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Bitcoin Mining Energy Consumption – A Feature Not A Bug?

Bitcoin Mining Energy Consumption - A Feature Not A Bug?
Table of Contents

Introduction

Tesla recently revealed that they had bought $1.5 billion of Bitcoin and plan on accepting it as a form of payment to purchase their electric cars. This was big news in the crypto world, but not surprising given Elon Musk’s long history of endorsing Bitcoin. In response, the mainstream media focused their attention on the apparent contradiction of a clean energy company investing in the “dirty” cryptocurrency. Reporting from Reuters and others once again tried to spin the narrative of this crypto good news story into something of a negative. For example, headlines like, “Tesla’s carrying Bitcoin’s dirty baggage”, only serve to reinforce common misconceptions about Bitcoin.

This post will give you an introduction to Bitcoin mining and clarify some of the common misconceptions propagated by the media.

Bitcoin mining and energy consumption

There has been an ongoing narrative and debate in traditional media about the Bitcoin network and its large energy consumption, how inefficient it is and how bad it is for the environment. Current estimates equate the annual energy used to run the Bitcoin network as equivalent to the annual electrical power consumption of Chile. This article hopes to give a brief overview of the background behind Bitcoin mining, how it works and why it is not necessarily the big problem mainstream media would have you believe. To do this effectively we need to give you a brief overview and explanation of how Bitcoin mining works.

What is the Bitcoin Network?

The Bitcoin Blockchain Network is a network of computers ( or nodes ) running a software protocol designed to send value in the form of Bitcoin transactions to different users on the network. In order for it to run consistently and correctly, it follows a set of protocols to decide on the next “Block” of transactions it will process and add to the Blockchain. Who gets to add the next block in the chain is decided by mining. For a more detailed explanation of Bitcoin, we recommend reading the posts below.

  1. What is Bitcoin?
  2. What is Blockchain?

What is Bitcoin Mining and Hashrate?

The Bitcoin network uses a process called Proof of Work (PoW) mining to secure the network. Bitcoin mining consists of computers trying to solve a puzzle ( the work) supplied by the Bitcoin mining algorithm, each attempt or calculation to solve this puzzle is called a hash. There is no short cut to solve this puzzle so it involves trying different possible solutions until the correct one is found. By finding the solution, that miner wins the right to produce the next block on the Bitcoin Blockchain and they are also rewarded with some Bitcoin( Currently, 6.25 BTC per valid block mined) as an incentive to keep mining. The hashrate is a measure of the speed at which the mining network can solve the mining puzzle. Miners try to increase their hashrate so they have a better chance of winning the next block and getting more Bitcoin.

This video gives a good explanation of what is hashing and how it applies to the Bitcoin network.

Why does Bitcoin mining take so much energy?

To maintain the security, reliability and speed of the Bitcoin Blockchain the algorithm is designed to increase or decrease the difficulty of the mining periodically, depending on the hashrate of the previous weeks. This, in turn, affects the power required to run the Bitcoin network. In the beginning, when Bitcoin was first invented, it took very little hash rate and energy to mine a block and it could be done on your home computer. Over time as Bitcoins popularity increased and more miners joined the network the algorithm increased the difficulty to mine a block. This has led to a technical arms race between miners around the world to build ever more powerful mining setups to win an ever-decreasing supply of Bitcoin.

What was possible on a home computer soon progressed to specially designed ASIC computer chips. These are faster and more energy-efficient at mining Bitcoin. Networks of thousands of these devices are running in data-centres and mining farms around the world — all competing to produce the next block on the chain.

Even though these ASIC mining devices are far more efficient at mining Bitcoin they still have a high demand for electricity. They also need cooling as they create a lot of excess waste heat. As a result, miners try to locate their operations in areas with an abundant supply of low-cost electricity and if possible in lower temperature climates to reduce the need for extra cooling.

The Laws of Thermodynamics

Let’s dust off that old physics book and look at the laws of Thermodynamics for a minute. You’re probably wondering what this has to do with Bitcoin, but you’ll be surprised how relevant it is. There are many different forms of energy. The first law tells us that energy cannot be created or destroyed, but is transformed from one form to another. When we work and get paid, we are essentially converting one form of energy for another. Money is just stored potential energy and nothing more.

The Proof-of-work protocol ensures Bitcoin’s blockchain is bound to the laws of thermodynamics. Bitcoin miners have found a way to convert electrical energy into economic energy, with some energy output as heat. There is no such thing as a free lunch in the Bitcoin world.

Note: Energy stored in Euros or dollars is syphoned off by inflation. Energy stored in Bitcoin’s fixed supply cannot be lost due to inflation.

China accounts for most of Bitcoin’s hashrate. The map below from the University of Cambridge illustrates the global distribution of mining activity.

China Bitcoin
Source: University of Cambridge, Cambridge Bitcoin Electricity Consumption Index

Where does the electricity to mine Bitcoin come from?

The energy comes from many different sources. Hydroelectric energy is the most significant contributor. CCAF’s research finds that 76% of ‘hashers’ use renewable energy to power their activities, with hydropower the number one source at 62%. Wind and solar energy meanwhile are used by 17% and 15% respectively. The share of renewables in hashers’ total energy consumption remains at 39%. This would appear to be consistent with previous research.

Mining Energy
Source: 3rd Global Cryptoasset Benchmarking Study, September 2020, https://www.jbs.cam.ac.uk/wp-content/uploads/2021/01/2021-ccaf-3rd-global-cryptoasset-benchmarking-study.pdf

Bitcoin mining using renewable energy

Since mining Bitcoin uses electrical energy and this energy is generally costly, there is an incentive for Bitcoin mining farms around the world to find areas with the cheapest source of electricity. In the past years due to the continued development and improvements in renewable energies and the rapidly falling costs of this energy; Bitcoin miners are increasingly moving their major operations and sourcing their electricity from the excess supply by new renewable sources.

The Electricity Grid Problem 101

The electricity most of us use every day is usually produced in large power plants like nuclear or fossil fuel burning plants. Once it is generated it needs to be sent over the power grid and used immediately as we currently have no viable and cheap method of storage. The demand for the amount of electricity varies depending on the time of day – normally low usage at night and heavier usage in the evenings when everyone is at home. These two factors – changing demand and inability of storage means that electricity suppliers and network grid operators are constantly trying to match supply and demand. There is also the risk of damage to the grid caused by spikes and surges in supply and demand.

The recent growth of renewable sources like wind and solar have further complicated this supply and demand balance. Renewables can be very inconsistent since the wind doesn’t always blow and there is no solar energy at night. As a result of these variables, renewable energy developers often overbuild supply capacity to compensate for times of low production. One solution that is now being employed is to use that excess energy to mine Bitcoin.

Andreas Antonopoulos talks about this topic in a short Youtube clip that’s worth looking at.

“The energy consumption in mining, I think, is misrepresented. […] What happens when you build a 50 megawatt plant in a place where they only have 15 megawatts of demand? In some cases, if it’s alternative energy, like wind, solar, or hydro, you can’t turn it off or turn it down. You’ve built it, and it will produce, and then what? You’re basically wasting energy.

Now what if, in that environment, you can find a way to turn that energy into an alternative store of value […] by using electricity that would be otherwise wasted. Now, Bitcoin is an environmental subsidy to alternative energy all around the world.”

Bitcoin mining as a subsidy to alternative energy

Energy use for Bitcoin mining is not necessarily a problem, it can be a feature. Not only is it what makes Bitcoin work, but it can also help with green energy adoption. Bitcoin mining can in some cases make otherwise unprofitable energy production methods profitable.
Bitcoin mining can be used to monetise otherwise wasted over capacity of electricity produced by renewable sources. This can also have the added benefit of helping to balance the ever-changing supply and demand requirements of our electricity grids as explained above.

An example of a renewable resource of energy creation is Hydro. This involves building a dam to capture a large volume of water which is sent through a turbine to create electricity. Depending on the weather, the season or even the location these dams can create more electricity than is needed leading to excess capacity and the potential for wastage. A good example of this is in remote areas of the world like rural China the government has planned ahead and built hydro-electric dams in areas that they predict they will need to satisfy future needs. Currently that over capacity of electricity would go to waste but innovative companies are capturing that energy and using it to mine Bitcoin.

A further example of how Bitcoin mining is being utilised to capture otherwise wasted energy is in the Oil and Gas sector. Be it Fracking or normal Oil and Gas exploration, an unfortunate byproduct of this process is a requirement for the flaring off ( waste burning) of a certain amount of gas. This gas is burned into the atmosphere as it is unproductive to capture or transport it. Now innovative companies like Great American Mining have built plug and play container mining rigs with gas generators that can be shipped to an oil or gas extraction site and the excess flare gas can be used to run the generator which powers the mining rigs. Thus utilising the otherwise wasted gas.

In some cases, the income generated from mining and selling Bitcoin with excess energy is being funneled back and being used to build and finish off current renewable energy developments. One such project is being led by a company called Soluna in Morocco on the western edge of the Sahara desert. They have acquired a location with 37,000 acres available for renewable energy development which will be capable of supplying 900megawatts of energy when finished in the coming years. They plan to use the excess energy supplied by wind generation to further grow the project and offset some of the associated costs. This vertical innovation is another step in the road towards making bitcoin mining sustainable and green.

Conclusion

This article gave an introduction to Bitcoin mining. Hopefully, it helped explain some of the common misconceptions about Bitcoin mining energy consumption.

If you’re interested in mining Bitcoin, but don’t have the hardware, we recommended checking out Bitluck to get started. Bitluck is a cryptocurrency cloud mining (Bitcoin mining) platform that enables users to mine Bitcoins without managing the physical hardware. Check out our Bitluck review here.

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