.
Lastly, a common mistake when measuring the Bitcoin energy output is often calculating the amount of energy per transaction. Energy consumption is not directly based on the number of transactions Bitcoin processes, rather, energy consumption is directly related to the hashrate of the network.
Total energy consumption
In 2021 and 2022—years in which the hashrate has reached unprecedented levels—it is estimated that Bitcoin used between 80-160 terawatt-hours (TWh) of electricity. This is approximately a 10-times increase from the estimated energy consumption of the network in 2016. Of course, this relates to the meteoric rise in popularity of Bitcoin and participation on its network.
One of the most common ways of expressing Bitcoin’s energy consumption is in relation to how much electricity is used by various countries. Assuming the midrange of most annual estimates of electricity requirements (approximately 110-130 TWh annually), the Bitcoin network is on par with countries such as the Netherlands and Pakistan and uses more electricity than Finland. That is also the equivalent of 2-3% of the annual electricity generated in the United States per year, based on data from 2021.
However, it is believed that Bitcoin uses significantly less energy than the gold mining industry and the traditional banking system (acknowledging that estimates vary significantly), two financial services that Bitcoin was designed to supplant.
Bitcoin and clean energy
A report in 2021 by the Bitcoin Mining Council (BMC) estimated that Bitcoin miners’ sustainable electricity mix represented as much as 56% of all energy use. A mining report published by Coinshares in 2022 estimated that non-fossil fuel use was closer to 40%. This is similar to the worldwide use of nuclear power and renewable energy for electricity, which was estimated to be approximately 40% in 2021—with the remaining 60% of all energy consumption is done using oil, gas, and coal.
However, it is important to note that Bitcoin miners are naturally drawn to cheap energy. This is because reducing the costs to run their hardware cuts into profits less significantly. Naturally, some “clean” energy sources—especially solar, wind, and geothermal—are cheaper than fossil fuels, especially as macroeconomics and international disputes can drive up the price of traditional energy sources. According to the International Renewable Energy Agency (IRENA), renewable energies have also been getting significantly cheaper over the last 10 years.
Bitcoin and greenhouse gas emissions
Although Bitcoin’s consumption of electricity is remarkable, not all of the energy it consumes results in carbon emissions. While some of the electricity used by Bitcoin miners comes from burning coal, natural gas, and oil, a significant percentage does not come from these sources.
In any discussion about energy consumption, it is important to tease out what proportion is related to the burning of fossil fuels—especially if criticism of a service like Bitcoin is tied to its potential contribution to climate change.
Greenhouse gases are typically measured in million metric tons of carbon dioxide equivalent (MMtCO2e). Between 2020 and 2022, it is estimated that Bitcoin mining is responsible for approximately 30-70 MMtCO2e every year. That is comparable to the annual greenhouse gas emissions of Portugal, but it is significantly less than Bitcoin’s usual comparators when it comes to electricity consumption—like the Netherlands. For reference, passenger cars in the Unites States emitted over 600 MMtCO2e in 2020.
The discrepancy between Bitcoin’s use of energy and its comparably low dependency on fossil fuels can be attributed to the fact that Bitcoin mining harnesses significantly more clean energy sources than the average country, per unit of energy it consumes.
Bitcoin mining as a tool for clean energy providers
Bitcoin mining has proven to be a way for sustainable energy projects to add an additional revenue stream and reduce the amount of their wasted energy production. This is true particularly in periods where their ability to generate power exceeds the demand for that energy.
While some non-sustainable energy sources, such as coal and natural gas, can scale energy production based on the needs of energy consumers, this isn’t the case for some sustainable sources such as solar, wind, or hydro power which depend on nature and weather conditions to generate power.
As a result, there are periods where solar, wind, or hydro plants are able to produce energy but have no one to sell the energy to. In certain areas of the world, such as west Texas in the United States, there are extended periods where energy prices can turn negative due to a significant excess of supply and production capacity.
When these sustainable projects integrate with Bitcoin mining operations, they are able to generate revenue with energy production that would otherwise be wasted, helping improve their financial outlook.
Role of Bitcoin
When evaluating the utility of Bitcoin, it is important to assess its benefits as well as its costs.
The Bitcoin network has and continues to support many communities worldwide. These include human rights activists, populations suffering from war, people whose currency is undergoing periods of high inflation, and communities that are and continue to be unbanked for a variety of reasons, among many others.
Bitcoin has provided a useful tool to circumvent difficult circumstances and enabled anyone to take control of their own financial situation, regardless of their living conditions. These use cases should be considered and weighed against the various costs (like energy consumption) in any discussion about the role of Bitcoin in society.
Summary
It is well known that the Bitcoin network consumes a substantial amount of energy to power its mining mechanism. Estimates of just how much electricity it uses are variable, as are the appraisals of how much of the network is supported by sustainable sources like solar and wind.
The public’s opinion of Bitcoin’s use of energy will depend on its opinion of the network’s usefulness. Bitcoin’s creator, Satoshi Nakamoto, said in 2010: “The utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used. Therefore, not having Bitcoin would be the net waste.”
Bitcoin energy essentials
Bitcoin is a Proof of Work network whose miners require energy to run hardware that solves complex mathematical algorithms to secure the network and create new blocks. The speed at which computers solve the algorithm is called Bitcoin’s hashrate.
The energy consumed by Bitcoin’s network is estimated using multiple factors including the hashrate, miner fees, and equipment costs and efficiency. Over the course of 2021 and 2022, Bitcoin used approximately as much energy as the Netherlands.
Miners are incentivized to use cheap sources of electricity. Because sustainable energy can often be cheaper than fossil fuels, a significant portion of Bitcoin’s mining power is backed by renewable sources.