Bitcoin set to consume 5 per cent of world’s total electricity supply
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Bitcoin, the online cryptocurrency that saw huge price surges last year, currently uses 0.5 per cent of the entire world’s electricity according to a new report.
In the first rigorously peer-reviewed article quantifying Bitcoin’s energy requirements, financial economist and blockchain specialist Alex de Vries uses a new methodology to pinpoint where Bitcoin’s electric energy consumption is headed and how soon it might get there.
Bitcoin uses a proof-of-work system, generally dubbed bitcoin mining, which rewards miners with fractions of the cryptocurrency. The process uses powerful computers to solve complex, computational problems, an activity that is inherently energy intensive.
Estimating exactly how much electricity the Bitcoin network uses, necessary for understanding its impact and implementing policy, remains a challenge.
“We’ve seen a lot of back-of-the-envelope calculations, but we need more scientific discussion on where this network is headed. Right now, the information available is pretty poor quality overall, so I’m hoping that people will use this paper as a foundation for more research,” de Vries said, who works at the Experience Center of PwC in the Netherlands.
His estimates, based in economics, put the minimum current usage of the Bitcoin network at 2.55 gigawatts, which means it uses almost as much electricity as Ireland.
A single transaction uses as much electricity as an average household in the Netherlands uses in a month. By the end of this year, he predicts the network could be using as much as 7.7 gigawatts - as much as Austria and half a percent of the world’s total consumption.
“To me, half a percent is already quite shocking. It’s an extreme difference compared to the regular financial system and this increasing electricity demand is definitely not going to help us reach our climate goals,” he said.
If the price of Bitcoin continues to increase the way some experts have predicted, de Vries believes the network could someday consume 5 per cent of the world’s electricity. “That would be quite bad,” de Vries warned.
In January 2018, UK Chancellor Philip Hammond came out in favour of regulating cryptocurrencies over concerns that they could disrupt the world’s economy.
However since then, Bitcoin - and other associated coins like Ethereum and Ripple - have tumbled in value. Bitcoin reached almost $20,000 per coin by the end of last year before falling to its current value of $8,000.
The subsequent 40 per cent drop in demand for graphics cards, the most important piece of hardware for mining operations, suggests that mining activities have cooled since the price downturn and could temper the electricity used by the network, too.
While many pundits were predicting the crypto bubble to burst entirely, Bitcoin’s value has actually stayed relatively consistent for the last few months, lending credence to the idea that the electronic currency is here to stay for the time being.
“There’s a big incentive for people to increase how much they’re spending on electricity and on machines,” de Vries said about miners who want to get the most value out of their operations.
It’s figuring out when that incentive stops paying off that is at the heart of de Vries’s estimation method. Economic principles suggest that the entire Bitcoin network will eventually reach equilibrium where the costs of the hardware and electricity used to mine equal the value of the Bitcoin being mined.
That information can approximate the total amount of electricity that the network will use at said equilibrium.
Other researchers have used the fundamentals of this method before, but de Vries goes farther. He uses production information about Bitmain, the biggest manufacturer of Bitcoin mining machines, to estimate both how much of a miner’s costs are associated with hardware rather than electricity and when this equilibrium might be reached.
While he does have confidence in his estimates, the problem with this method is that these manufacturers are extremely secretive. “Sometimes the best information we’ve got is really shaky eyewitness accounts. That’s the stuff we have to work with,” he said.
Still, he believes that getting a good estimate is important in determining the sustainability of cryptocurrencies moving forward and in helping shape policy around them. Some states in the US have already started to put restrictions around Bitcoin mining.
“You need to base your policy on something. I think that my method is important in that regard, because it’s very forward-looking. It’s focused not on the now, but on where we’re headed. I think that’s something you really need to know if you’re going to draft policy about it,” he said.