The price of one bitcoin hit a record $44,000 on Monday, after Tesla entrepreneur Elon Musk bought $1.5bn of the cryptocurrency. It is now the world’s fifth-largest currency when measured by gross money supply. Such news is often followed by scathing analyses of the cryptocurrency’s environmental impact. It has been labelled an ‘environmental disaster’ because of the amount of energy required to process transactions.
Bitcoin is based on a list of digital records known as blockchain, which stores the data of every transaction made through the currency. Bitcoin ‘miners’ ensure the continued functioning of the currency. They add new transactions to the blockchain by collectively carrying out extremely complicated mathematical sums known as ‘hash functions’. The aim is to try to solve algorithmic puzzles needed to create new ‘blocks’. Every ten minutes or so, a server somewhere finds the right solution: a new block is then added to the blockchain, and the successful miner is issued a financial reward that is paid out in bitcoin.
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By GlobalDataThe mining process has three desirable outcomes: it confirms bitcoin transactions, it ensures the security of a totally decentralised system, and it issues new bitcoins.
Since bitcoin’s invention in 2009, the cryptocurrency’s hash rate – the size of the computer network attempting the functions needed to mine a new block – has grown at a fairly consistent rate. This growth has continued even as the price of bitcoin and the value of miners’ financial returns has fluctuated. Conventional logic suggests that the more computers there are in a system, the higher its energy use. However, other factors also influence this, such as the need to cool data centres and the efficiency of mining hardware.
Total network consumption estimates vary hugely. Digiconomist’s Bitcoin Energy Consumption Index puts it at the equivalent of 77.8 terawatt-hours (TWh) of electricity a year. Cambridge University’s Centre for Alternative Energy offers three estimates: 260.4TWh and 39TWh as upper and lower limits, and 111.7TWh as the middle estimate, as of 28 January 2021.
Digiconomist’s model is based on more assumptions than the Cambridge model, notably that 60% of miners’ revenue is always spent on electricity costs. “We looked at previous modelling and decided to take more of a bottom-up approach,” explains Anton Dek, who leads work on cryptocurrencies and blockchain at the Cambridge Centre for Alternative Finance. “We looked at the hash rate data that was available, and when different equipment came out and the level of efficiency of each piece of equipment.”
He continues: “We made the assumption that miners would only run their equipment when it would be profitable to do so. The lower estimate on our graph represents the lowest possible amount of energy that could ever be mining bitcoin, with the most efficient mining equipment available. The upper estimate would be the case if miners were using the least efficient hardware. The middle estimate represents energy consumption with an average basket of equipment.”
Whatever the true value of bitcoin’s energy use, these figures are huge. The Cambridge researchers’ middle estimate of 111.7TWh is equivalent to the entire consumption of electricity in the Netherlands in 2019. It is perhaps no surprise, therefore, that software engineer Stephen Diehl recently described the power consumption of bitcoin as “a giant smouldering Chernobyl sitting at the heart of Silicon Valley”.
However, bitcoin’s relevance to the clean energy transition is more nuanced than simply the sheer amount of energy consumed by its mining network.
Bitcoin mining’s main overhead is the price of electricity. Experts agree that cost-effective mining depends on whether bitcoin miners can keep power costs down with the cheapest available electricity. This often means mining with cheap renewable energy in cool locations.
“It is all about efficiency: miners seek out the most efficient route to find the cheapest sources of power,” says British bitcoin miner and cryptocurrency consultant Jason Deane. “Bitcoin mining can be very flexible: miners can travel to wherever there is an abundance of power at a given time.”
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Ethan Pierse, director at the CryptoAssets Institute, a cryptocurrency advisory firm, adds: “If you are an entrepreneur building data centres for bitcoin mining, your profitability comes from cheap electricity and being in cooler regions, so you don’t need as much air conditioning. Miners are looking for excess, non-competitive electricity – and this means lots of wind, solar and hydroelectric power.”
Numerous studies suggest this approach has often meant that bitcoin miners seek out renewable energy in areas where generation is in surplus and would otherwise have to be curtailed.
Analysis of the IP addresses of bitcoin miners by Cambridge University between September 2019 and April 2020 shows 76% of bitcoin miners are based in China. Beijing has invested heavily in renewables in recent years – $758bn between 2010 and the first half of 2019, says the UN – but much of the country’s renewable capacity has been built in remote areas, where a lack of ultra-high-voltage electricity transmission leads to electricity being curtailed.
The landlocked western province of Xinjiang has the third-lowest population density of all China’s provinces, at 15 people a square kilometre. It also has among the highest capacities of wind and solar power in the country – 34% of the province’s total electricity capacity in June 2019 – and the highest curtailment rates. These were 32% for wind power in 2015 and 20% for solar power in the first half of 2018, shows Deutsche Bank and Chinese National Energy Agency research.
Xinjiang has among the largest number of IP addresses carrying out bitcoin mining hash functions in the country. Data suggests bitcoin miners have been taking advantage of the province’s cheap surplus solar and wind power.
Further analysis of the hash rate IP addresses shows how during the rainy season in southern China, when hydropower generation substantially increases, the amount of bitcoin being mined from those regions also increases. At the height of the rainy season in September 2019, the provinces of Sichuan and Yunnan – which have the highest number of hydroelectric plants in the country – represented 37.4% and 10.3% of the Chinese hash rate respectively. This dropped to 12.1% and 6.1% once the rainy season was over in January.
As with estimates of overall energy use, analysts disagree on the true proportion of bitcoin mining powered by renewables. One analysis from June 2019 put this figure at around 74%. The 2020 Global Cryptoasset Benchmarking Study from the University of Cambridge suggested 76% of digital currency miners use renewable energy sources, but that only 39% of miners’ total energy consumption comes from renewables.
All this does suggest, however, that bitcoin consumes a greater proportion of electricity from renewables than the global average, which was 28% in Q1 of 2020, according to the International Energy Agency.
“Bitcoin miners are driving innovations in renewables and power supply,” says Pierse. “They are embracing renewables and efficiency in data centres earlier than everybody else for profitability reasons.”
Daniel Quiggin, a senior research fellow at Chatham House, is more sceptical when the real-world applications of bitcoin are weighed up against issues around its energy use.
“The greatest opportunity that bitcoin and other cryptocurrencies offer is to challenge the fiat currencies [government-issued currencies unpegged to any innate value system, such as the gold standard] that dominate the world,” he says. “These bring about huge amounts of ill, encouraging greater debt, higher growth and high-consumption lifestyles.
“But this original intention has been lost,” continues Quiggin. “Bitcoin still doesn’t really have many real-world applications, and the price bubbles just encourage hoarding and the accumulation of wealth. We end up with these fairly weak arguments about nimble Chinese players moving around to follow hydropower, which misses the opportunity to change one of the fundamental drivers of climate change: high-growth, high-consumption lifestyles.”
A currency for the energy transition?
Beyond discussions around energy consumption, some argue that bitcoin can play a practical role as a currency for the clean energy transition. Greenpeace US accepts donations in bitcoin, citing the benefits of bitcoin processors charging less for transactions than conventional bodies, and the ease of money transfer for the organisation’s global members.
“The huge and ever-growing amount of energy needed to run bitcoin is largely down to the particular technology used to maintain this digital currency, but it also points to a wider challenge for the future of the internet,” says Greenpeace USA’s Travis Nichols. “The internet has the potential to serve as a critical foundation for sustainable economic growth, but its expansion needs to be powered by clean energy sources that help, not hinder, the crucial challenge of tackling climate change.
“Greenpeace is working hard to change the way the world makes energy, including in China where about half of the emissions associated with bitcoin mining are generated,” Nichols adds. “Due to the distributed nature of bitcoin mining, we are focusing efforts on government action and more traditional concentrated corporate actors like Apple, Facebook, Amazon and Google to change the electricity grid for all users of energy.”
Cryptocurrency start-ups have begun to appear in the clean energy space to try to take advantage of the potential of bitcoin. The Sun Exchange, a company that facilitates solar financing for commercial and industrial solar projects, uses bitcoin to allow individuals worldwide to buy solar cells in developing nations and profit from doing so as if the panels were on their own home.
“Our model allows people to get the economic benefits of having cheap power from solar, plus the social effects of job creation installing solar panels in emerging markets,” says Sun Exchange founder Abe Cambridge. “When I first moved to South Africa, I saw how slow it was to move money across borders. But bitcoin allows people to send very small amounts of money in a matter of minutes, to build solar panels anywhere in the world.” A total of 30% of investors in The Sun Exchange buy solar cells using bitcoin and 64% elect to earn bitcoin from their solar cells.
“Blockchain could be a game changer”
Writing in Nature, wildlife researcher Guillaume Chapron argues that blockchain can help the clean energy transition when decoupled from the cryptocurrency it was created to support. “For sustainability, blockchain technology could be a game changer,” he writes. “It can generate trust where there is none, empower citizens and bypass central authorities… Laws could be replaced with ‘smart contracts’ written in computer code.”
Bitcoin uses a massive amount of energy because of the ‘mining’ system it relies on for security and bitcoin issuance. Remove this function, and you are left with a highly secure, decentralised database with many potential real-world applications.
“Blockchain is about replacing humans with an algorithm that is more trustworthy and more efficient,” says Pierse. “There is a lot of potential for this in modern energy systems.”
Mitsubishi, KPMG, and the Port of Rotterdam have all announced clean energy projects making use of blockchain technology.
WePower is a Lithuania-based start-up that uses blockchain technology to create a marketplace from which it is possible to purchase green energy directly from producers.
Blockchain is unique: it is a trust-establishing mechanism that offers cheaper, easier and faster solutions than conventional technologies. Kaspar Kaarlep, co-founder of WePower
“When you pay your power bill to a conventional energy company, your money goes to a load of different places that are very hard to trace,” says Kaspar Kaarlep, co-founder of WePower. “Blockchain can provide a granular auditing system, allowing customers to choose where they buy their power from. It basically turns the energy seller into a big digital service provider.”
The company has operations in Estonia, Lithuania, Spain and Australia, with plans to expand worldwide. “Blockchain is unique,” Kaarlep says. “It is a trust-establishing mechanism that offers cheaper, easier and faster solutions than conventional technologies.”
Although less energy-intensive than the bitcoin mining network, blockchain solutions still use much more energy than a centralised alternative that does not store information on one massive digital ledger.
“It comes down to whether or not you believe in cryptocurrency and blockchain-based solutions,” says Pierse. “If you don’t believe in them, the energy argument works in your favour. But the reality is that the entrepreneurs working in this space are looking for innovative ideas that are supported by the most efficient and cheapest power possible – and in today’s world that is renewable power.”
