Bitcoin’s energy consumption has entered the public debate. With headlines like “Bitcoin Mining in China Will Exceed Energy Consumption of 181 Countries by 2024, Study Warns” and “Bitcoin’s Wild Ride Renews Worries About Its Massive Carbon Footprint,” more and more people are discussing the relationship between Bitcoin’s proof-of-work mining and global energy consumption. While Bitcoin mining is becoming an increasingly hot topic, any fair analysis needs to cover Bitcoin’s energy consumption as compared to alternative monetary systems such as gold and fiat money. Those who demonize Bitcoin without offering a comparison of gold or fiat money’s energy usage are either acting out of ignorance or bad-faith.
Digital Gold vs. The Original Gold
Bitcoin is often called ‘digital gold,’ so let’s look at gold’s energy usage first. The gold mining industry is estimated to use 475 million GigaJoules of energy annually. Further, gold mining can be detrimental to the health and safety of gold miners, often leading to a decreased life expectancy. Recent estimates for Bitcoin’s energy consumption put it at around 340 million GigaJoules. Of course, Bitcoin can do many things that gold cannot, such as securely transferring value across the globe in an hour, making Bitcoin far more effective per unit of energy when compared to gold.
While gold is a logical comparison for Bitcoin, if Bitcoin’s ultimate potential is a global monetary system, the most important comparison to make is with the monetary system currently in operation across the world: fiat money.
Bitcoin vs. Today’s Debt-Based Monetary System
The most widely used alternative system to Bitcoin is fiat money, or money decreed by governments. Fiat money is far larger than gold or Bitcoin and is ultimately backed by a government’s ability to enforce its decree as to what should be used as money by its citizens. Ultimately, the enforcement of fiat money is accomplished by (1) providing a currency that is at least somewhat effective, and (2) maintaining a military and prison system that is powerful enough to convince people that the government’s decrees can and will be enforced if necessary. While militaries and prisons provide the ultimate backing, fiat money is primarily operated by banks. From the electricity needed to keep a bank open, to the millions of miles commuted by bank employees, to the energy required to run servers and ATMs, banks across the globe require immense amounts of energy to operate. Unfortunately, militaries, prisons, and banks are not as open about their energy consumption as Bitcoin. So while fiat money’s energy consumption is almost without a doubt larger than that of Bitcoin’s, determining a reasonable apples-to-apples comparison is pure guesswork.
Instead, let’s consider a different angle regarding the existing fiat money system: the long-term impact of a debt-based system. The existing monetary standard is based on increasing amounts of debt, where people, businesses, and governments are incentivized to spend their savings and take on debt. The total world debt is now over $280 trillion and global debt represents 356% of global GDP. This $280 trillion of debt represents consumption of goods and services that society would not be able to consume without these huge debt levels.
A system that treats debt as neutral (i.e. does not actively incentivize or disincentivize debt) acts as a sort of governor on consumption. If people were less able to get a loan to upgrade to the newest car, the number of cars produced would decrease. On the flip side, a system that encourages debt acts as a supercharger for consumption of goods and services. Of course, all goods and services require energy to produce, deliver, and use. Thus, the debt-based monetary system that pervades the world today drives increased energy usage compared to a system which is not debt-based. In essence, the $280 trillion of global debt represents trillions upon trillions of dollars worth of energy usage that could not have been consumed as quickly without the debt. While proponents of the fiat system argue that it speeds up global growth and innovation, they fail to mention that the tradeoff required to grow at an outsized pace is to consume energy at an outsized pace.
Bitcoin’s Energy Incentives
While a central entity that encourages arbitrary levels of energy consumption risks pushing energy usage too far too fast, this is not to say that more energy consumption is inherently bad. Over thousands of years, humans have found ways to harness increasing amounts of energy. From fire to the printing press to refrigeration to transportation, societies have continued to harness energy in increasingly efficient ways to improve the standard of living.
Humanity’s problem is not a lack of energy. Rather, the issue is our inefficiency at transporting available energy to those that want to use it. For example, China curtailed over 50 TWh of solar and wind power in 2016. In other words, China’s wind and solar energy capacity far exceeded its energy demand, to the point where total energy output was reduced by about 180 million GigaJoules. This excess energy is not limited to China. Hydro-Quebec, a hydro-electric utility service in Canada, estimates that its “supply exceeds its requirements by more than 40 TWh of available energy each year.” The combination of just China and Hydro-Quebec’s excess renewable energy capacity is enough to approximately match the total energy output that secures Bitcoin right now.
Where does Bitcoin fit in? Because the miners’ profit is based on energy efficiency, Bitcoin incentivizes more and more efficient energy usage. If more efficient energy sources cannot be found, Bitcoin’s energy consumption will stagnate as miners run out of options for improving energy efficiency. As Bitcoin mining continues to become more competitive across the world, the only option to profitably mine will be to find more efficient energy sources. Basically, as long as energy efficiency has room for improvement, Bitcoin will lead the way for discovery and adoption of these more efficient energy uses. While Bitcoin may drive the adoption of more efficient energy, once developed, these improved energy sources can benefit all of humanity by providing increasingly efficient sources of energy for use beyond Bitcoin.