Lately, there is more and more talk about environmental sustainability and energy transition to renewable sources. The whole Bitcoin ecosystem requires large amounts of energy to function properly – some people think this is a problem while others think the opposite. Let’s find out more.
How Bitcoin mining works
Bitcoin mining is a process that allows the minting of new coins that enter into circulation. The usefulness of this process, apart from allowing the increase of supply, is to validate transactions, preserve the security of the entire Bitcoin Blockchain.
Mining is performed by processors with specific hardware (ASICs) that perform very complex mathematical calculations. They can be performed either by private citizens or in companies, a.k.a mining pools.
The mining algorithm rewards whoever gets to the solution first, in which case they will receive the entire amount of bitcoins mined in that specific block on the blockchain, and the block’s transaction fees. This process is repeated every time a block is added to the blockchain.
The incentive to mine
As mentioned in the previous paragraph, people have an incentive to mine because they earn from it.
Wherever there are potential profits, a market is spontaneously created. Since the birth of Bitcoin, many companies have sprung up that operate exclusively in this sector. These companies, called mining pools, have the advantage of drastically lowering their costs and maximising their efficiency and therefore their profits.
Mining in fact also has several costs to entry:
- Hardware purchase – this is an important initial cost because to mine it is necessary to have specific hardware that is able to process the type of mathematical calculation required by the algorithm
- Volatility – this is not really a cost but it can become one, in fact, the price of Bitcoin is known to be extremely volatile. Essentially the risk is when the miner wants to make a profit but at that moment the price of Bitcoin drops and there is a loss or worse.
- Energy consumption – although the hardware’s efficiency has increased significantly in recent years, the difficulty of the calculations will always tend to increase.
Energy consumption in mining
Any industry on the planet needs energy to function and consequently generates pollution, and this applies even more to mining. Many environmentalists, politicians, and economists raised the question of how much energy this particular industry needs to function and whether production somehow justifies this consumption and emissions into the atmosphere.
The University of Cambridge (CCAF) has conducted some studies to estimate the energy consumed by the whole Bitcoin Blockchain in 1 calendar year. The estimate is about 110 TW/h per year, which would be 0.55% of the energy produced worldwide annually or, to put it differently, it is the consumption of some small countries like Sweden.
The second question is: how much energy should a monetary system consume?
The answer cannot be given today because this depends on many variables, the main one being the utility attributed to Bitcoin. For those who see no utility whatever, the amount of energy consumed is still excessive, conversely for those who see a real practical utility in Bitcoin, then the energy consumed is certainly well spent and acceptable.
Energy consumption is not pollution
Energy exists in many forms and is derived from many different sources, some of which produce pollution and some of which are environmentally neutral.
The only form of energy that can be used in mining is electricity, so what is really important is to calculate the energy mix used to produce the energy used to mine Bitcoin, but this is difficult to estimate and therefore it is not possible to know the exact emissions produced.
The most accurate estimate again comes from the University of Cambridge, from which many mining pools around the world with different characteristics were involved in the study. The study found that about 39% of the energy consumed by Bitcoin comes from energy sources with zero impact on the environment.
Compared to the global average, this is objectively very good. For example, in the United States, total energy consumption from carbon-neutral energy sources is less than half that of Bitcoin.
Smart energy solutions
Unlike almost any other industry, Bitcoin mining can be done almost anywhere and by anyone, all you need is an internet connection, the appropriate hardware and some electricity.
In this regard, there are many regions in the world where the production of electricity (from renewable and non-renewable sources) far exceeds local demand, as you can imagine this excess energy is virtually wasted.
Many miners, over time, have identified these regions of the world and have located their mining farms nearby. The result is that energy that was previously wasted or not used by anyone is now being used by the mining farms, which buy it at very cheap prices, thus making excellent profits.
One example is the huge amount of hydroelectric power produced in China during rainy periods, and therefore from renewable sources. Although China is an industrialised and battery-producing country, it is not able to store all the electricity produced, which is also why around 10% of global Bitcoin mining is concentrated there.
Of course, El Salvador, known for adopting Bitcoin in 2021, has also committed to this. The Central American state has launched a pilot project with the aim of using some of the geothermal electricity from the volcano to power the hardware needed for Bitcoin mining. The energy is produced using turbines, the heat is used to generate the water vapour and then the rotating motion of the turbines produces electricity.
The current production is about 1.5 megawatts per hour, which is enough to power about 300 computers running 24 hours a day and test the pilot project’s idea.
As you can guess, the energy issue of Bitcoin mining is constantly evolving and it is very difficult to have reliable data to draw objective conclusions.
All countries around the world, each at their own pace, are slowly moving towards a renewable and sustainable energy future. The same can be expected of all industries, including mining.