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Behind Bitcoin's Energy Consumption

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You’ve probably seen the headlines about the most recent tech hype: Bitcoin. And you may have heard that it’s going to consume all the world’s energy. Should you be worried about its impact on your business? Let’s take a look at what we know.

Simply put, Bitcoin is an online public ledger maintained by a network of thousands of computers around the world. Practically speaking, it’s an investment stock, though it has the future potential to be used like any currency to purchase goods and services. 

As a digital currency, it doesn’t have a physical footprint. And yet, creating, distributing and storing Bitcoins requires major energy consumption.

Here’s why

As a decentralized entity, Bitcoin is free from government regulations and banks. But it maintains its security through a complex process of cryptography called blockchain, which is executed by computer algorithms. On average, it takes a single computer 2 billion attempts to crack the code required to make a single Bitcoin transaction, a process called “mining.” Imagine the server power necessary to make an average 200,000 transactions per day.1 That's 400 trillion attempts to crack the cryptographic code every single day. And a lot of energy.

When the price of Bitcoin rises, as it did drastically during the past year, the demand for computer miners increases, too. In other words, the price of the currency correlates directly with the amount of energy it needs. 

Because of its inherent network connectivity, Bitcoin also uses significantly more energy per transaction than other payment systems. Visa, for instance, consumed a total amount of 674,922 Gigajoules of energy globally this past year.2 That means Bitcoin consumes more energy per transaction than Visa does for every 1,000 transactions.

Will Bitcoin really consume all the world’s energy?

Such a real-time information exchange takes hardly any storage space, and has no central vulnerability – two gigantic advantages in today’s digital age of cyber hacking. But many experts worry about whether a system that requires such enormous computer power is actually sustainable.

CBS reported in November 2017 that mining for Bitcoins consumes more energy than 159 individual countries:

"It takes a whopping 29.05 TWh (terawatt hours, equal to one million megawatt hours) annually to operate the energy-hungry computers and networks that power bitcoin transactions. That's about 0.13 percent of total global electricity consumption, according to Digiconomist. That would rank bitcoin as 61st if it were its own country." 3

Yes, you read that right: mining a largely obscure currency consumes more energy than a small country. And Newsweek declared that consumption is increasing so rapidly that by 2020, Bitcoin might consume all of the world's energy.4

These numbers suggest that every single transaction of the currency consumes no less than 250 kWh. That would be enough to power an average home for no less than nine days. And of course, energy production is not rising alongside it, leading to understandable sustainability and consumption concerns.

But other experts, like those quoted by CNBC, report that such forecasts are alarmist and misguided:

"This kind of analysis makes a classic mistake: It projects high growth rates associated with a new technology into the future, resulting in an eye-popping demand forecast. Similar projections were made about internet data traffic and electricity usage from office computers and mobile devices, he notes. Sure enough, their initial growth rates moderated as they scaled up." 5

It’s also important to consider that over time, Bitcoin energy consumption may be minimized by the growth of sustainable energy sources and energy efficiency technologies, which are becoming more popular and affordable worldwide.

What is the future of Bitcoin?

Given its anonymity, decentralized record keeping and the inability thus far for governments to regulate it, Bitcoin is difficult to predict or control. But that’s also what makes it so popular, with its value increasing tenfold in 2017 alone.6

So, is Bitcoin a bubble about to burst, the future of secure transactions or merely a tech hype that will prove to be insignificant over time? Who knows? But do you need to worry about Bitcoin dominating the energy grid? The jury is still out, but probably not. Certainly, Bitcoin mining has an energy efficiency problem. But until there is more hard data on its growth and power consumption, the effect on the energy markets can’t be forecasted with any confidence. 




Posted: February 28, 2018