Over the past couple of years I’ve fallen into a habit of infrequently pointing out the flaws, dangers, and threats to Bitcoin as a viable cryptocurrency. While I find the experiment in alternative currency intriguing, I’m just as intrigued by criticisms made against Bitcoin. Even if Bitcoin ultimately fails, it will provide numerous valuable lessons about peer-based innovation, and the criticisms that were warranted can help us avoid pitfalls in the future.
We won’t know, of course, which criticisms are valid or what will lead to the downfall of Bitcoin until after it happens (my guess is will be due to government regulation). But some criticisms are more interesting than others. Take, for instance, this point that I had never considered before: it takes a lot of energy (and money) to produce a single Bitcoin.
I was aware that the process of Bitcoin mining requires substantial computing power and therefore must use up some amount of electricity. It just never occurred to me, until economist John Quiggin’s recent article, how much energy (and money) were required:
In the early days of Bitcoin, the computations in question could be performed on ordinary personal computers. Nowadays, however, ‘miners’ use special purpose machines optimised for the particular algorithms used by Bitcoin. With these machines, the primary cost of the system is the electricity used to run it. That means, of course, that the only way to be profitable as a miner is to have access to the cheapest possible sources of electricity.
Most of the time that means electricity generated by burning cheap coal in old plants, where the capital costs have long been written off. Even in a large grid, with multiple sources of electricity, Bitcoin mining effectively adds to the demand for coal-fired power. Bitcoin computers run continuously, so they constitute a ‘baseload’ demand, which matches the supply characteristics of coal (and nuclear). More generally, in the process of decarbonising the energy supply system, any increase in electricity demand at the margin may be regarded as slowing the pace at which fossil fuels can be phased out.
The cost of coal-fired electricity can be as low as 5c/kWh for industrial users; mining with electricity costs above 10c/kWh is usually unprofitable. With the coin price currently a little above $US200, optimized systems can break even with electricity requirements of around $150 for each coin. At 5c/kWh, that’s three megawatt-hours (MWh) per coin. That corresponds, in turn, to about three tons of carbon dioxide for coal-fired electricity. Even at 10c/kWh, each Bitcoin mined using coal-fired power is associated with 1.5 tons of CO2 emissions.
The total circulation of Bitcoin is capped at 21 million, at which point there will be no more mining. Currently, there are just over 14.7 million in circulation. That leaves 6.3 million to be mined. At a cost of $150 a coin and 1.5 tons of CO2, it will cost nearly a billion dollars and create over 9 million tons of CO2 just to produce the remaining Bitcoins.
If we assume that all Bitcoins were mined as cheaply as $150 a coin, then it cost $3.1 billion to pay the electricity costs to put all those coins in circulation. It would also have created 31.5 million tons of CO2.
You don’t have to be a hysteric about climate change to find those figures troubling. That’s a lot of wasted energy for a “make-work” project. When this externality becomes more widely known, will it cause people to cool on Bitcoin?