Industries related to energy production are susceptible, and this applies to Bitcoin mining as well, where electricity consumption during mining is a particular challenge.
The world of cryptocurrencies began with Bitcoin, and the intrinsic value of this cryptocurrency is based on user trust within the Bitcoin network, flexible rules, and protocols based on user feedback, high security, being open source, network transparency, decentralization, and independence from central banks and governments. The philosophy crafted by Satoshi Nakamoto, the founder and mastermind behind Bitcoin, was the main reason for its value. Over the years, Bitcoin has faced many challenges that have impacted its value and financial circulation. Today, a major factor affecting Bitcoin mining is electricity consumption by Bitcoin mining devices (miners).
In the early days of Bitcoin, anyone involved in the project could mine it using their personal computer’s processor, and everything was going well. However, as more people and “Nodes” joined, fierce competition arose to obtain more Bitcoin, making mining increasingly difficult and time-consuming. This was particularly due to the protocol’s time-consuming process for verifying each block, which made the situation even more complex. Soon, specialized Bitcoin mining devices with immense power consumption emerged, and without them, it was no longer possible to directly mine Bitcoin. As Bitcoin’s value increased against the US dollar, serving as the international reference currency, mining farms were established to allow individuals to generate more income and profit. At this point, Bitcoin’s financial value, and even its existence, became closely tied to a crucial issue: energy consumption.
It is worth mentioning that Bitcoin’s electricity consumption has two aspects: first, is related to its mining, and second, is due to the servers involved with Bitcoin and related projects. However, the second aspect can be overlooked in comparison to the first, as Bitcoin mining consumes significant electricity, whereas the amount of data it occupies on the web and internet is relatively insignificant. Statistics show that 99.8% of energy consumption is due to mining devices.
With this introduction, in this article, we will explore energy and electricity consumption in the Bitcoin mining process as the central topic. After reviewing the issue, we will also delve into the challenges and controversies surrounding it, and to better illustrate the scale and importance of the matter, we will compare the energy consumption of Bitcoin mining with that of traditional financial systems.
Why is Electricity Consumption a Challenge?
Undoubtedly, Energy costs are high globally. On average, a kilowatt-hour costs about $0.176 for household use and $0.192 for industrial use. In countries like Iran and Lebanon, however, energy is nearly free, costing about $0.001 per kilowatt-hour. To understand the high energy cost better, consider that a refrigerator consumes about 1800 kilowatt-hours of electricity annually, costing around $320 per year. This means that in two years, the electricity cost of running a refrigerator equals its average price. On a larger scale, this issue becomes a significant challenge.
Moreover, energy-related industries are highly sensitive, which makes this issue problematic. These industries are subject to significant and sometimes severe fluctuations and instabilities due to the slightest changes in climatic conditions, such as extreme cold, the extraction of raw materials like oil, as well as political events and shifts in international relations. The complexity and difficulty become even more apparent when considering that; naturally, the primary priority of any country and its government is the well-being of its people and the functioning of its industry and economy, with energy being the lifeblood of these matters. In today’s world, energy is considered the most valuable asset. This became especially clear during the recent military invasion of Ukraine by Russia and the related energy issues. Energy is such an important topic that one can find a correlation between the scale of energy consumption and optimization in a country’s industry and financial sector, and the size and progress of its economy; concepts like the Kardashev scale also support this notion. Furthermore, as any economy grows, the challenge of securing more energy for greater progress arises. This also holds for Bitcoin, where the expansion of the network and the scale of its mining are correlated with its energy consumption. Therefore, electricity and energy consumption are particularly a challenge.
Overview of Miners’ Electricity Consumption
Bitcoin mining faces three major issues, similar to traditional industries: the value against the cost of energy, the priority of energy consumption, and environmental issues. Despite efforts to develop more energy-efficient miners, these devices still consume a significant amount of electricity. The Proof of Work (PoW) algorithm is designed to require heavy computational processes, leading to high electricity consumption. Miners typically need to operate 24/7, making them energy-intensive.
To gain a better perspective, it’s useful to compare the average power consumption of miners with other devices that continuously consume electricity. Common mining devices today have a power consumption ranging from 1,000 to 3,000 watts. Due to the high processing load, these devices become hot and require external cooling systems, meaning we can roughly estimate the miners’ consumption to be up to twice the mentioned values. In contrast, standard household refrigerators typically consume between 200 and 300 watts, and even the power consumption of display refrigerators in stores doesn’t exceed 600 watts. If we also consider industrial electrical equipment, almost none of them (except for internet servers) run continuously and are comparable to miners. To better illustrate the scale of the challenge, many financial and cryptocurrency media outlets provide an interesting comparison: the Bitcoin network specifically consumes between 100 and 120 terawatt-hours of electricity annually, which is equivalent to the electricity consumption of a country like Austria. These comparisons can be shocking, but we have overlooked many factors here, which we will revisit later.
“Bitcoin is a very exciting development that could become a global currency. I think in the next decade, Bitcoin will become one of the most important methods of payment and transferring assets.” — Kim Dotcom (CEO of MegaUpload)
The Economic Challenge
Even without referring to statistics, it can be assumed that the world of cryptocurrencies, due to their nascent nature, has yet to secure its place in the global macroeconomy. However, if we look at the estimates, we find that this assumption is close to reality. Despite its impressive growth and bright future, the entire crypto market currently accounts for less than one percent of global GDP growth. As of mid-May 2023, with the current price of Bitcoin around $30,000, the total value of Bitcoin is less than 1.5% of the world’s money supply. Now, if we also consider the average global cost of electricity, each miner consumes more than $5,000 worth of electricity annually. Yet, due to the heavy processing involved in mining and the intense global competition, an average miner cannot even extract one Bitcoin per year after deducting transaction fees and other costs. Given the current price of Bitcoin and the rough estimates we’ve made, it becomes evident that the electricity consumption for Bitcoin mining seems hardly justifiable. However, this line of reasoning might appear somewhat superficial and requires more careful consideration, which is why we will revisit this issue.
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Given the explanations we’ve provided, it’s natural that the Bitcoin ecosystem, and cryptocurrencies as a whole, would constantly face energy challenges. We have, for certain reasons, delayed addressing the environmental aspects. However, upon closer inspection, these analyses are not particularly in-depth and require more careful attention. Based on these imprecise and somewhat superficial analyses, as well as other issues, the matter of Bitcoin mining is primarily pressured by four groups of people: First, traditional financial institutions and banks, as they find themselves in competition with Bitcoin, both from an economic perspective and in terms of energy consumption. Second, conservative figures in the world of economics and politics, especially government officials and large business owners, who see existing mechanisms at risk or are not optimistic about cryptocurrencies as a future economic driver. Third, environmentalists; who believe that high electricity consumption in any sector leads to increased polluting activities on the planet and fourth, a segment within the cryptocurrency community, who have philosophical and ethical concerns. They argue that those with more power and money can acquire more Bitcoin, thus potentially controlling it to a greater extent—something they see as contradicting the spirit and philosophy of cryptocurrencies. But let’s remain patient until the end of the discussion and examine the issues more carefully from different angles. So far, we have explored the topic from the perspective of skeptics, critics, and opponents of cryptocurrencies.
Why Are Most Analyses of Bitcoin Network Electricity Consumption Superficial?
Changpeng Zhao, the CEO of Binance, also known as CZ, was one of the first to draw more precise attention to the issue of electricity consumption by miners and the entire Bitcoin network. For example, in a video posted on Binance’s LinkedIn, he compared the electricity and energy consumption of banks and all financial institutions with the overall consumption of Bitcoin. He pointed out that many aspects of the traditional banking industry are never properly calculated or accounted for, such as the electricity used by bank branch signs or their advertising billboards around cities—many of which operate 24/7. These significant costs are usually hidden within the public relations and marketing budgets of banks. If we also consider the costs of repairs, maintenance, and updates to various banking systems, we encounter even more overlooked energy consumption figures. Additionally, we should not limit the banking industry solely to financial matters; instead, we should compare Bitcoin against the entire traditional financial industry. The world of precious metals and gems, particularly gold and diamonds, the insurance industry, and large sectors of the fossil fuel and real estate industries are deeply interconnected with banking. This is because, traditionally, such assets have served as the backbone and operational basis of banking.
There is another issue at hand. Many critics have specifically and intentionally considered the events surrounding each Bitcoin and a hypothetical average of miners. The energy consumption per Bitcoin transaction has been compared to traditional systems as a whole, which is incorrect and somewhat misleading. A logical comparison should calculate the energy and cost for each unit of the world’s standard currency. For example, when each dollar traded globally requires a dollar “U-Turn” at a bank in the U.S. (centralization of currency and traditional banking), this process relies on the international interbank network (SWIFT). Additionally, most payments are handled by payment processors like Visa and PayPal, which have become layers within the banking system, and their share of energy and costs in the banking system is not specifically calculable so far. In contrast, all Bitcoin transactions and processes occur on a decentralized network, where each component’s cost-benefit is transparently visible. These examples indicate that there is not yet a proper metric for understanding and evaluating energy consumption.
I don’t understand why internet-based (non-physical) businesses don’t accept cryptocurrencies for payments. This integration is easier, faster, and cheaper than traditional payment gateways. It requires less paperwork and reaches a more diverse population and geography. — Changpeng Zhao (CEO of Binance)
It’s important to correct another assumption we mentioned earlier. In a few paragraphs above, we compared the electricity consumption of the Bitcoin network to that of Austria. Such a comparison is fundamentally flawed; a country, with its continuous and centralized system, is far more complex than a cryptocurrency network, where energy consumption is essential and unavoidable. A significant portion of this consumption—at least on the surface—does not offer favorable cost-benefit ratios, such as in social, health, and medical services.
Moreover, countries are not considered as a single financial-economic unit. In reality, economic systems and processes are one of the foundations of each country. In contrast, Bitcoin is not defined in this way and should be compared with its counterparts, such as banking and precious materials extraction industries. To clarify our point, recall that the total energy consumption of the Bitcoin network (including both useful and wasted energy) is less than 120 terawatt-hours, whereas data from the World Bank and the International Energy Agency shows that global electricity wastage alone exceeds 2,200 terawatt-hours annually, which is more than 19 times that of the Bitcoin network. Interestingly, 10% of this amount is attributable to American households alone. Here, one might ask: “Do you think Bitcoin’s consumption is high? What exactly are you comparing it to?”
A Closer Look and More Logical Comparisons
Given all the considerations, examples, and shortcomings discussed in the previous section, let’s simplify and focus on a more precise and logical comparison. Here, we will only consider traditional banking and the gold mining and distribution industry, referring to official and widely accepted statistics. First, let’s define what we mean by the banking system and gold mining.
The traditional banking system has at least three main components: 1) branches, 2) ATMs and POS devices, and 3) data centers and servers. We will disregard the physical network and proprietary internet infrastructure of many banks, as calculating them independently is challenging. Additionally, we should note that other related industries, such as insurance, investment and stock companies, small and local banks, and single-branch funds in small towns, are not our focus. We will examine only the 100 largest and main banks globally, as most transactions and deposits of these institutions and financial sectors are defined by these major banks. This limitation helps avoid data overlap and false magnification.
The gold extraction and distribution network begins with mines. After extraction and cleaning, smelting plants come into play. At this point, the gold consumption cycle starts with its transportation and storage, which diverges into two separate paths. First, the gold bars that are used in the jewelry and luxury goods industries become reserve assets and elements of economic exchanges, which are part of a recyclable cycle. Second, gold is used in technology industries, such as in computer components, which often are non-recyclable and may even be discarded. It should be noted that the share of the first, more traditional path is significantly larger.
In the formal sectors of traditional banking worldwide, branches consume close to 20 terawatt-hours, data centers approximately 240 terawatt-hours, and ATMs account for about 3 terawatt-hours. This totals around 263 terawatt-hours. Banking processes consume more than twice the electricity of the Bitcoin network.
In the gold industry, the World Gold Council reports that the direct and indirect electricity consumption of this industry exceeds 240 terawatt-hours, with mining, gold smelting, and recycling covering half of this amount. Thus, gold consumption is twice that of Bitcoin.
According to the calculations, these two industries together consume 4.6 times the electricity of Bitcoin. It should also be noted that all three industries—cryptocurrency, banking, and gold—have additional energy consumption, such as gas, oil, or gasoline in their various sectors. Banks and the gold industry, due to their large workforce, certainly have a significant share in this type of consumption.
If we revisit the GDP metric, we see that currently, banking accounts for about 20 to 25 percent of the global total, while the gold industry accounts for 4 to 6 percent. The comparison might seem a bit disheartening, but it is worth pausing for a moment. Bitcoin has claimed about 1 percent of the global economy in less than 15 years, while the banking and gold industries have been gradually declining. This trend began after the Industrial Revolution in the 17th and 18th centuries, and we have continually witnessed the diminishing role and share of these traditional industries in the global economy. Technology and production consistently hold the upper hand, as they are creating added value and expanding the economic pie for everyone. With the emergence of modern computing, internet, and artificial intelligence technologies over the past four decades, of which Bitcoin is a part, the economic competition for banks and gold mines has intensified.
Another noteworthy point is that prominent contemporary economists, including Hayek, Keynes, and von Mises, have shown that issues like inflation and recession stem from banking, financial, and monetary policies, such as expanding the money supply, irregular loans, or money distribution due to rent-seeking growth (rent here refers to economic growth without producing goods or creating added value, like when oil prices rise). Over the past hundred years, there have been at least two major depressions (1929 and 2008) and several significant inflations globally, which have led to increased costs and inefficiencies in banking processes and a lack of investment in banking and gold extraction industries, driving a rush towards gold purchases and chaos in the gold industry. During periods of recession and inflation, these two industries face prolonged contractions and severe reductions in growth, and the economic efficiency of energy consumption in both industries is questioned. Meanwhile, as of the time of writing this article, Bitcoin is not in its best days. Nonetheless, approximately $25 to $27 million worth of Bitcoin is mined daily, while the annual electricity cost of the Bitcoin network, at an average rate of less than $30 million per kilowatt-hour, is significant. Although we are aware of other network needs, the primary costs are related to energy, which provides a good metric for Bitcoin’s value even during a downturn (especially considering that if electricity becomes expensive or Bitcoin’s value decreases significantly, you might turn off a few miners, but banks would lay off thousands of employees directly and indirectly!).
Additionally, another statistic can reveal the cost-benefit ratio of electricity consumption in various scenarios. Suppose, in the year Bitcoin first gained value, 2010, you had $40,000 and invested $10,000 in gold at $950 per ounce, $10,000 in bank bonds with an annual interest rate of 5 percent, $10,000 in shares of a tech giant like Microsoft at $11 per share, and $10,000 in 9-cent Bitcoin. Today, each would be worth just over $20,000, around $20,000, approximately $145,000, and over $3 billion (equivalent to Donald Trump’s total wealth)! This is assuming that Bitcoin has only had such high consumption in the past 4-5 years. In terms of return relative to electricity consumption and total cost, Bitcoin has shown that it is no less than other financial sectors. However, it is important to consider Bitcoin’s future for this example to be fully understood. Many cryptocurrency and economic experts believe that Bitcoin will have a bright independent future, although some think it is just a passing wave.
“Cryptocurrency is a good idea on many levels, and we believe it has a promising future, but it should not come at a significant cost to the environment.” —Elon Musk (CEO of Tesla and SpaceX)
Energy Consumption and Environmental Issues
Now it is useful to consider another aspect of electricity consumption in the Bitcoin network. Every moment we spend online, whether watching movies or listening to music, consumes a few megabytes to several gigabytes of data. At any given moment, millions of other users are doing similar activities, meaning that hundreds of thousands of servers are consuming vast amounts of electricity. Estimates indicate that each gigabyte of data consumption is equivalent to 0.015 kilowatt-hours of electricity, which on average results in the release of 4.2 grams of carbon dioxide into the Earth’s atmosphere. In blockchain terms, the electricity consumption of mining devices relates to their computational power. The amount of computational power a miner can perform per second is measured in hash rate or hashes per second. The typical hash rate of mining devices usually ranges from 10 to 20 terahashes per second, with each terahash consuming 0.012 watt-hours of electricity. Mining a single Bitcoin today requires 382 million terahashes per second, which is equivalent to 4,700 kilowatt-hours of electricity. This amount of electricity is roughly equivalent to 1,300 kilograms of carbon dioxide. Currently, around 900 Bitcoins are mined every 24 hours, leading to significant emissions and undoubtedly posing a threat to our environment. Pollution, greenhouse effects, and global warming are serious issues that cannot be ignored. We must contribute to the preservation of the Earth by saving energy or utilizing clean renewable energy sources. But how polluted is Bitcoin? It is necessary to refer to calculated statistics here.
Estimates indicate that over the 14 years since Bitcoin’s inception, more than 200 million tons of carbon dioxide have been released into the atmosphere due to Bitcoin mining. This report, published by the University of Cambridge, has expressed negative assessments of this amount. While this is a significant amount and its danger is undeniable, how does it compare to the total carbon dioxide produced and the situations in the banking and gold industries?
By referring to the report from the Center for American Progress, we find that the volume of carbon released annually due to the activities of just 18 major banks in the U.S. is close to 2 billion tons [15]. This means that, annually, only a few large banks contribute 10 times the environmental damage caused by the traditional banking industry compared to the Bitcoin network. A rough estimate shows that the hidden electricity consumption of the banking industry is greater than the official statistics indicate. Now, if we turn to the gold industry, we find that the extraction and distribution of this precious metal add between 100 to 120 million tons of carbon dioxide to the Earth’s atmosphere each year. If we assume that most Bitcoin mining activity has occurred in the last 5-6 years, the environmental impact of this activity is between 40 to 50 million tons annually, which represents a significant gap between Bitcoin and traditional industries.
According to data and reports from the White House on greenhouse effects and global warming, it is found that only 0.4% to 0.8% of the total carbon dioxide produced comes from the entire cryptocurrency industry. Since about 60% of the cryptocurrency market’s turnover is attributable to Bitcoin, it can be estimated that Bitcoin directly contributes less than 0.5% to pollution.
These figures indicate that, compared to other industries, Bitcoin mining is cleaner. Furthermore, economic activity statistics alongside these figures show that the environmental cost-benefit ratio of Bitcoin is significantly better. On the other hand, it should be noted that reforming cryptocurrency systems in any area is simpler, faster, and less costly compared to other industries. Miners are continually improving and operating more quickly and efficiently. They also have simpler maintenance and repair needs overall. Additionally, in most cases, it is sufficient to keep these mining devices in a dry and cool environment to maintain their health and consume less electricity. With a bit of effort, the performance of miners can be maximized; this seems essential, as typically the electricity consumption of miners at peak capacity does not vary much from the usual, and economically, it offers better efficiency compared to environmental issues.
Conclusion and Discussion
This article examined various aspects of Bitcoin’s electricity consumption challenges. Throughout the discussion, an effort was made to determine whether Bitcoin, representing the world of cryptocurrencies, is a suitable and cost-effective option for the new era of transactions and financial and banking interactions. What has been presented so far seems to tilt the scale in favor of Bitcoin’s advantages. However, as previously mentioned, the future and survival of cryptocurrencies in this regard are highly influential. If issues such as poor regulation or decryption algorithms do not make the survival of digital currencies more difficult, future challenges in managing and optimizing processes will certainly be tougher than today. For example, with the decreasing number of available Bitcoins and increasing competition for mining, the difficulty of the Bitcoin network will increase, requiring more and heavier processing power, which inevitably results in greater energy consumption and pollution. Although blockchain networks are developing software and protocol advancements to make processing simpler and faster, hardware technologies are also continually improving in computing and processing, still adhering to Moore’s Law for growth and development. Additionally, renewable energy technologies, particularly solar and wind energy, are becoming increasingly better and more efficient, offering hope that they could soon become the primary energy source for Bitcoin mining farms. Based on the assumptions and statistics presented and reviewed so far, it is generally optimistic to believe that the Bitcoin network will continue to operate in a relatively cost-effective and clean manner in the future.
