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Bitcoin Mining's Energy Consumption and its Environmental Impact

Bitcoin Mining's Energy Consumption and its Environmental Impact

Explainers Cryptocurrencies

02 Mar 2022

Bitcoin uses the Proof-of-Work (PoW) consensus mechanism that requires miners to dedicate their computing power to solve complex mathematical puzzles in order to validate blocks and add them to the blockchain.

In May 2021, billionaire Elon Musk announced that Tesla had decided to halt Bitcoin payments for its electric cars, citing concerns about the environmental footprints of the cryptocurrency's energy-intensive mining process.

Musk's statement further intensified a great debate that started in 2020, when government officials, regulators, enterprises, and mainstream media outlets heavily criticized Bitcoin for its negative impact on the environment.

Since then, it has become common to compare the activity's power utilization to the electricity consumption of entire nations without providing data for other energy-hungry industries as a comparison. At the same time, some critics have gone so far as to call BTC a "dirty currency."

Similar to when critics compare Bitcoin to the Dutch tulip mania, to a Ponzi scheme, or straight out call it a "fraud," the arguments against BTC mining in this debate are rather subjective. They fail to consider additional factors that would provide a complete picture of the issue.

Of course, crypto market players quickly jumped in to defend Bitcoin, saying that its network must consume great amounts of electricity to function properly. While many of these arguments are valid, subjectivism in this issue has been no stranger to digital asset enthusiasts either, with some claiming that it's not a topic the industry should worry about.

On the contrary, Bitcoin mining's environmental impact is definitely an important question that shouldn't be ignored. For that reason, prominent players in the digital industry have joined forces to make it more sustainable to mine BTC, with the increased usage of renewables and energy that would otherwise be wasted.

But has Bitcoin become greener since 2020? Let's find out!

Before jumping to the actual statistics, it's essential to revisit the basics of Bitcoin mining, the purpose of energy consumption during the process, and its potential impacts on the environment.

Energy Is Critical to Secure the Bitcoin Network

As you may already know, Bitcoin uses the Proof-of-Work (PoW) consensus mechanism that requires miners to dedicate their computing power to solve complex mathematical puzzles in order to validate blocks and add them to the blockchain.

Similar to gaming and many other computer-related activities, miners turn electricity into computing power, which is a measure that refers to how fast a machine can perform an operation. Since the PoW mechanism is responsible for achieving consensus among validators in the Bitcoin network in a decentralized way, energy is a crucial element in securing the cryptocurrency's ecosystem.

In fact, the mining process allows Bitcoin to be one of the most resilient computer systems and financial networks in the world that features a nearly 99.99% uptime with less than 15 hours of downtime throughout its 13 years of history. At the same time, since attackers would have to spend a fortune and use tremendous amounts of energy to take over the network for only a few hours, no one has ever managed to hack BTC or counterfeit on-chain transactions.

For these reasons, it wouldn't make much sense for Bitcoin to switch to a significantly less energy-intensive consensus mechanism, such as the Proof-of-Stake (PoS) algorithm and its variants.

Do We Really Need Bitcoin?

Now that we have discussed why Bitcoin mining needs electricity, it's time to see whether it is sensible to leverage so much energy to keep BTC around. The short answer is yes.

Unlike fiat money that is issued, controlled, and managed by central banks, Bitcoin's blockchain network is permissionless, governed, and managed by its community without any centralized authorities. This means that no one can stop you from using it, or increase the money supply arbitrarily, or prevent you from sending and receiving transactions on the chain. Furthermore, while BTC facilitates financial sovereignty, it enhances human rights as well as decreases individuals' dependence on nation-states.

In terms of money supply, Bitcoin is a deflationary currency that features a fixed supply of 21 million coins as well as a gradually decreasing inflation rate, as the amount of new BTC mined with each block is cut in half roughly every four years via the halving mechanism.

For these reasons, BTC has become an attractive alternative investment vehicle and store of value for a growing number of retail and institutional investors who have found it an excellent tool to combat the rising inflation rates worldwide. Also, due to its deflationary properties, Bitcoin's price is expected to grow in the long run, even if the demand stays at the same level as now.

At the same time, you don't have to use the services of any intermediaries to transfer money on the BTC blockchain. Instead, Bitcoin transactions are executed in a peer-to-peer (P2P) way, meaning that they are directly sent and received between users. Also, BTC is truly global, without any geographical restrictions for people who use the network or the hefty transaction fees charged by banks for cross-border transfers.

Since scalability wasn't a top priority in the Bitcoin main chain's design - the focus remains on security and decentralization instead - it's not the best platform to settle everyday payments. This is the reason why developers created the Lightning Network, a layer-two scalability solution on top of the L1 blockchain that makes it possible for users to send and receive instantaneous and inexpensive BTC micropayments.

Overall, Bitcoin has so many strengths and unique benefits for human society that it is definitely worth keeping around. And, even though it is the oldest functional cryptocurrency within the industry and many altcoins have since then come into existence, BTC has managed to remain the largest digital asset by market cap throughout its 13 years of history.

Bitcoin's Energy Consumption and CO2 Emissions Compared to Other Industries

So, we have concluded that electricity is a crucial element of securing the Bitcoin network, and BTC is an asset that is worth keeping around even if its ecosystem's maintenance is a power-hungry process.

Now, it's time to see how this impacts the environment and how severe it is, especially if we compare it to the energy consumption of other industries.

According to the Bitcoin Mining Council's (BMC) Q4 2021 report, out of the 154,750 TWh energy generated every year, global BTC mining uses 220 TWh, which represents only a 0.14% share. Interestingly, while the military-industrial complex, US air conditioning, as well as the finance and insurance industry consume 6,691 TWh, 6,283 TWh, and 4,939 TWh respectively, gold mining (571 TWh) involves a 2.6 times higher energy-intensive process. At the same time, it costs only a little more power to secure the Bitcoin network than to run computer games (214 TWh) and keep holiday lights (201 TWh) turned on.

As you can see, Bitcoin contributes to a very small share of the world's power consumption. And it seems that this is also the case with CO2 emissions.

According to CoinShares' January 2022 report, BTC mining features a total net emission of 39 Mt CO2, accounting for less than 0.08% of the global (49,360 Mt CO2) carbon emissions annually. For comparison, CoinShares estimates that the worldwide banking system, data centers, and tumble dryers emit 130 Mt, 100 Mt, and 53 Mt of CO2 in a year, respectively.

As the creators of the report phrased, Bitcoin's annual carbon emissions are an "insignificant addition to total emissions" in a global context. While this statement is indeed true, and it seems like critics have put too much emphasis on BTC's role in harming the environment, this doesn't provide a valid case to neglect the issue.

On the contrary, we should focus on making Bitcoin greener as well as more energy-efficient and sustainable.

Is Bitcoin Getting Greener?

As we have discussed all the key questions, background information, and data around Bitcoin's energy usage and how it impacts the environment, it's time to see whether the cryptocurrency's mining activity has become greener since the start of the debate in 2020.

According to the 3rd Global Cryptoasset Benchmarking Study published by the University of Cambridge in September 2020, while the majority (76%) of miners utilized renewable energy, sustainable power only contributed to 39% of the total consumption of Bitcoin mining in the surveyed period.

BMC's data seems to confirm this phenomenon, with researchers measuring the share of renewable electricity in Bitcoin mining at 36.8% even in Q1 2021. Interestingly, the data shows that BTC's sustainable power mix wasn't that low at the time, especially when compared to Germany's 48.5%, the EU's 43.5%, Iran's 33.5%, and the United States' 31.4% that are among the leading jurisdictions in this field.

Since then, the sustainable electricity mix in Bitcoin mining has grown tremendously. By Q4 2021, renewables dominated BTC's power consumption with a 58.5% share representing a nearly 60% increase from the BMC's first-quarter data and a 50% growth from the University of Cambridge's September 2020 report.

At the same time, a growing trend (+41%) could be observed since Q2 – even after a 53% drop between Q1 and Q2 – in terms of fleet electricity consumption. However, mining efficiency (which refers to how much hashrate miners contribute to the network compared to how much energy their rigs consume) has increased more significantly throughout 2021. As a result of the over 53% growth in this field, while the BTC network featured a higher hashrate in Q4 (169,855 PH) than in Q1, the mining fleet's electricity consumption fell 33% in the same period.

The reason why Bitcoin mining rigs are becoming more efficient is rather straightforward. Due to the cryptocurrency's halving mechanism, miners earn 50% fewer block rewards roughly every four years. Since electricity costs money and they are generating half the profits than before, it makes sense for them to increase the power efficiency of their fleet so they can contribute more hashrate to the network with less energy (thus, improving profitability without reducing revenue).

In addition to reducing the industry's negative impact on the environment and responding to criticism in this field with real action, enhancing miners' profitability is among the main reasons why market players are increasingly turning to sustainable energy. And it is also why BTC mining rigs are often powered by methane, an unwanted dry gas that is 40 times more potent as a greenhouse gas than CO2 and would be otherwise flared by oil producers.

In terms of methane and renewable electricity, Bitcoin mining has a powerful ability to convert wasted energy into computing power to maintain its underlying blockchain network via the on-site deployment of the fleet. As a result, while it provides an alternative revenue source for oil producers and a way to optimize renewable-powered electricity grids that are often subject to overproduction, since these resources would have been otherwise wasted, BTC miners have access to much lower prices.

While BMC estimates that 50,000 TWh energy is lost due to inefficiencies every year, Bitcoin mining "saves" 0.44% of this wasted power, which is even higher in the US (3.2%). At the same time, CoinShares' estimation suggests that flare mitigation removes a total of 2.1 Mt CO2 equivalents annually, which represents 5.12% of BTC mining's gross carbon emissions (41 Mt).

Bitcoin Mining to Become a Crucial Building Block in the Renewable Energy Sector

Bitcoin's power consumption is definitely a controversial topic. However, despite the exaggeration of critics in this field, it is an important issue that has a great influence over the sustainability of the crypto industry as well as the overall public opinion about digital assets.

Since Bitcoin is a critical tool for society and significant amounts of energy are needed to operate without compromising its security and decentralization, increasing the share of renewables in mining is an excellent solution to gradually reduce its impact on the environment.

And, since global Bitcoin mining features a nearly 60% sustainable electricity mix, we can safely say that this sector is increasingly going green. The halving mechanism further incentivizes this trend, as miners are forced to enhance their fleet's efficiency and turn to sustainable energy to retain their profitability after block rewards are reduced to half during market cycles.

Most importantly, as sustainability plays a more critical role in the industry, Bitcoin will eventually become a crucial building block in the renewables sector's development due to its unique ability to transform wasted energy into computing power.

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