The truth about bitcoin mining, energy and the environment

This article is a French translation of the original article » The Single Most Important Truth About Bitcoin Mining, Energy and the Environment » written by Troy Cross, professor at Reed College and member of the Bitcoin Policy Institute.

Last week, Greenpeace USA projected animations showing the CEOs of JPMorgan Chase, Jamie Dimon, and the CEO of BlackRock, Larry Fink with laser eyes on the skyscrapers of Manhattan, accompanied by shocking statistics on the energy use and greenhouse gas emissions of Bitcoin mining.

According to the flashy ad, Bitcoin consumes more energy than many countries, emits more carbon than millions of cars, and its pollution is “GOING TO GET WORSE WORSE WORSE WORSE!” Four “WORSE” have been stacked vertically, in case the first three didn’t convince you.

As an environmentalist who has been studying the energy footprint of Bitcoin mining since 2011, I have a radically different perspective. I believe Bitcoin has enormous potential as a tool to decarbonize the electricity grid, reduce methane emissions, and accelerate the electrification of heating. I believe that emissions from Bitcoin mining will steadily decline in the future.

And I also think that this will result in cheaper energy, not more expensive.

How do Greenpeace USA and I have such radically opposing views?

People who are critical of Bitcoin have yet to grasp the most important point about Bitcoin's impact on energy systems: Bitcoin mining tends to use only the cheapest electricity in the world, everywhere and everywhere. moment. Currently, most miners already pay well less than $0,08 per kilowatt-hour (kWh) for their electricity, with some even claiming rates as low as $0,02/kWh.

But these numbers will continue to decline in the months and years to come, until it becomes profitable to mine Bitcoin with almost free electricity.

In the remainder of the article, I will first support this assertion, then show that the effects of Bitcoin miners purchasing virtually free energy would be overall positive for energy systems and the environment.

Why will Bitcoin miners only use the cheapest electricity in the world?

Here are some indisputable but underappreciated facts about Bitcoin.

Miners earn bitcoins from two sources: block reward and transaction fees. Transaction fees currently represent a negligible percentage of miners' revenue, so we will set them aside. The block reward is how new bitcoins enter circulation: 900 new bitcoins are distributed to miners around the world every day, in proportion to their computing power.
This emission rate is halved every four years, during the event called the "halving". In April 2024, this emission of new bitcoins will increase to 450 BTC per day and will remain at this level until 2028, when it will increase to 225 BTC per day.
Bitcoin is an asset produced from the same source – electricity – at roughly the same rate by the same specialized mining machines (application-specific integrated circuits, or “ASIs”). ASIC"), wherever they are in the world. Once mined, Bitcoin is sold on a global market and instantly "sent" to its buyer by recording it on the Bitcoin ledger itself.
Bitcoin miners are flexible and are malleable; they can quickly turn their machines on and off and adjust their electricity usage with minimal loss of profit.
The largest area of expenditure for miners – at more than 70% – concerns the electricity bill.

How do these facts show that mining tends towards almost free energy use?

Firstly, the uniformity and availability of the means of producing Bitcoin – ASICs – and the fungibility of the product mean that there is a very low barrier to entry into this market. The bitcoins you produce will be as valid as those of others and you will use the same machines to produce them. So if it's possible to mine bitcoin cheaper, then someone, somewhere in the world will do it, because people are always looking to earn more.

Second, once the mining market is saturated, the miners with the highest expenses will find themselves right on the edge of profitability – with enough profit to make it worth continuing – and no one else will be. attempted to enter the market unless they can reduce their expenses and fees. If a new miner comes on the scene during saturation, and it is profitable, then the existing miner that was marginally profitable will go bankrupt.

Third, miners with access to cheaper electricity have a significant advantage. If energy represents 70% of your costs and you can achieve 50% savings on energy, if you reduce your expenses by 35% it results in a dramatic increase in your profits.

There are other business benefits to consider – firmware, cooling, taxes, personnel, access to capital, uptime, etc. – but the elephant in the room is your electricity bill. If you have a significant disadvantage on a cost that represents 70% of your expenses, then no matter your other advantages, your business is doomed; cheaper energy reserves will be tapped somewhere in the world until you file for bankruptcy.

Fourth, the halving of bitcoin issuance, which will take place in April 2024, brutally eliminates less profitable miners every four years.

When the total amount of money bitcoin miners are expected to spend on their electricity bill declines by about 50% in nine months – which will happen, unless the price of Bitcoin doubles or it stops. There will be a dramatic increase in market transaction fees – any miner with low margins will be forced to find cheaper energy or stop their activity.

The impacts of energy cheapskate

We can therefore conclude that bitcoin will tend towards the cheapest energy in the world. What does that mean? An immediate implication is that bitcoin is not going to drive up the price of electricity for anyone for very long. It would be difficult otherwise. If the entry of bitcoin miners into a power market significantly raises prices for users, those prices will subsequently be higher than in other parts of the world and it will then be more profitable to mine elsewhere. Miners in the region where electricity has become too expensive will then find themselves in difficulty.

Additionally, miners, since they can shut down at any time, will never use electricity at times when it is most expensive – when the cost of electricity to mine one bitcoin is higher than one bitcoin – and will therefore never contribute to peaks in demand within a network. These peaks in demand are largely responsible for infrastructure needs and high energy costs. While miners can raise price thresholds (but not too much, otherwise they will compete!), they certainly won't raise price caps.

Another conclusion from an environmental point of view is much more dramatic: the cheapest energy in the world is the one that, for the moment, no one wants. This means that it is energy that is stuck somewhere or produced at the wrong time. This almost free and excess electricity is mainly the result of production that cannot adapt to fluctuations in demand (nuclear, hydroelectric, wind or solar).

For a gas plant, if demand drops, we simply reduce the amount of gas used. But when demand drops for part of the day, or when heavy industry leaves a region, these non-fossil energy sources cannot reduce their production, and as a result, prices fall. With ambitious plans for power plants based on renewable energy, such pockets of excess energy will continue to grow in the decades to come.

Thus, Bitcoin, which exploits the energy produced in excess by renewable energies, at an inopportune moment, or by nuclear or hydroelectric power plants on local markets, improves the economy of these electricity production centers.

Read the article : Mining company Gridless improves the economy of African villages

An analogy may help here. Suppose a bakery customer agrees in advance to purchase a certain quantity of pastries each day, except on busy days, when he would cancel his daily order. Suppose the customer also agrees to purchase all unsold pastries at the end of each day. This is how Bitcoin mining works.

Just like the ideal bakery customer who is a regular buyer, but also respectful of other buyers, miners agree to buy a certain amount of energy in advance, predictably, at a low price, but turn off their machines to make room for other buyers who can pay higher prices during peak demand.

And just as the buyer at the bakery waits for unsold baked goods at the end of the day, Bitcoin miners with older, less efficient machines wait for the only energy they are profitable with: the kind that is free.

In both cases, the seller – of baked goods or energy – is able to meet the demands of their customer, while enjoying more stable income thanks to this very special and flexible customer.

Another consequence of Bitcoin's miserly energy consumption is that it is well suited to optimize wasted energy. The burned methane earns absolutely nothing, but can be used to produce electricity and mine Bitcoin. It follows that Bitcoin miners will look for burned methane, whether in landfills, sewage treatment plants, the farms or in oil companies, and will take the opportunity to mitigate what the Nations Unions consider it to be “the most powerful lever we have to slow climate change over the next 25 years.”

Finally, all the energy that goes into a ASIC in the form of electricity comes out in the form of heat. Miners who find a way to sell this heat will have a competitive advantage over those who don't. This is already happening in various situations – spas, distilleries, district heating – where it makes sense. And we can infer that this will continue if it is a profitable business.

Finally, bitcoin mining is an almost perfect market with margins tending towards zero, the most important contribution of which is energy. Since bitcoin mining is not tied to a fixed geographic location, it will move to where electricity is cheapest. In other words, where there is little competition for wasted energy, which represents the inevitable by-product of our current energy production.

The consumption of what would otherwise be wasted energy is then intended to be beneficial and not harmful to the energy economy as a whole, since it improves the economics of non-distributed electricity production. This also encourages the reduction of methane emissions and encourages the electrification of fossil uses.

Real-world complications and tough questions that linger

The deductions I have made above must be understood with some caution. Miners can take on debt and operate at a loss, so miners can prosper if they have access to capital rather than cheap energy. The criterion of regulation may also trump the price of electricity – who wants to have a bitcoin mining company that can be seized at any time by a corrupt government?

During periods of market growth, ASICs or other electrical equipment may not be available in sufficient quantities. This then pushes miners to consume more expensive energy until ASICs and other equipment are available in sufficient quantity.

In addition, the event of halving can trigger a sufficiently large increase in the price of bitcoin that the least efficient miners are still profitable. New power generation projects are difficult to finance with the promise of bitcoin mining because Bitcoin's volatility can repel investors.

Likewise, cheap electricity from renewables comes with significant downtime, while ASICs depreciate at a constant rate, posing a challenge for mining based solely on excess renewable energy .

Finally, states subsidize energy and regulate energy markets and my analysis may lose its relevance – for example, when coal plants are subsidized, they suddenly become cheaper energy for mining Bitcoin. Any electricity market can be manipulated in such a way that Bitcoin miners seek the lowest prices while other buyers are forced to pay more due to a surge in demand.

All these details must be taken into account and partly explain the events which triggered an avalanche of negative criticism on Bitcoin mining over the last two years. When China banned Bitcoin mining during a period of historic price increases, electricity rates didn't matter, and easy money flooded the Bitcoin mining industry. This has led to a mad rush for electricity at any price. This put a strain on some local networks with the maintenance of some fossil fuel plants which had to be closed.

However, these are the exceptions that prove the rule. These represent temporary anomalies or market failures, which ultimately must give way to a market with virtually free energy. Nothing can prevent the most geographically flexible and price-sensitive energy consumer from seeking abundant, nearly free energy that would otherwise be wasted. This is his destiny.

Of course, Greenpeace will continue to claim that Bitcoin is destroying the world while urging changes to how it works. By running a campaign without solid evidence, Greenpeace is showing its willingness to attack a new but frightening technology that could well be beneficial for the environment.

However, serious discussions between policymakers and industry leaders about the impacts of Bitcoin mining on energy systems and the environment need to be deepened. They need to examine this new technology by addressing the sticking points about how Bitcoin mining happens in the real world.

This point of convergence, which is the basis of rational discourse, is the inexorable impulse that pushes Bitcoin mining to use ever cheaper energy.