Bitcoin is currently tanking.
The dreaded tweet…
Or, Elon Musk’s dreaded tweet, to be more specific.
Tesla & Bitcoin pic.twitter.com/YSswJmVZhP
— Elon Musk (@elonmusk) May 12, 2021
Yep, that right there was enough to send the whole asset class into a tailspin.
Aside from how funny it is that Tony Stark, I mean Elon Musk, can single handedly crash a trillion dollar industry*, the whole story raises an important question that many people are wondering…
Is bitcoin’s energy usage going to kill the planet?
The way I worded that sounds like an obvious exaggeration, but that’s not to take away from some eyebrow raising truths about bitcoin:
- Bitcoin currently uses 129 TWh of energy per year.
- I had no idea what a TWh was either, but apparently the entire country of Norway only uses 124 TWh per year.
- Meaning if bitcoin were a country, it would use the 29th most energy in the world.
So, I looked into it. And, I was surprised to find out that no, bitcoin will not kill the planet.
Here’s 4 reasons why:
1) Bitcoin’s energy usage is designed to decrease by 50% every four years.
Right now, most of bitcoin’s energy usage is from the creation of new bitcoins.
But by design, bitcoin’s supply is limited, and the rate of new coins being created is dropping significantly.
You see, when the mysterious Satoshi Nakamoto created bitcoin, he coded a set limit of 21 million bitcoins, ever.
Except, he couldn’t just release all those into the wild right away. That’s just not good monetary policy. (Although The Fed and their money printer might disagree right about now! Hey-o!)
Instead, Satoshi devised the system of “bitcoin mining” which is really just a fancy way of saying “lending computing power to bitcoin’s network.” In exchange for lending computing power, miners get paid (aka mine) new bitcoins.
Not surprisingly, applying all this computing power (aka mining) uses a lot of energy.
But here’s the important part…
The rate of bitcoins released gets cut in half every four years.
For example, when bitcoin started in 2009, the network released 50 bitcoins per transaction. Today, the network only releases 6.25 bitcoins per transaction.
Less bitcoin paid = less bitcoin mined = less energy used.
Eventually (in the year 2140) all of bitcoin’s 21 million coins will have been mined, so energy used for bitcoin mining will drop to zero.
2) Bitcoin uses almost entirely renewable energy.
That said, all that mining does currently use a lot of electricity. Which is why the boomers like to hop onto 60 Minutes and report on shocking stories about how a single computer mining bitcoin somehow uses 4,000 times the electricity as the average American household.
Scary stuff, except they omit one very key fact.
It’s too cost prohibitive not to.
For a simple (exaggerated) example, if you live in the United States and try to use your computer to mine bitcoin, you’ll get slapped with sticker shock after your first month’s energy bill. Put simply – $10,000 worth of energy usage sure isn’t worth the $10 worth of bitcoin you might receive.
Instead, the only people in the United States who successfully mine bitcoin usually buy a plot of land in the New Mexico dessert, strap up some 100% renewable solar panels, and run their whole bitcoin operation in a way that would make a eco-conscious, off-the-grid van lifer proud.
Same story in China. One region of China (Sichuan) currently does half of the world’s bitcoin mining. Why? They have cheapest renewable energy in the world – 95% of miners there use 100% renewable hydroelecticity.
Of course, mining is just one cause of bitcoin’s energy use. The other is the network’s transactions. But on that front…
3) Geniuses are working on ways to make bitcoin exponentially more energy efficient.
And they’ll probably succeed.
Quick recap – the secret sauce to bitcoin’s functionality is the blockchain. That’s a fancy word that basically means a public ledger… no different than a big accounting notebook the whole world can see.
But how to make sure nobody tampers with the notebook?
Computers on the network have to solve a complex math problem – a mathematical “proof” to, incidentally, prove the transaction is legit.
Like bitcoin mining, that math is a complex process, and it uses electricity. Critics will say it’s too complex and too slow, especially if bitcoin is ever going to grow big enough to put a dent in the world’s existing payment systems.
Here’s the part they’re ignoring though…
They’re assuming each bitcoin transaction (math problem) equals one payment.
Bitcoin’s code is open source, which means everyone can look at it and try to find solutions. So, geniuses are doing what geniuses do – finding genius solutions to problems.
So far, they’ve figured out that they can actually use one bitcoin transaction to fuel hundreds, or even thousands of other transactions.
4) Other forms of money aren’t exactly clean, either.
As surprising as it is to learn about bitcoin’s energy usage, this whole argument is a bit silly.
Comparisons in a vacuum aren’t very useful. Bitcoin’s energy usage sounds awful until you consider that something as innocent as idle electronics in the USA (your TV or computer that’s turned off but still plugged in) use four times as much electricity as the entire bitcoin network each year.
Along the same lines, when is the last time Tesla scrutinized the current banking industry’s energy usage? Or the government’s money printing? Gold mining?
- The traditional banking system, complete with towering skyscrapers, branch offices, ATM machines, computer servers, personal computers, endless telephones, etc.
- Traditional money creation, which mines tons of copper, nickel, paper, and ink, feeds them all through an energy intensive printing press, and then throws it all away every five years.
- Don’t even get started on the environmental impact of gold, which not only destroys the earth from the get-go, but then gets loaded into armored trucks and planes that burn fossil fuels transporting the dense material around the planet.
And besides, at the most fundamental level, Bitcoin’s energy consumption (and the intense computing power confirming the blockchain’s security and accuracy) is actually what backs its value. If you want to play the real comparison game, ask yourself what truly backs the value of the United Stated Dollar?
As Fiat currency, it’s sure not gold or gemstones anymore…
Try military strength.
More than anything, that’s what keeps the US dollar secure. And those tanks, F-22 raptors, tomahawk missiles, intercontinental nukes, and millions of military pensions sure aren’t cheap.
Given the choice, bitcoin fueled by renewable energy could actually be the most environmentally friendly form of money we have!
*Maybe one day, if you sneak Uncle Money Wizard enough booze, he’ll share his conspiracy theory about Elon Musk’s bitcoin concerns.