Far from squandering electricity, bitcoin miners perform a socially important function by converting otherwise unusable energy into a global store of value, say analysts at CoinShares, a firm specialising in cryptocurrency investment products.
In a new white paper on bitcoin mining, researchers Christopher Bendiksen and Samuel Gibbons of CoinShares provide evidence that the energy powering the cryptocurrency’s network comes largely from renewable sources.
Bitcoin consumes energy since the security of its network relies on a computer algorithm called “proof-of-work”, performed by all the nodes in the network seeking to generate, or “mine” new digital coins.
The proof-of-work algorithm involves the high-frequency repetition by powerful computers of a mathematical function called “hashing”. A hash function converts any input into an alphanumeric string of a defined length. The output of a hash is easy to verify, once performed, but the function is effectively impossible to perform in reverse.
In the bitcoin proof-of-work race, miners compete to produce a hash of a form specified by the network’s rules. Once a miner produces evidence of the successful hash, he or she receives new bitcoins, plus transaction fees, in return for printing a new “block” of transaction data into the network. Each bitcoin block currently generates around $95,000 worth of new coins.
“The immutability of the bitcoin blockchain is a direct result of the cost of mining”
Proof-of-work cryptocurrency mining has been criticised by some as an unnecessary and harmful use of energy.
Bitcoin is “a combination of a bubble, a Ponzi scheme and an environmental disaster,” said Agustín Carstens, general manager of the Bank for International Settlements (BIS), earlier this year.
“The electricity used in the process of mining bitcoins is staggering…, making them socially wasteful and environmentally bad,” said Carstens.
Some estimates of bitcoin’s future energy consumption imply a massive expansion of current demand.
“By 2020 bitcoin will be using as much energy as the USA. It’s completely and utterly unsustainable,” Catherine Mulligan, co-director of the Imperial College Centre for Cryptocurrency Research and Engineering, said in an interview with BBC World Service in December.
Bendiksen and Gibbons say in their white paper that, far from squandering electricity, the energy expenditure of proof-of-work systems is necessary to keep the record-keeping system secure.
“The immutability of the bitcoin blockchain is a direct result of the cost of mining, as any attacker attempting to rewrite or append fraudulent transactions to the blockchain would need to acquire and operate enough hash power to outpace the entire honest network,” they say.
Bendiksen and Gibbons also deny the more alarmist claims of the bitcoin network’s energy consumption.
Using a bottom-up analysis based on assumptions for mining equipment, hardware efficiency and the average cost of electriticy, the CoinShares analysts estimate the annual energy consumption of bitcoin miners to be around 35 terawatt hours (TWh). A terawatt is a million million watts, where a watt is the standard international unit of power.
An energy consumption of 35TWh equates to around the primary energy demand of Luxembourg, says CoinShares. This total is around half one widely cited estimate: Digiconomist says bitcoin consumes 70TWh of electricity a year.
On its site, Digiconomist also alleges that bitcoin generation is polluting by nature, stating that “bitcoin’s biggest problem is not even its massive energy consumption, but that the network is mostly fuelled by coal-fired power plants in China”.
“Bitcoin mining is largely driven on cheap renewable energy, dominated by hydro”
CoinShares’ analysts refute this claim.
“Bitcoin mining is largely driven on cheap renewable energy, dominated by hydro, with the limited permanent use of, and some seasonal migrations to, coal-based generation in certain areas of China only representing a small part of the network’s total electricity demand,” say Bendiksen and Gibbons.
In fact, bitcoin miners and renewable energy sources such as hydro plants have a symbiotic relationship, argue the CoinShares analysts.
“Because bitcoin mining is a highly mobile industry it will migrate to any area offering the cheapest electricity. Dams cannot be moved and as such, any installed hydro capacity is captive to its geographic location. This often makes stranded hydro plants willing to offer highly competitive electricity contracts to any willing takers,” say Bendiksen and Gibbons.
According to CoinShares, the most competitive sources of energy for the bitcoin network are currently in the South West of China and the North American Continent, where dams generate large amounts of surplus electricity.
In these locations, the cost of electricity can be as low as $0.02-$0.025/KWh, say the CoinShares analysts.
“Hydro is the preferred generation source in the north-western United States, Norway and Sweden, whereas Icelandic mines use a mixture of hydro and geo-thermal,” say Bendiksen and Gibbons.
In its calculations, CoinShares assumes that the rest of the bitcoin industry is paying higher electricity rates than those payable near to Chinese and North American hydroelectric plants, leading to a global average of $0.05/KWh for bitcoin mining as a whole.
Taking into account other costs, such as the cost of purchasing and depreciating mining hardware, rent, cooling and mining pool fees, CoinShares estimates the average cost of creation of a single bitcoin in mid-May 2018 as $6,400. This would allow miners a reasonable profit margin at the June 6 market price of around $7,600 per coin.
However, according to this cost estimate, at the bitcoin market lows of around $6,000 in February this year the mining industry will have been operating at an aggregate loss.
Measured by the bitcoin network’s aggregate hash (processing) rate, the February price decline did not result in any immediate withdrawal of mining capacity.
CoinShares attributes this to miners taking a long-term view of their cost base, a large part of which results from capital expenditures on mining hardware.
Bitcoin mining is now performed using expensive specialised chips called “ASICs”, which merge the computational and storage functions needed for the hashing calculation.
Calculations of the aggregate profitability of the bitcoin mining business disguise important competitive differences, says CoinShares.
Some manufacturers of mining hardware, such as Bitmain, retain a privileged position by both producing and then exploiting ASIC-based computers.
“Miner-manufacturers have the ability to access their own hardware immediately post-production and often adjust the sales price of their externally marketed gear to reflect current trends in bitcoin prices in order to maximise their own profits and lower those of competitors,” say Bendiksen and Gibbons.
“Some miners might be operating at razor-thin margins, while others might be deeply profitable,” say the analysts.
“Bitcoin mining is a form of energy recycling. Excess electricity otherwise wasted is instead converted into an exchangeable store of value.”
The fact that bitcoin mining is now a highly specialised, industrial-scale activity utilising cheap, renewable sources of energy should lead to a reassessment of allegations that cryptocurrency production is inherently polluting, say Bendiksen and Gibbons.
“Bitcoin mining represents a form of energy recycling, somewhat akin to a battery, whereby excess electricity otherwise wasted is instead converted into an exchangeable store of value,” the analysts write.
In turn, power plants should exploit the potential new source of demand, says CoinShares.
“This could represent a wider global opportunity for renewable power plants struggling with periodic overproduction,” the analysts argue in their white paper.