Bitcoin’s Real Energy Expenditure: A Comparative Analysis

As Bitcoin continues to grow in market capital­iza­tion and energy expen­di­ture, it has been the cause of criti­cism. A common argument is that the mining network uses more energy than some small countries.

The problem with that state­ment is that it fails to dive deeper into the critical analysis required to fully under­stand Bitcoin’s energy consumption.

Nuances need to be explored, such as: What is the source of that energy? 

Is it environ­men­tally harmful to mine Bitcoin (like gold mining)? 

Is that energy consump­tion a sum zero to the energy already being wasted? 

What utility does Bitcoin provide to society?

It is a finan­cial instru­ment that can be sent inter­na­tion­ally between different parties, can be memorized and brought anywhere in the world, and can be stored offline with no counterparty.

Just 13 years into existence, it is the most portable, verifi­able, censor­ship resis­tant and divis­ible asset in the world. But perhaps most impor­tantly, it is the most scarce.

We’ve all seen the headlines recently in attempts to cancel and silence anyone that goes against the media narra­tive. De-platforming, doxxing, and many other strate­gies have become the norm.

Do we expect it to stop there? 

What happens if the govern­ment moves forward with Central Bank Digital Curren­cies? They’ll be able to turn off your account or freeze your money.

Bitcoin is in the full custody of the owner, assuming they keep it in the appro­priate storage and maintain their own private keys. Nobody can ever take it from you.

We’re living in an age of soaring infla­tion. Over 40% of the total fiat money supply has been created out of thin air in the last couple of years. This was decided by a handful of politi­cians without input from the people who will feel the most significant effect of these policies.

While that has benefited those holding assets like real estate and stocks, it has absolutely crushed those without. Meanwhile, wages are stagnant, and the cost of goods has also soared. If fiat curren­cies continue as our primary store of value and monetary system, we are heading toward the same inevitability that has plagued the citizens of Venezuela, El Salvador, and Zimbabwe (to name a few).

Bitcoin has a fixed supply of 21M. There will never be any more. It is essen­tially wealth creation and preser­va­tion that is 100% in the custody of the owner.

Seizing assets is a time-honored tradi­tion throughout human history.

Whether it be through property taxation, real estate seizures, or the 1933 forced forfei­ture of all person­ally held gold under penalty of imprisonment.

God forbid your country is invaded, overthrown, or any other number of possibilities… 

Do you really think your real estate holdings or 401k would be safe?

Since it is impos­sible for anyone to seize your Bitcoin without access to your private keys (which can be memorized), it is the only asset class that gives you 100% protec­tion from being confiscated.

Now let’s dive into the energy conversation…

It is conser­v­a­tively estimated that as much as 74.1% of all Bitcoin mining is produced from renew­able energy.

Critics have said that using renew­able energy to power Bitcoin mining means it won’t be avail­able to power a home, a factory, or an electric car.

However, the renew­able energy that Bitcoin miners utilize is typically linked to the excess energy output from these sources. For example, in West Texas, miners buy excess wind and solar energy from providers when energy is abundant. In so doing, the miners monetize a renew­able asset that would other­wise be wasted while maintaining gener­ally high uptime.

The same is true in the recent surge in flair gas energy usage. Miners are contin­uing to adapt in search of more inexpen­sive output.

To take it further, nuclear plants are being decom­mis­sioned around the world due to their diffi­culty in remaining profitable in compar­ison to substa­tions and tradi­tional power grids. What if energy compa­nies harness this untapped resource of wasted energy to power a massive adoption of Bitcoin mining infrastructure?

All of this lends credence to the hypoth­esis that Bitcoin is galva­nizing the use of renew­able energy.

Now imagine govern­ments wish to tame infla­tion in the future without plunging the world into a massive reces­sion. They can’t raise rates to do so, like they did in the 1980s, because most of the world would default on their massive low-interest loans. They will need to choose a new system to back their money. Destroy the economy or destroy fiat currency. That is the question they are currently faced with today.

With its huge renew­able energy founda­tion, Bitcoin will be too good to pass up.

When asking this question, it is impor­tant to not put it in a vacuum. While there is still room for improve­ment on the 26% non-renew­able Bitcoin mining sources, the expec­ta­tion is that this will continue. Conversely, we must compare Bitcoin’s environ­ment impact to its alternatives:

Based on a 2014 study, gold produc­tion expends roughly 132 terawatt-hours of energy per year. Compare that to Bitcoin’s 105 terawatt-hours as of 2021. These are fairly similar in energy output. However, the large differ­ence to be seen is just below the surface (no pun intended).

Gold mining activ­i­ties lead to the gener­a­tion of large quanti­ties of heavy metal-laden wastes, which cause widespread conta­m­i­na­tion of the surrounding ecosystem.

Modern indus­trial gold mining destroys landscapes and creates huge amounts of toxic waste. Due to the use of dirty practices such as open pit mining and cyanide heap leaching, mining compa­nies generate about 20 tons of toxic waste for every 0.333-ounce gold ring. The waste, usually a gray liquid sludge, is laden with deadly cyanide and toxic heavy metals. 

Gold doesn’t even come close to competing with Bitcoin in its preser­va­tion of the environ­ment or the energy required to create it.

As the world is hungry for more wealth, gold miners are begin­ning to look to the sea bed and oceans to begin large-scale mining. How do we expect this to turn out, based on the damage already done with land mining? 

Answer: Not good.

As Vijay Boyapati pointed out in his article, The Bullish Case of Bitcoin, it is not just the finan­cial systems that must be accounted for, but every­thing that is needed to uphold it. That is the measure of the true environ­mental impact of today’s fiat monetary systems.

On the surface, there are people, build­ings, banks, computers, and commuting systems to consider. But what backs fiat systems since it came off the gold standard?

Bitcoin has Proof of Work. Fiat currency has politics and the military.

Make no mistake, without the military and the polit­ical strength of the nation, there is no way the world accepts the dollar as the world currency.

What is the environ­mental impact of war, planes, carriers, tanks, the gasoline to power them, the steel created to build them, and the millions of service men and women? It’s almost immeasurable.

Bitcoin is housed in data centers spread around the world, typically going where the most avail­able excess renew­able energy can be used. All you need is an internet connec­tion, and no military in the world can confis­cate it because it is decentralized.

We as respon­sible investors must look beyond the surface of energy expen­di­ture. Look at how Bitcoin’s energy is created, and the impact trail it leaves behind.

We must compare Bitcoin’s environ­mental and socio-economic impacts to the finan­cial systems it aims to replace.

We must look at who the current system aims to enrich, and how Bitcoin aims to fix that.

It goes far beyond the surface. And once you under­stand those impacts, you realize there is only one true solution: buy, hold, dollar-cost-average as much as you can, and leave the world a better place for future gener­a­tions of your family.