Total Pageviews

Sunday, October 16, 2022

Why it is necessary for Bitcoin to consume high energy


If bitcoin were a country, it would be the 24th-largest country by power consumption.

That would put it ahead of Poland – a country with 40 million people.

Here's what this means…

The bitcoin network consumes an enormous amount of electricity.

For example, bitcoin's estimated power consumption soared from an annual rate of 6.6 terawatt-hours at the start of 2017 to 150 terawatt-hours in early 2022.

That's more than a 2,000% increase.

Of course, this staggering growth triggered headlines in the mainstream media about how bitcoin wastes energy and harms the environment.

If you follow bitcoin, you have certainly heard these claims.

So today, I want to take a moment to address bitcoin's "energy problem…" and show you why there's more to this issue than meets the eye.

A Feature, Not a Bug

In 2020, Stone Ridge Holdings announced it had bought over $115 million worth of bitcoin as part of its cash reserve strategy. Stone Ridge Holdings is an asset manager with over $10 billion under management.

In a letter to shareholders, the company addressed bitcoin's energy consumption:

Bitcoin is a better technology for performing central banking than the current government monopolies on central banking.

In the same way that cars consume far more energy than the bikes and horses they replaced, and electric lights replaced candles, and central heating replaced chimneys, and computers replaced typewriters, bitcoin's better monetary system consumes far more energy than the current central banking system.

In other words, the amount of energy bitcoin consumes is a feature, not a bug. And that feature represents the security of the network.

Remember, the bitcoin blockchain is simply a public database of transactions distributed across thousands of computers worldwide.

About every 10 minutes, bitcoin miners add a new block – or set of transactions – to the existing database (blockchain).

Miners play a crucial role in the bitcoin network. First, they constantly validate the entire transaction history. Second, they verify that new transactions are legitimate and follow the bitcoin protocol.

Before a bitcoin miner can submit a new block to the network, they must compete to solve complex math problems. The first one to solve the math problem earns the reward – which is approximately seven bitcoin (worth around $140,000 as of writing). Then, the process starts again.

But solving the problem requires an enormous and increasing amount of computer hardware, processing power, and electricity.

It may all seem unnecessary at first, as the math problems are unrelated to the transactions. But it's a crucial part of ensuring the bitcoin network is secure and self-sufficient.

Miners must incur actual costs – expensive computer hardware, electricity, etc. – to solve difficult math problems and submit a new block to the network.

If the block they submit doesn't follow the bitcoin protocol or is otherwise invalid, the network will reject it, and the miner will not earn the transaction fees and block subsidy.

Now, the genius of bitcoin is that it is hard and expensive for miners to submit a new block… But it's easy, cheap, and fast for the network to verify whether that block is legitimate or not.

This means that if a miner ever tried to stray from the bitcoin protocol or include invalid transactions in the block, it would be very expensive for them to do so.

They would need to use an enormous amount of electricity and processing power to solve the math problem in the first place. In other words, it would be nearly impossible.

And that's why bitcoin's energy usage is a feature, not a bug.

Simply put, the more energy that's required for miners to solve the math problems, the more difficult it becomes to attack the bitcoin network, and the more secure it becomes.

Bitcoin's energy consumption is not only worth it, but there is arguably no better use of energy. Here's why…


The Energy Buyer of Last Resort

When it comes to a bitcoin miner's profitability, the most important factor is electricity costs. Some estimates put electricity costs at over 90% of a miner's operating costs.

So only miners with reliable access to the cheapest electricity in the world can mine bitcoin profitably.

You can think of bitcoin mining as the "energy buyer of last resort," a guaranteed buyer of cheap energy.

That's the reason why renewables and energy that usually gets wasted have come to power a large portion of bitcoin.

Nomi Prins

No comments:

Post a Comment