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Lately, there’s been a lot more debate about cryptocurrency and how much energy it uses to be produced. Bitcoin, in particular, uses as much energy per year as the Netherlands, its carbon footprint is estimated to be the size of Singapore’s and it generates as much electronic waste as the country of Luxembourg.
All these estimates come from the Bitcoin Energy Consumption Index at Digiconomist. I spoke with Alex de Vries, the founder of Digiconomist, who said Bitcoin mining involves running millions of computations in kind of a coin-producing lottery. But some cryptocurrencies, like Ethereum, can be created in a less energy-intensive way. The following is an edited transcript of our conversation.
Alex de Vries: And what they will hope to do is to take out the mining completely. They intend to make your chance of winning in the lottery depending on your wealth rather than your computational power. And if they succeed in doing that, you no longer need those energy-hungry devices for being part of this network, which would cancel 99.99% of the energy needs. So it would be really great if they succeed in making that move. But as it stands, they’re not expecting it to finish before the end of this year or even the start of next year. So we’ll have to see when they actually succeed in that.
Molly Wood: There is a lot more attention on this now. We’ve seen, in fact, China tried to ban cryptocurrency mining activity in parts of Mongolia. Do you think we’ll get to a point where there could be regulation that speeds up the process of shifting to a less energy-intensive mode of mining?
De Vries: I definitely think that these actions are helping the communities that are driving these changes to realize that it’s really important that they succeed because if they don’t, and the energy consumption of these network keeps on growing, we’re increasingly likely to see more government action.
Wood: We should be clear that energy usage is not always the same as a lot of carbon emissions. People in the industry like to talk about their increasing use of renewable energy. Is that a valid argument, that the drive for more efficiency could cause this industry to move more quickly toward renewable energy?
De Vries: We have seen so far, these mines have only obtained one significant source of renewable energy, which is in the south of China during the summer months, when it’s the rain season over there. That’s when there is a little bit of an excess that they can take, and that lasts for about four to five months. The only thing is that then the dry season starts and those miners move to the north of China, where they take advantage of an abundance of coal-based energy, which more than negates the gains from using renewable energy in the summer. And there’s no other area where they can get such a substantial amount of renewables. And it’s questionable whether they’ll even be able to access these renewables in the south of China for much longer because China actually needs that to clean up the rest of the grid. And they’ve been working on upgrading the infrastructure in China, so they can export that energy.
So it’s really hard to say whether Bitcoin miners are going to be using an increasing amount of renewable energy. I consider that very unlikely, personally. And we know that more than half of this network is already using fossil fuels. Just very recently, a coal mine incident in the north of China led to one-third of the Bitcoin network going down. So that shows that at the moment, this is a really dirty business. And we see that there is also a trend towards Bitcoin miners using obsolete fossil fuels. We’ve seen that in several areas — in Montana, in New York very recently, and even Kentucky thought it was a great idea to try to attract these miners to save their obsolete coal fields. So I don’t see a trend to renewables in this current energy transition. We need renewables, so we don’t have an excess of that, but we do have an excess of obsolete fossil fuels, and they would be better left in the ground. But some of these miners will love to take advantage of the availability because it’s both cheap and also constantly available. These miners don’t just need cheap energy, they also want constant power, which is something really hard to provide with, for example, solar energy.
Wood: I want to clarify what I’m pretty sure I heard there. So you have states, for example, in the U.S. that have a lot of excess fossil fuels. You have cryptocurrency miners in search of cheap excess power, and these states are saying, “Come here, use our coal, burn more carbon” to create what is, at least right now, basically just an asset class.
De Vries: Yeah, exactly. This was literally what happened very recently in Kentucky, where they converted a clean-energy subsidy into a tax break for Bitcoin miners because they think it’s great that this industry uses a lot of energy 24/7. And they wanted to save some jobs from the obsolete coal plants. So yeah, that’s also an interesting development where you have governments thinking of this as an opportunity to save obsolete fossil fuels and maybe save some jobs in the process.
Wood: Obviously, people who are involved in cryptocurrency are very passionate about it, and they say, “Look, in five years, this will all be worth it because we will have decentralized money.” And for the tens of millions of people who are using cryptocurrency to do remittances without banks interfering, it’s totally worth it. Is there any scenario in which this new invention is worth this energy consumption?
De Vries: They will have to solve some other issues as well first because if you look at Bitcoin, it’s not capable of handling a whole lot of transactions. It’s actually limited to a processing capacity of just seven transactions per second. If you compare that to a payment provider like Visa, they can do 65,000 transactions per second, if needed. So right now, Bitcoin can’t even replace a bunch of small banks. And if they don’t increase that in some way, it will never be capable of doing that. So this is another issue that the community will have to address — how do you scale distributed software? And if they can’t solve it, then you can’t do much more with Bitcoin than speculate on it.
Wood: Should we ban it?
De Vries: Well, there’s several things you can do. We know that these miners are flocking to the same locations because they all want the same cheap sources of energy. And you can throw them off your grid. That will drive up the cost of mining, but it will not completely stop mining because ultimately, people can still run these machines in their own houses. If everything else is banned, you can still run it at home, which would mean a lot less energy consumption, but it would still happen. So that leaves only one option, which is you could ban people from investing in these currencies altogether and make it impossible to invest in Bitcoin and Ethereum, which would subsequently, most likely, if sufficient countries go along with that, crash the value of these currencies. And if the currency value crashes, so does the income that goes to miners, and if miners get no money, they can’t pay for electricity either. So that would also be a very nuclear option, but it’s definitely a possibility.
Related links: More insight from Molly Wood
There’s a devastating piece in climate coverage outlet Grist about a power plant in Dresden, New York, that’s only operational because of Bitcoin after being shut down in 2011 for a lack of fossil fuel demand.
Recently, Harvard Business Review published a bit of a rebuttal, of which there are many, on this energy question. The piece asks how much energy a monetary system should consume and then points out that, as I mentioned, energy usage isn’t necessarily carbon emissions. The Cambridge Centre for Alternative Finance estimated last September that 39% of total energy consumption by crypto miners, or hashers, as it calls them, is powered by renewable energy. Something like 76% of mining activity involves some renewable energy, according to the Cambridge Centre report, which also says the topic is typically misrepresented in most sources and “on both sides of the debate.” But the short version is there is some renewable energy at play, but there’s still too much energy usage overall. And so far, who is benefiting from the existence of cryptocurrencies? Mostly investors and speculators.
And even if the ultimate goal is to revolutionize and replace the financial system with decentralized currency that anyone can use anywhere, that’s still a ways off and we have a rapidly warming planet. And right now, it’s rich people getting richer and the planet warming faster. So, is it worth it?
On that note, there’s a brutal Medium piece about NFTs and crypto art, which also consumes a ton of energy to create and which the author refers to, given our climate emergency, as a “crime against humanity.” It also does a good job of explaining how crypto mining uses so much energy. And if you want an even more concise version, I leave you with this from Alex de Vries explaining “proof of work” and why it requires so many computers.
De Vries: Well, it always sounds a little bit complicated when you start about proof-of-work mining and technical terms like that. But that’s essentially what’s going on in Bitcoin. Bitcoin is an open network, nobody’s controlling it. And you need a way to align an open network where anyone can just participate. And proof-of-work mining is a way to do it. It’s, first of all, a reward system. So if you turn your computer hardware to participate in creating new blocks of transactions for the Bitcoin blockchain, you can earn a reward for that. Each block that is created pays a reward of around 6.25 bitcoins, times the current rate of around $60,000, [which is] a substantial reward. Especially considering it’s on average once every 10 minutes that a block is being created. But then the thing is that the protocol, the Bitcoin protocol, also makes it really hard to obtain that reward. And now what miners are really doing, what I always say is they’re sort of participating in what is essentially a massive lottery. It’s a process of trial and error, where they have to guess the winning number that will allow them to create the next block for the blockchain. So they’re just making guesses constantly. The whole network, the Bitcoin network, is making 160 quintillion guesses every second of the day, nonstop, trying to create the next block for the blockchain. And that process just goes on and repeats after every new block. And that’s why you have millions of devices around the world making those guesses and consuming a lot of energy in the background.
Wood: And it’s also my understanding that the more Bitcoin is created, the more complex the creation process gets, right? It used to be that I had friends who built really powerful PCs and were doing mining at home, and it caused their home energy to spike. But now it takes a data center.
De Vries: Yes. That’s also because these parties are no longer people like you and me that are just using their hardware. That was very much in the beginning, early days of Bitcoin that anyone can use their computer hardware to participate. But by now, it’s such a competitive process, where everyone’s looking for the cheapest sources of electricity, taking advantage of economies of scale. So what happens is that a big chunk of this network is located in China, taking advantage of really cheap energy over there, and also taking advantage of the fact that it’s more efficient to cool 20,000 devices than it is to cool a single one. And that’s why you can’t compete with that anymore if you’re just running these machines at your house.
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