China crackdown potentially a positive for Bitcoin carbon footprint
Understanding the real effects of Bitcoin’s energy consumption, and if it is wasteful, is a complex subject. Why does the Bitcoin network need to use this much electricity? How important is the Bitcoin network to its users? Perhaps most importantly, how much carbon does it actually emit, as opposed to how much electricity it consumes?
The most recent data from the Cambridge Centre for Alternative Finance (CCAF) says the Bitcoin network consumes ~115.84 Terawatt hours per year. This is about 0.52% of the world’s total consumption and puts Bitcoin mining between the nations of the Netherlands and the U.A.E as a global electricity consumer. But the reality behind Bitcoin’s energy footprint is nuanced.*Source: Cambridge Centre for Alternative Finance*
What is Bitcoin’s value to the world?
The Bitcoin network is a decentralized, secure payment network for users seeking to send and receive money. Beyond that, Bitcoin is a breakthrough digital technology. It operates free of the control of centralized authorities like banks or governments. A public ledger records all Bitcoin transactions and copies of this ledger are held on servers around the world. Anyone with a computer can set up one of these servers, known as a node.
Consensus on who owns which coins is reached cryptographically across these nodes rather than relying on a central source of trust like a bank. The Bitcoin network relies on its peer-to-peer nature for its operations and cryptography. Bitcoin - and blockchain technology more broadly - has solved the ‘double spend’ problem and enabled the digitization of value. For decades, many industry sectors have been disrupted because they could not effectively address this issue. Music and software, for example, could be copied and the copies were identical replicas with no loss of quality or function.
Obviously, if money could be digitally copied in the same way it would be worthless. Bitcoin’s distributed ledger solves this problem. If an attempt is made to double-spend, the nodes won’t verify the second transaction and integrity of the currency is maintained - automatically and without any involvement from banks or governments. It’s a game-changer.
The relatively cheap and accessible nature of the Bitcoin money transfer process has offered citizens dealing with broken financial systems in politically unstable countries like Lebanon, Syria, Brazil, and Argentina, an alternative banking system. It allows such people to be directly paid by a foreign employer for services like software development - and not have to deal with a slow cumbersome currency exchange process or local currency inflation.
Beyond usage in politically chaotic environments, Bitcoin is relied on by many in large economies like Russia, China, and the US, as a tool to escape monetary repression, inflation, or capital controls.
But there is a downside. Securing the information and value stored on the network in a truly decentralized manner, it turns out, takes a great deal of processing power - particularly as Bitcoin grows and achieves scale. As a result of the recent Bitcoin price bull run, for example, the electricity consumption of the network has increased by 138.16% in just the last year.
The Bitcoin mining and electricity equation
So Bitcoin uses a lot of electricity and it always will - for the time being there is no getting around that fact. The reason is that Bitcoin and all other ‘proof-of-work’ cryptocurrencies are produced by ‘mining’ blocks. In very simple terms it works like this - the Bitcoin network produces a constant amount of Bitcoin every 10 minutes (a block). This Bitcoin is produced by banks of powerful computers called miners that solve complex math problems and are rewarded with Bitcoin for doing so - which they then sell into the marketplace to fund their operations.
The number of miners in the sector is measured by hashrate which is essentially a measure of how much computing power is being applied to the network. As more miners enter the sector, more power is applied to mining Bitcoin and the difficulty of the math problems increases to ensure the rate of Bitcoin production is consistent at one block every 10 minutes. It’s a quirk of the network that more miners means greater difficulty and higher energy consumption.
Can Bitcoin go green?
Given the reality of its energy consumption, where does this leave people like occasional Bitcoin evangelists Elon Musk and others, who, while fans of the disruptive potential of Bitcoin, are nonetheless concerned about the asset’s carbon footprint? If it’s a given that the Bitcoin network is going to continue to require large amounts of electricity to power fair, secure decentralization, could its electricity consumption be cleaner?
Nic Carter, the founding partner at venture capital firm Castle Island Ventures, told Bloomberg recently that Bitcoin miners want to be environmentally friendly. He says that most miners are ‘long Bitcoin’, they hold BTC and use their mining profits to buy more Bitcoin. It is in their best interest to improve the carbon efficiency of the network to prevent Bitcoin from being targeted by government environmental agencies and move it towards being a more sustainable technology.
The CCAF’s 3rd Global Cryptoasset study, published in September 2020, states that around 39% of proof-of-work mining is currently powered by renewable energy. The surveys conducted also found that 76% of miners used renewables as part of their energy mix.
So how does that usage profile break down geographically? Using geo-location data from sources like IP addresses of hashers connecting to the Bitcoin mining pools BTC.com, Poolin, and ViaBTC, the CCAF has mapped where Bitcoin electricity is consumed. *The majority of the hash power generated by the Bitcoin network is produced in China. Source: CCAF*
According to the CCAF, hashrate in the Asia Pacific region (China included) is powered by a mix of coal and hydroelectric generation. A wider mix of energy sources, with more clean emission sources like wind and nuclear, is used by North American miners.
Coal-powered crypto mining is principally adopted in the Chinese provinces of Xinjiang and Inner Mongolia, and in Kazakhstan, whereas hydroelectric energy is mainly generated in the South-Western regions of China (Sichuan and Yunnan). It has often been claimed that because cryptocurrency mining takes advantage of China’s oversupply of hydroelectric energy during the rainy season between May and October, that it is not as environmentally unfriendly as it appears. *A wind farm in Xinjiang. China's renewable energy footprint is growing rapidly.*
While there is some truth to this argument and miners in Sichuan and Yunnan are using renewable hydroelectric power, the CCAF data shows that most of China’s mining hash power is produced in Xinjiang. The region is a major coal mining hub and thus it is likely that for most of Bitcoin’s existence, the hashrate produced in this region has been generated using coal.
But this narrative is changing as China has begun developing wind farming in Xinjiang. While coal still dominates Chinese energy production it currently only accounts for around 65% of capacity - down from 79% in 2011. In the same time period, China has increased its total renewables (Hydro, Thermal, Solar and Wind) production by 50% and has a goal of being carbon neutral by 2060.
Furthermore, in a surprise move in 2017, the Chinese National Energy Administration canceled production of 103 new coal power plants as renewable capacity increased and it was revealed that many existing coal plants were operating at far below capacity.*Chart by Kaj Tallungs*
Bitcoin miners are probably not leaving China
May 2021 was not a good month for Bitcoin. On May 13th Elon Musk announced that Tesla will suspend accepting BTC for vehicle purchases. He initially cited the use of fossil fuels during the Bitcoin mining process and its “great cost to the environment” as the reason for the suspension. This is despite Tesla having purchased $1.5 billion worth of Bitcoin in February, and Musk previously publicly backing Bitcoin as an emergent payments network and even a technology that encouraged renewable energy usage.
A week later at a meeting of China’s Financial Stability and Development Committee of the State Council, Liu He, a Deputy Premier, suggested China would soon “crackdown on Bitcoin mining and trading behavior” to “resolutely prevent the transmission of individual risks to society.“
While crypto trading and exchange activity have been banned in China since 2017—mining, privately holding cryptocurrency, and over-the-counter (OTC) trading—can still be conducted legally. Was this about to change? Following He’s speech, the bitcoin price slid heavily and rumors began circulating that Chinese miners were cashing out of Bitcoin positions and exiting the crypto ecosystem.
These rumors appear to be unfounded. Popular Chinese blockchain journalist Wu Blockchain says the Chinese hashrate has seen no obvious fluctuations and suggests miners are just waiting to see the specific policies of the Chinese government. Beijing-based Venture Capitalist Matthew Graham of Sino Global Capital says Western observers have overreacted to what was just a couple of lines in a very long speech. He says in reality the speech was a pretty standard warning about excess retail speculation in investment markets - something the Chinese government does often.
While there is still confusion as to what Musk’s intentions are in the Bitcoin space, he has been seen to be walking back his comments somewhat - and is instead lending his influence to drive cleaner Bitcoin production.
Speaking recently at the Consensus 2021 conference, MicroStrategy CEO and Bitcoin mega bull Michael Saylor announced the formation of the Bitcoin Mining Council. Saylor says the “loose” group will be formed with a selection of North American miners and it will work towards publishing transparent mining energy usage data. The mission of the Council will be to address concerns and negative narratives that Bitcoin is not environmentally friendly.
Saylor says Musk and a group of eight North American miners, who are estimated to control about 10% of Bitcoin’s hashrate, have already met to discuss the energy usage of the network. On Twitter, Musk suggested the meeting had a ‘promising’ outcome.
A potential explanation for why Musk is concerned about the renewable energy consumption of Bitcoin is the success Tesla has had selling regulatory credits. In an effort to reduce industrial carbon emissions, governments around the world have introduced incentives for automakers to develop electric vehicles in return for re-sellable credits.
Tesla, because it only sells electric cars, receives a lot of these and sells them on to other automakers who can’t meet regulatory requirements. This process has become one of the company’s biggest value drivers. It’s a win-win for all involved, but less so for Tesla and its shareholders if the narrative around the company’s massive Bitcoin holdings becomes less ‘green’.
Michael Burry, of Big Short fame, said Tesla’s reliance on a regulatory credits-based profit model is a red flag and he recently took a $534 million short position against the electric carmaker, betting that its shares will fall.
With the carbon emissions of the Bitcoin network coming under increasing scrutiny, Musk may be trying to front-run the rest of the mining industry and establish a cleaner, greener Bitcoin mining sector that could take advantage of a regulatory environment that favours miners that use renewable energy.
At the same time, China is going greener every day - and while it’s true that a carbon-neutral China in 2060 is still a long way off, it’s not when you factor in that at the current rate of production the final Bitcoin will not be mined until the year 2140.
So if Bitcoin production remains in China, its carbon footprint must decrease - what President Xi wants President Xis gets. Alternatively, if the alarmists are right and mining will be outlawed in China, then a greater global dispersion of hashrate will be good for the network in the long run - dispelling the myth that Bitcoin is controlled by China and moving its production to regions of greater environmental transparency and oversight.
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