How much energy does Bitcoin actually consume?

Illuminated mining rigs operate inside racks at the CryptoUniverse cryptocurrency mining farm in Russia. Photo / Getty Images

According to the Cambridge Center for Alternative Finance, Bitcoin currently consumes around 110 terawatt-hours per year, accounting for 0.55 per cent of global electricity production and roughly equivalent to the annual energy draw of small countries like Malaysia or Sweden. This sounds like a lot of energy. But how much energy should a monetary system consume? Understanding Bitcoin's energy consumption can help to contextualize how much of an environmental impact Bitcoin really makes.

ENERGY CONSUMPTION IS NOT EQUIVALENT TO CARBON EMISSIONS

There's an important distinction between how much energy a system consumes and how much carbon it emits. Bitcoin's energy consumption is relatively easy to estimate: You can look at its hashrate (the total combined computational power used to mine Bitcoin and process transactions), and then make educated guesses as to the energy requirements of the hardware that miners are using. But you cannot extrapolate the associated carbon emissions without knowing the precise energy mix — the makeup of different energy sources used by the computers mining Bitcoin. The best estimates of energy production geolocation (from which an energy mix can be inferred) come from the CCAF, which has worked with major mining pools to put together an anonymized data set of miner locations.

Based on this data, the CCAF can guess about the energy sources miners were using by country, and in some cases, by province. But their data set doesn't include all mining pools, nor is it up to date, leaving us largely in the dark about Bitcoin's actual energy mix. As a result, estimates for what percentage of Bitcoin mining uses renewable energy vary widely. In December 2019, one report suggested that 73 per cent of Bitcoin's energy consumption was carbon neutral, largely due to the abundance of hydropower in major mining hubs like Southwest China and Scandinavia. However, the CCAF estimated in September 2020 that the figure is closer to 39 per cent. Even if the lower number is correct, that's still almost twice as much as the US grid, suggesting that looking at energy consumption alone is hardly a reliable method for determining Bitcoin's carbon emissions.

BITCOIN CAN USE ENERGY THAT OTHER INDUSTRIES CAN'T

Almost all of the energy used worldwide must be produced relatively close to its end users — but Bitcoin has no such limitation, enabling miners to utilize power sources that are inaccessible for most other applications. Hydro is the most well-known example of this. 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. It's no coincidence that these provinces are the heartlands of mining in China, responsible for almost 10 per cent of global Bitcoin mining in the dry season and 50 per cent in the wet season.

Another promising avenue for carbon neutral mining is flared natural gas. The process of oil extraction today releases a significant amount of natural gas as a byproduct — energy that pollutes the environment without ever making it to the grid. Since it's constrained to the location of remote oil mines, most traditional applications have historically been unable to effectively leverage that energy. But Bitcoin miners have seized the opportunity to monetize this otherwise-wasted resource, and some companies are even exploring ways to further reduce emissions by combusting the gas in a more controlled manner. This is still a minor player in today's Bitcoin mining arena, but calculations suggest that there's enough flared natural gas in the US and Canada alone to run the entire Bitcoin network.

Bitcoin uses as much energy as a small country. Photo / Getty Images

This excess natural gas still creates emissions, and some have argued that using it encourages energy companies to invest more in oil extraction than they otherwise might. But income from Bitcoin miners is a drop in the bucket compared to demand from other industries that rely on fossil fuels — and that external demand is unlikely to disappear anytime soon. Given the reality that oil is and will continue to be extracted for the foreseeable future, exploiting a natural byproduct of the process is a net positive.

MINING BITCOIN CONSUMES A LOT MORE ENERGY THAN USING IT

Many journalists and academics talk about Bitcoin's high "per-transaction energy cost," but this metric is misleading. The vast majority of Bitcoin's energy consumption happens during the mining process. Once coins have been issued, the energy required to validate transactions is minimal. As such, simply looking at Bitcoin's total energy draw to date and dividing that by the number of transactions doesn't make sense — most of that energy was used to mine Bitcoins, not to support transactions.

RUNAWAY GROWTH IS UNLIKELY

Because Bitcoin's energy footprint has grown so rapidly, people sometimes assume that it will eventually commandeer entire energy grids. But there's good reason to believe this won't happen. As has become common in many industries, the energy mix of Bitcoin grows less reliant on carbon every year. Many organizations within the mining industry have launched initiatives like the Crypto Climate Accord to advocate for and commit to reducing Bitcoin's carbon footprint. And as renewable options grow more viable for mining, Bitcoin could end up serving as a serious incentive for miners to broaden these technologies.

Miners are also unlikely to continue expanding their mining operations at the current rates indefinitely. The Bitcoin protocol subsidizes mining, but those subsidies have built-in checks on their growth. Today, miners receive small fees for the transactions that they verify while mining, as well as whatever profit margins they can get when they sell the bitcoins they have mined. However, the protocol is built to halve the issuance-driven component of miner revenue every four years, so unless the price of Bitcoin doubles every four years in perpetuity, that share of miner revenue will eventually decrease to zero. Bitcoin's natural constraints on the number of transactions it can process (fewer than a million per day) combined with users' finite tolerance for paying fees also limit its growth potential.

There are countless factors that can influence Bitcoin's environmental impact, but many concerns are exaggerated or based on flawed assumptions of how the Bitcoin protocol works. Nevertheless, there's no denying that Bitcoin does consume resources. As with every other energy-consuming industry, it's up to the crypto community to acknowledge and address these environmental concerns, work to reduce Bitcoin's carbon footprint and ultimately demonstrate that Bitcoin's societal value is worth the resources needed to sustain it.

- Article written for Harvard Business Review by Nic Carter, a general partner at Castle Island Ventures and co-founder of Coin Metrics.