What type of energy does Bitcoin consume?

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Bitcoin mining is a very energy-intensive process. An enormous amount of electricity is consumed by powerful computers to solve complex mathematical equations, which I briefly discussed in my previous post. 

According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin consumes 0.27% of total electricity produced globally. If it does not sound like a lot, the percentage effectively means that Bitcoin consumes more electricity than Austria or Venezuela, for example.

Due to high energy bills, Bitcoin mining has come under social and environmental scrutiny. 

Some argue that energy consumption by the Bitcoin system is not justifiable and even wasteful as it does not bring any benefits to our society. I want to address the environmental angle first and will return to this "waste" argument later.  

Since the Bitcoin blockchain (as do many other cryptocurrencies) needs nearly the same amount of electricity as Columbia, it is not a surprise that miners set their operations in areas with the cheapest electricity available. Now this is where a lot of misconception lies, with many people shivering at the world “cheapest”, because the “cheapest” electricity comes from coal. Right? Not quite, and I will explain why.

To be clear, however, I am not saying that Bitcoin uses solely green electricity. I want to explore (and discuss) other energy sources for the sake of a constructive discussion.

A few months ago, I came across the article by Nic Carter for Coindesk where he talked about Bitcoin mining having no significant impact on local energy prices.

Nic explains that when looking at miners' geographic base camps, it is relevant to consider the locations of the electricity sources. Miners are drawn to areas far away from household and commercial sectors (i.e. end-users) and therefore have abundant stranded electricity.

For example the major mining sites are located in Washington and New York states, British Columbia, Norway, The Caucuses, and Yunnan and Sichuan provinces of China, according to the Bitcoin Mining Network Report 2019 (by CoinShare). A quick Google search reveals that these are hilly or mountainous regions with rivers which are ideal for hydroelectric power plants. (The report also contains a map of global mining sites on page 7 for those who are particularly interested).

Electricity is an unusual commodity. It can't be efficiently transported across long distances due to energy losses that increase its price per kWh. Hence, electricity sources, such as the hydro plants, tend to have an oversupply of electricity, which has no further uses and is cheap.Bitcoin miners are seizing opportunities to monetise this energy, which produces zero emissions, and helps maintain security and reliability of the blockchain network.

Besides looking at the locations of main mining hubs, the CoinShare report's authors have also estimated that the penetration of renewable energy in the mining energy mix was around 73% at the end of 2019. 

The estimates from the Cambridge study are close enough - around 75% of miners are using some sort of renewable energy as part of their energy mix. 

But there is a big BUT. Only 39% of the total energy consumed by miners comes from pure renewable energy, and both coal and natural gas are the leading energy sources in some mining locations. 

There are some advocates, however, who argue that Bitcoin can help us in the renewable energy transition, as on its own Bitcoin does not produce any greenhouse gas emissions. However, electricity generating plants do. 

One of the problems with renewable electricity is that it tends to be overproduced. We can't stop the wind or switch off the sun when the demand is low. At the same time, in the peak demand periods, electricity generated by renewables might not be sufficient. For this reason, we still use fossil fuel plants - to close the gap.

Bitcoin mining offers the solution of optimising grids. Miners are very mobile and flexible, so they move between locations which have cheap electricity. They can relocate to a source of renewable energy when its supply outweighs the demand from end-users. This allows monetising the otherwise wasted energy and could perhaps incentivise more renewable energy projects. 

When the demand picks up, miners could be contacted by watchdogs to halt their operations, freeing power for end-users.

In China, for example, miners used to move their operations into provinces with high hydroelectric capacities (Sichuan and Yunnan) during rainy seasons and enjoy cheap energy costs. 

So, what have we learned? Bitcoin is not green, and as the technology of the future, it probably needs to be, in my opinion. But the Bitcoin community is working hard to reduce the carbon footprint of the systems (check out the Crypto Climate Accord). Furthermore we've established that the Bitcoin blockchain does not totally rest on the shoulders of oil, coal and natural gas, as many people think.

Finally, I promised a couple of words about whether Bitcoin is a waste of energy. I really like Christopher Bendiksen's (head of research at CoinShare) argument that claiming that Bitcoin is wasteful requires either: a lack of understanding of the actual function of mining and how it relates to the Bitcoin properties; no knowledge of Bitcoin’s practical uses; or understanding its value (Bitcoin is an independent monetary system) but considering that the costs (resources consumed) are higher. But this is for a future discussion.