How Bitcoin’s vast energy use could burst its bubble

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We’ve all heard the stories of Bitcoin millionaires.

Elon Musk is the latest.

His electric car company Tesla made a paper profit of more than $900m (£646m) after buying $1.5bn (£1bn) -worth of the cryptocurrency in early February.

Its high profile support helped pushed the price of a single Bitcoin to more than $58,000.

But it isn’t just the digital asset’s price that has hit an all-time high. So has its energy footprint.

And that’s caused blowback for Mr Musk, as the scale of the currency’s environmental impact becomes clearer.

It also helped prompt a series of high profile critics to slate the digital currency this week, including US Treasury Secretary Janet Yellen.

President Biden’s top economic adviser described Bitcoin as “an extremely inefficient way to conduct transactions,” saying “the amount of energy consumed in processing those transactions is staggering”.

It’s unclear exactly how much energy Bitcoin uses. Cryptocurrencies are – by design – hard to track. But the consensus is that Bitcoin mining is a very energy-intensive business.

The University of Cambridge Centre for Alternative Finance (CCAF) studies the burgeoning business of cryptocurrencies.

It calculates that Bitcoin’s total energy consumption is somewhere between 40 and 445 annualised terawatt hours (TWh), with a central estimate of about 130 terawatt hours.

The UK’s electricity consumption is a little over 300 TWh a year, while Argentina uses around the same amount of power as the CCAF’s best guess for Bitcoin.

And the electricity the Bitcoin miners use overwhelmingly comes from polluting sources.

The CCAF team surveys the people who manage the Bitcoin network around the world on their energy use and found that about two-thirds of it is from fossil fuels.

Huge computing power – and therefore energy use – is built into the way the blockchain technology that underpins the cryptocurrency has been designed.

It relies on a vast decentralised network of computers.

These are the so-called Bitcoin “miners” who enable new Bitcoins to be created, but also independently verify and record every transaction made in the currency.

In fact, the Bitcoins are the reward miners get for maintaining this record accurately.

It works like a lottery that runs every 10 minutes, explains Gina Pieters, an economics professor at the University of Chicago and a research fellow with the CCAF team.

Data processing centres around the world race to compile and submit this record of transactions in a way that is acceptable to the system.

They also have to guess a random number.

The first to submit the record and the correct number wins the prize – this becomes the next block in the blockchain.

At the moment, they are rewarded with six-and-a-quarter Bitcoins, valued at about $50,000 each.

As soon as one lottery is over, a new number is generated, and the whole process starts again.

The higher the price, says Prof Pieters, the more miners want to get into the game.

“They want to get that revenue,” she tells me, “and that’s what’s going to encourage them to introduce more and more powerful machines in order to guess this random number, and therefore you will see an increase in energy consumption,” she says.

And there is another factor that drives Bitcoin’s increasing energy consumption.

The software ensures it always takes 10 minutes for the puzzle to be solved, so if the number of miners is increasing, the puzzle gets harder and the more computing power needs to be thrown at it.

Bitcoin is therefore actually designed to encourage increased computing effort.

The idea is that the more computers that compete to maintain the blockchain, the safer it becomes, because anyone who might want to try and undermine the currency must control and operate at least as much computing power as the rest of the miners put together.

What this means is that, as Bitcoin gets more valuable, the computing effort expended on creating and maintaining it – and therefore the energy consumed – inevitably increases.

We can track how much effort miners are making to create the currency.

They are currently reckoned to be making 160 quintillion calculations every second – that’s 160,000,000,000,000,000,000, in case you were wondering.

And this vast computational effort is the cryptocurrency’s Achilles heel, says Alex de Vries, the founder of the Digiconomy website and an expert on Bitcoin.

Agencies

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