Bitcoin And The Planet

There was some snark thrown around in February when Elon Musk’s Tesla announced its purchase of $1.5 billion of bitcoin out of their corporate treasury. Musk has been outspoken on the role of fossil fuels in causing climate change. The businesses Musk leads explicitly are tackling this challenge. To cite the company’s website: “Tesla’s mission is to accelerate the world’s transition to sustainable energy.”

Not long after this announcement, the BBC ran a story on the significant energy usage of the Bitcoin network, as estimated by The Cambridge Centre for Alternative Finance.  The Cambridge researchers calculated Bitcoin’s energy usage to be 121.26 terawatt-hours per year, which, without being energy experts, we take to be significant consumption on par with mid-size countries. The article’s headline: “Bitcoin consumes ‘more electricity than Argentina.’”  

The implication of the article is that Bitcoin consumes a lot of energy. Naturally, people question if this large amount of energy causes humans to burn more fossil fuels, emit more greenhouse gases and otherwise accelerate climate change. Can one square Musk’s embrace of bitcoin with the Bitcoin network’s energy consumption? And, for readers of this piece, should investors who are concerned about ESG issues invest in bitcoin?

Why Does Bitcoin Consume Energy?

The Bitcoin network consumes energy. This is undeniable. The Bitcoin blockchain relies on a proof-of-work method for achieving consensus on the ledger. This method of consensus requires Bitcoin miners to use specialized computers to constantly compete to solve a puzzle to propose a new block (a group of transactions) to the blockchain. The computers competing to propose a new block—and earn their bitcoin reward—are consuming electricity this whole time. This competition, and the requisite work, are intrinsic to the functioning of the Bitcoin network. Through that lens, energy consumption is not really an externality of Bitcoin. In a way, it’s the point.

Is Bitcoin Mining Inherently Bad for the Environment? (No)

If energy consumption is unavoidable, the cost of that energy becomes very important to Bitcoin miners as profit-maximizing firms in a perfectly competitive market. To maximize profits, miners must constantly keep down their largest variable cost (electricity). This is not a hypothetical. Riot Blockchain, a publicly traded cryptocurrency miner, filed an annual report with the SEC (10-K) that contains interesting language:

1 2 3 4
View single page >> |

Will Peck is Head of Strategy and Emerging Technologies at WisdomTree. In this role, Will oversees corporate development and other strategic initiatives for the firm, including the firm’s ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.