Inspired by the “Bitcoin as Clean Energy Stimulus” section of Ryan Selkis’s Crypto Theses for 2022, I’ve spend a bit more time recently thinking about Bitcoin and energy usage.
The view by a lot of non-crypto enthusiasts is that Bitcoin is terrible for the environment. The typical argument is that Bitcoin itself does not add any value to society, and Bitcoin mining results in billions of dollars of electricity a year wasted on basically nothing. Wasting energy like this is very bad for the environment, and as such Bitcoin is very bad for the environment.
I don’t know that this holds up that well when you dig in a bit. Let’s start with how much energy Bitcoin uses – it’s around 91 terawatt-hours of electricity per the New York Times. On the one hand, that might be a lot – it’s more than the entire nation of Finland uses in one year. But what does that actually equate to in dollar terms? One terawatt-hour is around $106 million, so 91 TWH is something like $10 billion a year.
Is that a lot? I mean, ‘a billion’ seems big. Yet as Alex Tabarrok points out, that’s about what Americans spend every year on Halloween costumes, or 1/8th what Americans spend every year on cigarettes. The point being – energy is very cheap! A lot of large groups of people spend over $10 billion a year on a lot of different things. Viewed that way, spending $10 billion a year on energy is not actually a particularly crazy figure. At the time of writing, the market cap of Bitcoin (at a price of around $44,000) is around $840 billion. $10 billion thus equates to a bit less than 1.2% of the value of Bitcoin, which again doesn’t strike me as a particularly high figure. That’s also assuming that the entirety of energy going towards Bitcoin mining is ‘dirty,’ which we know isn’t true – it’s estimated that at least 40% of mining energy comes from renewable sources.
But that’s all about why Bitcoin’s energy usage isn’t a bad thing. The way more interesting argument to me is how it could actually be a good thing.
At an abstract level, the way Bitcoin mining works is that it basically enables you to turn computing power (which requires energy) into money. If you have a cheap source of energy (and thus a cheap source of computing power), you can then turn that energy into money at a profit. This is what makes some refer to Bitcoin as a “money battery.” But it’s also good for creating an effective price floor for sources of clean energy. If you can find a cheap but impractical source of clean energy, now you have something to use it for!
One kind of funny example is volcanoes. Volcanoes aren’t exactly known for being easy to move. They’re not particularly flexible. We can’t create more of them. But if you happen to have access to a volcano and can use its (quite clean!) geothermal energy, then congrats, you now have the ability to turn that cheap clean energy into money.
The first thing this made me think of was a great way you could use Bitcoin to subsidize clean energy development. There are a lot of places where the cheapest source of energy available is something pretty ‘dirty,’ like coal or oil. If we want those places to adopt cleaner sources of energy, we either need to (1) make clean alternatives available at a cheaper price, (2) penalize or tax the dirty option, or (3) find a way to subsidize the clean option so it’s competitive with the dirty option. We’re making great progress towards (1) and we’ll talk about that again soon. I’m a big supporter of a carbon tax, which is (2), but am pretty skeptical about the political willpower behind doing that. I think there’s a clear way Bitcoin could help with (3).
If a nonprofit, or an NGO, or even a government wanted to, they could scale up Bitcoin mining at cheap but inconveniently located energy source like a volcano. That would generate a lot of revenue for the organization to use. They could then put that revenue towards subsidizing clean energy in communities where it’s not otherwise economic to use. One part of the organization makes money, one part of the organization loses money, and society wins.
Another interesting argument is how Bitcoin could help with (1). Square and Ark Investments have a detailed white paper outlining this case. At a high level, it rests on Bitcoin’s ability to serve as the ‘energy buyer of last resort’ for any project. The basic case looks like this:
- Renewable energy sources like solar and wind are, strictly on a dollar basis, the cheapest current sources of energy available.
- But they have some problems. Wind patterns are somewhat unpredictable, and it’s usually windier at night (and in the winter). The sun is reasonably predictable, but only shines during the day (and shines more in the summer). Energy supply is thus inconsistent throughout the day (and the year).
- Energy demand, on the other hand, tends to peak in the evening (when people are home after work). This doesn’t line up well with either source of supply, which results in a few hours where demand is much larger than supply and a lot of hours where supply is much larger than demand.
- The key to fixing this is to store some of the energy in batteries, so it’s available to meet the demand when needed, but this is expensive. Realistically, to create enough renewable energy sources to meet peak demand, you need to overbuild, and have an oversupply of energy throughout the off-demand periods. But this isn’t economic to do so – unless you have something to do with that extra energy.
- This is where Bitcoin comes in. Mining is easily scalable, and also easy to turn on and off. It doesn’t care what time of the day it is, or what season it is, it just turns energy into money. If you integrate Bitcoin mining into the construction of renewable projects, you thus have a way to make an otherwise non-economic project work, and we can build the excess capacity we need to supply enough clean energy with ease.
This excess capacity is great for other things as well – like dealing with unexpected stresses to the energy system (the Texas grid, which famously failed last year and seems to be facing similar problems again this year, is the obvious example that comes to mind). It can also help accelerate construction. Grid congestion has become a major obstacle for building, with long queues before a new clean project can come online to the power grid. Mining gives those projects something to do before they go online, improving the viability of the projects.
If you’re somebody who’s convinced that Bitcoin is worthless, and not worth thinking about, I don’t imagine this is particularly convincing. For anyone else, however, I think it’s a pretty useful view of a positive social impact to Bitcoin – and a good reminder that it’s worth thinking a layer or two deeper than initial headlines.