Home ›› 05 Feb 2021 ›› World Biz
Bitcoin’s price isn’t the only thing surging lately — the amount of electricity it consumes is also on the rise.
The cryptocurrency has for years alarmed experts due to the sheer level of energy required by so-called miners, which release new coins into circulation.
Bitcoin has a carbon footprint comparable to that of New Zealand, producing 36.95 megatons of CO2 annually, according to Digiconomist’s Bitcoin Energy Consumption Index, an online tool created by data scientist Alex de Vries. It consumes as much power as Chile — around 77.78 TWh — according to Digonomist’s estimates.
The Cambridge Bitcoin Electricity Consumption Index, a separate tool from researchers at Cambridge University, shows a much larger figure of 110.53 TWh — more than the entire annual energy consumption of the Netherlands.
“That’s an unfathomable amount of electricity,” said Charles Hoskinson, a cryptocurrency entrepreneur who co-founded Ethereum, the blockchain network underpinning ether, the world’s second-most valuable digital coin.
Bitcoin’s energy needs are “enormously large,” Michel Rauchs, research affiliate at the Cambridge Centre for Alternative Finance, told CNBC. It accounts for around 0.5% of total global electricity consumption, according to the Cambridge researchers’ estimates.
“Although we agree the amounts are ludicrous right now, that is still half as much as inactive home appliances in the U.S. consumed,” Rauchs said. The amount of energy wasted on idle home devices like phone chargers and microwaves in the U.S. could power the bitcoin network for two years.
Why does bitcoin consume so much energy?
Bitcoin isn’t controlled by any single authority — like a central bank — but a disparate network of computers. So-called “miners” run purpose-built computers which compete to solve complex math puzzles in order to make a transaction go through.
The blockchain — a digital ledger of all bitcoin transactions — is designed this way to ensure that users aren’t able to “double-spend” funds, a flaw in which the same digital token could be spent more than once. Each block that is added onto the chain carries a hard, cryptographic reference to the previous block. Proponents of bitcoin say this makes it extremely secure.
But bitcoin miners do not run this operation for free. A key incentive of bitcoin’s model, known as “proof of work,” is the promise of being rewarded in some bitcoin if you manage to solve the complex hashing algorithm.
“The issue is, it can never get better by design,” says Hoskinson, who now runs IOHK, a blockchain firm that developed another digital token called Cardano.
“The more successful bitcoin gets, the higher the price goes; the higher the price goes, the more competition for bitcoin; and thus the more energy is expended to mine.”
Cardano and some other digital coins rely on a “proof of stake” consensus mechanism, where participants buy tokens which allow them to join the network. Hoskinson says the cardano cryptocurrency network consumes only 6 GWh of power, a tiny fraction of bitcoin’s energy consumption. Similar proof-of-stake tokens include polkadot and algorand, he added.
Rauchs said bitcoin is only likely to consume more and more electricity over time due to its proof of work mechanism.
“It doesn’t really matter whether there are new, more efficient machines on the market,” Rauchs said. “You will just use more and more machines but the total electricity consumption won’t go down based off of that.”
A key measure of bitcoin’s mining difficulty hit an all-time high last month. With bitcoin rising in price, revenue to miners is also increasing, incentivizing more participants to mine the cryptocurrency.
The counterargument
Nevertheless, bitcoin believers argue that disputes about its environmental impact are missing the point.
“Energy use in itself is not bad,” Meltem Demirors, chief strategy officer of digital asset management firm CoinShares, told CNBC. “Sending and storing emails uses energy. Yet, we don’t infer email to be bad because it consumes energy.”
“What we have here is people trying to decide what is or is not a good use of energy, and bitcoin is incredibly transparent in its energy use while other industries are much more opaque.”
Demirors questioned why the banking industry, for instance, wasn’t under more scrutiny for its energy usage. She said bitcoin miners were “incentivized to use renewables” because it’s getting cheaper to produce it.
But most bitcoin mining facilities are located in China, which is still heavily reliant on coal-based power. Though the Chinese province of Sichuan is known to attract miners due to its cheap electricity and rich hydropower resources, the level of power generation capacity fluctuates depending on the season.
Then there’s the question of how bitcoin is used. Many investors today consider bitcoin to be a form of “digital gold” rather than an efficient payment system — Digiconomist estimates that the energy footprint of one bitcoin transaction is equivalent to 100,000 payments on the Visa network.
The cryptocurrency more than quadrupled in value last year and is up another 27% so far this year, according to Coin Metrics, currently trading at about $37,189.
Andrew Hatton, head of IT at Greenpeace U.K., said the larger issue at hand is that “we’re largely powering 21st-century technology with 19th-century energy sources.”
“Bitcoin’s spiralling energy usage is largely down to the huge amount of data-crunching needed to create and maintain this cyber-currency,” Hatton told CNBC. “But their fast-growing hunger for electricity is just an early symptom of a much bigger problem to come.”
“As online services become bigger and more complex, the demand for computing power is bound to go up over the next few years, and that will require more energy,” he added. “The problem is that only about a fifth of the electricity used in the world’s data centres comes from renewable sources, and that’s not good enough.”
