Bitcoin (BTC -3.65%) takes a lot of criticism for its extensive energy use. According to Cambridge Bitcoin Electricity Consumption Index, Bitcoin uses about .29% of the globe's energy . That is a whopping amount of energy, but this figure doesn't tell the whole story.
This statistic tells us nothing about how Bitcoin uses the energy, the type of energy it is using, or any external effects this energy use has. Although it may seem counterintuitive, I would argue that it is a good thing that Bitcoin uses as much energy as it does.
Image Source: Getty Images
What is the energy actually used for?
In order to discuss Bitcoin's usefulness, we need to cover what the energy is actually used for. Bitcoin has three strict rules that the energy is used for:
- Keep the maximum supply of bitcoin at 21 million coins.
- Produce a 1MB block roughly every 10 minutes to store transactions on the blockchain.
- Don't change the first two rules.
Ultimately, Bitcoin uses a significant amount of energy to secure and protect its network from an attack. An attack could theoretically stem from an entity that wishes to alter the core parameters of its protocol. This entity may try to alter three main things: the supply, the block size, or the block schedule.
This entity might want to change the block schedule -- and thus the supply of Bitcoin -- in order to profit from newly created Bitcoin. Or, someone may want to increase the block size, which would increase the number of transactions per second Bitcoin can handle (this has been flagged as a potential threat to Bitcoin's decentralization, as doubling the block size would increase hardware requirements for node runners, which in turn would decrease the number of people that could run their own Bitcoin node).
As it turns out, the ruleset that was configured at Bitcoin's launch were calibrated to maximize decentralization, If someone wanted to change the rules in any way, they would need to acquire more electricity than what the network is already using, and a massive fleet of computers.
A task like that would prove difficult even for the largest of nations .
What the energy is not used for
The energy bitcoin uses is not directly used to process transactions. The network will use the energy to produce a block (or a packaged set of transactions), regardless of whether or not there are transactions within the block. Processing transactions is a byproduct of block production, not the purpose.
The type of energy Bitcoin uses
The Bitcoin Mining Council estimates that around 58.5% of the network is powered by renewable energy . Bitcoin miners routinely search for the cheapest forms of energy because they can make more money.
Bitcoin incentivizes miners to find cheaper forms of energy production because to mine Bitcoin, all that is required are computers that run on electricity. The cheaper the energy, the less the miner spends mining blocks. When a miner mines a block, they're rewarded with BTC, which they can then sell to recoup the cost of energy. This often leads miners to deploy their operations next to renewable energy sources such as hydroelectric, wind, and solar. These renewable energy farms can sell electricity cheaper than non-renewable sources which means Bitcoin mining companies can make more money.
A buffer for the grid
Bitcoin's heavy energy usage, therefore, creates more demand for these renewable forms of energy. Bitcoin can actually be a 24/7 buyer-of-last-resort for these energy farms, when retail and industrial buyers might be offline, asleep, or when the energy would have otherwise just been dumped (known as curtailment) . This allows bitcoin to act as a buffer for the grid, and smooth out energy production -- and profits. This leads to more profitability for both bitcoin mining farms and green energy providers. The profits can then be used to reinvest in new green energy projects, accelerating the rate at which the globe transitions to a greener energy grid.
An acknowledgement of waste
Bitcoin is not perfect by any means. It is run by computers which have their own carbon footprint to produce. The solar, hydro, and electric energy sources also have an environmental cost to produce. Lastly, around 41.5% of Bitcoin's energy use still comes from non-renewable sources, such as coal and fossil fuels. But every useful industry produces waste of some sort; no one is exempt. Bitcoin is about transitioning to a more sustainable and reliable financial system. I would argue that this is accelerating the rate at which more sustainable sources of energy production is used for such a process.
Bitcoin puts the energy to good use
Bitcoin uses energy to protect the integrity of the network, ultimately securing about $1 trillion worth of bitcoin. But there are also positive externalities that come from bitcoin using as much energy as it does. It buys energy from suppliers that may not otherwise have a buyer. It prefers cheaper, and therefore greener energy sources, aiding in the necessary rapid transition to a greener grid. So I am comfortable with bitcoin using as much energy as it does.
I also think it is a good thing to have bitcoin use this energy to secure my own investments, and everyone else using the network to store, save, and transact value.
