The price of bitcoin has hit record prices this month, and that’s bad news for the climate. As the price of the currency shoots up, so does the energy consumption as people are incentivized to mine more bitcoin. And a new paper published Wednesday in the journal Joule estimates that by the end of the year, bitcoin mining could use nearly as much energy as all the world’s data centres combined.
The paper, authored by data scientist Alex de Vries, who runs the Bitcoin Energy Consumption Index, examines the implications between what skyrocketing bitcoin prices could mean for energy use, and how high prices could, without regulation, lock the world in to years of increased mining, emissions, use of fossil fuels in areas with high security risks, and resource scarcity. There’s a “fundamental relationship” between bitcoin price and energy use, said de Vries. “Miners are making more money than they ever have before, which is making it enormously profitable to add devices to the network,” he said.
We’ve only been in 2021 for a few months, but it’s already been a banner year for bitcoin. In January, the price of a single coin skyrocketed past $US40,000 ($51,864) for the first time, doubling its previous price record of $US20,000 ($25,932) set in December of 2017. The price has continued to climb since, and as of this writing, the price of bitcoin now sits at more than $56,000 per coin. Because miners get rewarded for mining coins, high prices are, naturally, encouraging people to buy more mining tech: Bitmain, the world’s dominant producer of mining machines, said in January that it was sold out of stock until August of this year.
Bitcoin is a currency that is, De Vries explained, itself based on using power as a means to keep itself secure. Mining bitcoin is essentially the practice of churning through complex puzzles as miners compete with each other to solve them and create new blocks on the blockchain. When they create a new block, they are rewarded with bitcoin. The process is based on proof of work, meaning whoever solves the puzzle first wins, while the calculations of all the other miners furiously working and burning through electricity are for naught.
There’s a couple different ways to mine bitcoin — you can technically give it a go on your laptop, although you probably wouldn’t make any money — but the pros use specialised equipment with specific microchips that are designed to hack away at problems. In his paper, De Vries estimates that the world’s miners make 150 quintillion attempts to solve problems per second, which eats up a hell of a lot of electricity.
One of the issues with regulating bitcoin mining and estimating its energy use, de Vries said, is that anonymity is baked into the system, making it challenging to see who’s behind the machines. “We don’t know exactly who is mining,” he said. “We can kind of estimate what the total computational power of the network is, but you can’t see who is participating in the network with what devices.”
Understanding the costs of mining bitcoin and how the market for mining accessories works, de Vries said, is one of the keys to predicting bitcoin’s energy consumption — and making regulatory changes. Curiously, one of the most important factors to consider is a simple return policy. Mining machine giant Bitmain, de Vries said, is driving increased energy consumption regardless of the market price of bitcoin because they have a no-returns policy on their machines.
“If you put in an order [for a mining machine] and you pay for it, it’s a sunk cost,” he said, explaining that the demand for mining equipment means that machines are also arriving months after customers’ orders. “One effect that this could have is that even if the price [of bitcoin] falls…we’re still going to hit that same energy consumption.” In other words: if you order the machine, you might as well use it.
“It’s extremely profitable to just add more devices that, in essence, make useless calculations,” de Vries said, comparing adding bitcoin machines to a network to airlines flying “ghost flights” to keep their routes during the pandemic last spring. “That analogy works well with bitcoin mining. [These machines are making] useless calculations in order to keep the network secure.”
The good news is that understanding how the supply chain for bitcoin mining influences its energy use, De Vries said, can lead us to some regulatory solutions. “These platforms still exist in a regulated world where the government has a say in what happens on these platforms,” he said. “There’s a lot of weak spots in the bitcoin ecosystem that have developed over time that can be targeted by regulatory bodies.”
One pretty simple solution: banning miners from the electric grid, as a Chinese province said they would earlier this month. That can help cut emissions, at least in some regions.
But miners are savvy. Banning them in one area means they might just figure out ways to get electricity for the cheap in another place or cover their tracks. Bitcoin miners reportedly jacked $US2 ($3) million in electricity in Malaysia recently by allegedly tricking electrical monitoring hardware. De Vries pointed out that miners have been flocking in droves to Iran to take advantage of the country’s heavily subsidized electricity, which is powered by glut of oil the country can’t export due to sanctions. Giving Iran a new market for its sanctioned oil is “obviously really bad for the environment, but it’s also bad from an international safety perspective,” de Vries said. (After blackouts hit the capital of Tehran in January, Iranian officials say they are targeting illegal bitcoin farms.)
There are still other options, including regulating machine producers. “Bitmain is responsible for producing the majority of these mining devices. Why not put a carbon tax on them?” de Vries said.
Restricting investment in bitcoin at centralised trading centres could also help lessen demand for mining. And as the world faces a silicon chip shortage that’s stifling supply chains from cars to computers, regulating how many of these chips bitcoin machine producers are able to provide — or cutting them off altogether — could be another solution.
Outside regulation, De Vries said, can only go so far. “The best thing would actually be an internal change. Bitcoiners could choose to do away with the mining and replace it with a greener alternative,” he said. “You don’t necessarily need to be dependent on computational power. You could actually have alternative algorithms for making new blocks for the blockchain.”
The proof of work model for bitcoin could also be replaced by a technique called proof of stake, which rewards only one machine with the opportunity to make a calculation rather than having all the mining machines racing each other. That could dramatically cut down on wasted energy. The world’s second-largest cryptocurrency, Ethereum, is working to transition to a proof-of-stake model following concerns over energy use. But it could be a while before we see more changes in bitcoin mining.
“The motivation isn’t there in bitcoin,” de Vries said.