The debate about the energy intensity of bitcoin mining and its impact on the environment still does not cease in the world.
In December 2021, U.S. Senator Elizabeth Warren expressed the opinion that electricity consumption in the extraction of digital gold “is comparable to that of Denmark, Chile, Argentina and the state of Washington.” In early 2022, it requested data from six mining companies on the impact on the environment.
In June, the Bank of Sweden called for a ban on bitcoin and other cryptocurrencies mined through Proof-of-Work (PoW) due to the environmental impact. According to the report of the financial institution, the energy consumption of this method of mining is equal to the indicator of 200,000 households.
It is possible that after the activation of The Merge in the Ethereum network, environmental discussions will flare up with a new force – Bitcoin, which remains the largest PoW cryptocurrency, will be even more criticized.
How big is the energy consumption of digital gold on a global scale? What will it be in a few decades if the price of the first cryptocurrency rises to $ 2 million?
Armed with analytical materials from Arcane Research and the Cambridge Center for Alternative Finance (CCAF), Cryplogger found out the share of bitcoin in the global energy consumption structure and the prospects for its growth in the long term.
- In the world, discussions about the impact of mining on the environment do not cease.
- The energy efficiency of cryptocurrency mining increases over time, and the share of green energy in the mining industry increases.
- Contrary to the opinion of critics of mining, the energy consumption of bitcoin on a global scale is not at all great. However, in a few decades, the situation may change significantly.
Between Kazakhstan and Pakistan
The CCAF website provides entertaining comparisons designed to give an idea of the “voracity” of the Bitcoin network.
For example, the energy consumption of the network of the first cryptocurrency is compared with a similar indicator of gold mining.
The site allows you to compare bitcoin’s energy consumption with different industries and segments – for example, with all refrigerators and TVs in the United States or with global cement production.
In terms of energy consumption, the Bitcoin network is comparable to countries such as the Philippines, Kazakhstan, Pakistan and the Netherlands.
The figure of almost 100 TWh may seem impressive. However, on a global scale, it is not so great – less than 1% of world consumption.
Another example: the energy generated by flaring gas would be enough to ensure the operation of seven networks comparable to bitcoin.
According to the Bitcoin Mining Council (BMC), the energy efficiency of mining is increasing, and the share of green energy in the digital gold mining industry is also increasing. However, there are many critics of BMC who doubt the objectivity of such studies.
How much will the Bitcoin network consume in the future?
In the long term, the price of bitcoin tends to grow. This is due to the tightly limited supply, the growing adoption of cryptocurrencies in the world and the systematic decline in the rate of emission due to halving of the block reward.
It can be assumed that with the growth in the price of the first cryptocurrency, the mining industry will also develop, increasing capacity. This means an increase in the energy consumption of the network, even despite more efficient and green technologies.
Arcane Research researcher Jaran Mellerud modeled bitcoin’s energy consumption figures until 2040 at different asset prices. He listed the most essential components of his model:
- the price of bitcoin;
- transaction fees;
- a percentage of the income that is directed to cover the cost of electricity;
- average price of electricity.
Mellerud derived the following formula:
Annual consumption of the bitcoin network = bitcoin price * (rewards for the mined block + average transaction commission per block) * number of mined blocks per year * percentage of income spent on electricity / average price of electricity in the mining industry
According to him, the market value of the cryptocurrency is the most important factor determining the consumption of its network in the future.
“The price of bitcoin, multiplied by the block reward, determines the industry-wide income of miners. It covers costs and provides profits. The growth in the price of cryptocurrency increases the income of miners throughout the industry and their profits in the short term, “the researcher noted.
He stressed that bitcoin mining is a “hypercompetitive” industry with low entry barriers. Consequently, potentially high profitability can attract many players to the segment in the future, increasing energy consumption.
According to Mellerud, most miners almost do not pay attention to revenues from transaction commissions – their share in total revenues is still extremely low.
“Therefore, it may surprise you that the level of income from commissions is crucial for the future of energy consumption,” the expert added.
Bitcoin miners mine 52,560 blocks per year. At the same time, according to Coin Metrics, historically, the average volume of transaction fees per block is 0.4 BTC.
“Commissions may seem like an unimportant component of the award, but their importance will gradually increase in the future due to halvings. The latter occur every four years, halving the block reward,” Mellerud said.
His model assumes the preservation of the indicator of 0.4 BTC until 2040. According to the researcher’s calculations, the share of commissions in the revenues of miners will reach 67% by this time. The halvings, which occur every four years, will reduce the block reward to 2040.0 BTC by 195.
“Bitcoin miners will spend a certain percentage of their income on electricity. And the higher this percentage, the more significant will be the energy consumption in the industry, “the researcher noted.
Mellerud recalled that costs in any industry can be divided into two main components:
- CAPEX (capital expenditures);
- OPEX (operating costs).
Bitcoin miners have CAPEX investments in hardware and electrical infrastructure. OPEX represents predominantly electricity costs.
Taking into account the total energy consumption of the network of the first cryptocurrency and the average price of $ 50 per MWh, the researcher came to the conclusion that bitcoin miners spend about 50% of their income on electricity.
“I am confident that the share of miners’ electricity costs will grow compared to the current level as the segment matures,” Mellerud said. Competitive forces are likely to reduce profits in the long run. The exception will be miners with access to very cheap electricity.”
The researcher suggested that the CAPEX component will gradually decline as innovation in the production of ASIC devices slows down.
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Given the above trends, the annual increase in the share of miners’ electricity costs will be 2%. By 2040, the figure will reach 71%.
“I estimate the average cost of electricity in the mining industry at $ 50 per MWh. I believe that the indicator will remain at this level in the foreseeable future. There is already high inflation around the world, which is likely to continue. However, the ultra-competitive nature of mining over time motivates market participants to search for cheap energy sources, “the researcher shared his opinion.
Mellerud is confident that miners will be located in various parts of the world. Some market participants monetize the thermal power of their devices, which also “compensates for the impact of inflation.”
“Paying attention to any news headlines about bitcoin mining, you could believe that the industry is a major consumer of energy on a global scale,” the researcher noted.
However, the share of the network of the first cryptocurrency in the global structure of energy consumption is negligible – about 0.05%. The figure, according to Mellerud, is “on the verge of rounding error.”
On the other hand, historically, energy consumption has always increased along with the price. Consequently, Bitcoin’s rally over the next couple of decades could really make the network a “global consumer.”
The researcher modeled three scenarios:
- bullish: the price of cryptocurrency grows linearly to $ 2 million by 2040;
- neutral: bitcoin reaches $500,000 by 2040;
- Bearish: $100,000 by 2040.
The chart below shows that the future energy consumption of the Bitcoin network largely depends on the price of the cryptocurrency.
According to the researcher’s calculations, when reaching $ 2 million by 2040, the bitcoin network will consume 894 TWh annually – about 10 times more than the current level.
“This is 0.36% of the estimated global energy consumption in 2040, which implies a significant increase compared to the current figure of 0.05%,” Mellerud said.
The neutral scenario assumes annual energy consumption at 223 TWh, which is slightly more than twice the current level.
The researcher also proposed a scenario analysis that takes into account not only the price, but also transaction fees.
“In the table above, we see that with a bitcoin price of $2 million in 2040, transaction fees have a huge impact on energy consumption. For every additional 0.1 BTC of commissions per unit, the energy consumption of the network grows by 150 TWh – a value almost twice as high as the current figure, “the expert explained.
Another interesting finding is that with a historically average amount of transaction fees per block (0.4 BTC) and reaching $200,000 by 2040, energy consumption will remain roughly at current levels. This, according to the researcher, is the result of halvings, which cut off low-performing players from the market.
The following table is similar to the previous table. However, instead of values in TWh, the cells indicate the share of global energy consumption. An annual increase of 2% is expected until 2040.
As already mentioned, when the price of bitcoin reaches $ 2 million by 2040, its share in global energy consumption will be 0.36%. According to Mellerud, the figure, although high in comparison with the current one, is still much lower than the “apocalyptic estimates” made by some critics of digital gold.
“With this consumption, bitcoin mining will be considered a fairly energy-intensive industry. However, it will still be significantly inferior to industries such as cement production, which consumes 2% of the world’s energy, “the researcher noted.
He is also convinced that regular halvings will limit the growth of the network’s energy consumption, even despite the gradual increase in the market value of the cryptocurrency.
“The award is halved every four years. To offset this effect, the price of cryptocurrency must double during each of these periods. Therefore, in order for the energy consumption of the network to exceed the current level, the market value of bitcoin should be in the region of $ 650,000 by 2040, “Mellerud explained.
The energy consumption of the Bitcoin network depends on various factors, it is quite difficult to predict it for the future. However, it can be concluded that digital gold will become a really significant consumer of energy if its price reaches several million dollars.
The growth of the market value of bitcoin stimulates the activity of mining and, accordingly, increases energy consumption. But regular halvings have the opposite effect: in order to increase the total cost of electricity in the long term, the price of cryptocurrency must grow at an extremely rapid pace.
An increase in the share of transaction fees can somewhat mitigate the effects of halvings on digital gold miners. But this is possible only with the active use of bitcoin as a means of payment.
The price of the first cryptocurrency mainly depends on market demand for it as a means of preserving value. In turn, the size of the commission is determined by the use of bitcoin as a medium of exchange.
The total energy consumption of the network will grow only if the first cryptocurrency in the coming decades continues to successfully perform the above basic functions of money.
The figure of 0.36% at a price of $ 2 million in 2040 is not so high, given the usefulness and potential of the use of bitcoin by millions of market participants around the world.