‘Money Reimagined’ is a weekly column that analyzes events and trends in the technological, economic and social sectors that are redefining the relationship between money and humans or changing the global financial system.
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Today I will only talk about Bitcoin. Due to the recent rise in bitcoin price, increase in hash power, and interest from ESG (environmental, social, governance) investors, the discussion on bitcoin’s energy consumption has been heated again. Today, I will focus on this topic.
As it is a vast and important topic, it will not be short.
Eco-friendly Bitcoin can help develop clean energy
No matter how much regulators and cryptocurrency advocates hate each other, neither government nor bitcoin will disappear from our lives. Now is the time for the government and Bitcoin to work together to create a’sustainable global energy system’, the most pressing task on the planet.
Contrary to the view of bitcoin as a’second Chernobyl crisis’, the basic economic principle of bitcoin, which allows miners to search for cheap energy, and the increase in the efficiency of renewable energy technologies can be seen as the same.
And the dynamics of the market are already making this trend possible. Nevertheless, in order to make progress fast enough to overcome the climate crisis, it is necessary to take preemptive measures at the national, regional, urban and corporate level. What our society needs is a prudent strategy to mine bitcoins according to the entire system of renewable energy generation systems.
Free market purists in the cryptocurrency industry may hate it, but now we need policy-based government intervention. This is because the energy market is already distorted by incorrect subsidies, illegal use of electricity, inefficient power grids, and geographical factors that prevent the integration of renewable energy sources.
Miners will continue to seek profits, and climate change will proceed at a frightening pace without incentives to resolve market distortions.
Fortunately, a variety of smart ideas are coming out one after another to solve this problem.
Carbon intensity is a relative concept
According to a 2019 study by CoinShares, 73% of all bitcoins were mined using renewable energy as an energy source, but it is undeniable that today’s bitcoin mining produces a huge amount of greenhouse gases. to be.
According to the Cambridge University Bitcoin Energy Consumption Index, the current median estimate of Bitcoin’s total energy consumption is 129 TWh (terawatts per hour), accounting for 0.7% of global total energy consumption. Considering that the share of energy sources other than renewable energy is 27%, this means that the Bitcoin network still consumes 35 terawatts per hour of high carbon-intensive electricity. As discussed in more detail below, this exceeds Denmark’s total electricity consumption (across all energy sources).
However, it doesn’t make much sense when it comes to the total amount of electricity consumed by Bitcoin. With the exception of Iceland, which uses geothermal energy, all countries that use energy generated from the power grid emit greenhouse gases, and what matters is what value is created with the energy consumed.
In the case of Bitcoin, the answer lies in the subjective cost-benefit analysis between the two alternative financial systems. In other words, the question of how many kilowatts per hour (kWh) will each be given to censorship-resistant decentralized systems that exchange digital assets that can verify scarcity, and traditional and centralized financial systems.
It is impossible to calculate the total energy use of the global financial sector. However, we can see that there are more than 20 million people in the financial industry worldwide, relying on existing inefficient computing systems that continue to bloat, and taking extensive physical and cybersecurity measures. Some of these measures include US troops, as US forces play a vital role in maintaining dollar dominance by protecting global trade.
How much energy goes into all of this? And is it really worth using that energy?
However, even if you don’t know the actual total energy consumption, some may argue that, with plausible logic, measuring the value of a traditional financial system in dollars alone will make it even more useful. In the case of SWIFT, an international payment system, which is one of the components of the global financial system, the average daily transaction volume reached 6 trillion dollars in 2019, because it is 1000 times the average daily transaction volume of the entire Bitcoin network.
However, even if the Bitcoin network’s scalability increases even further in the future, the energy intensity will be lower due to the’Layer 2’solution with high computational efficiency such as Lightning.
And more importantly, this dollar-based valuation method does not take into account the external factors of the traditional financial system under gatekeeper control that Bitcoin’s open access model is trying to overcome. Here, the external factors refer to obstacles to innovation, financial exclusivity, and human costs incurred by the U.S. wars around the world supported by the financial system. The relative energy value will vary depending on how you view these external factors.
A preemptive policy
Either way, Bitcoin’s massive energy “waste” (a completely misrepresentation of the cost of system security) cannot be ignored.
Bitcoin’s carbon footprint is increasing as hashrate and energy consumption have also increased along with the recent increase in the price of bitcoin, which is causing anxiety among institutional investors who must comply with ESG. As a result, the pressure for change or regulatory action is likely to increase.
As I did earlier, emphasizing only the high energy intensity of the traditional financial system can be seen as an act of turning the arrow to others. Rather, it should cooperate with investors for bitcoin-centered energy governance that meets everyone’s interests. What Bitcoin supporters need to do is to elaborate on how they can help policymakers break away from stereotypes and look at the challenges of the energy sector and the role of Bitcoin across the system.
Already, this partnership is being formed between the Bitcoin mining industry and eco-friendly energy infrastructure developers, and this relationship can be a useful starting point.
In this week’s’Rethink Money’ podcast episode, Harry Soo-dok, vice president of strategy at the mining infrastructure company Grid (GRIID), recently spoke from power generation companies such as wind power plants, small and large hydro power plants, and nuclear power plants, and other renewable energy suppliers. He said that he is receiving a lot of requests for joint operation of bitcoin mining sites. Sudok said, “All energy producers are looking for a strategy to increase profits that can resilience against climate change as well as increase energy production.”
There are a variety of ways the government, power grid operators, and local governments can join forces to accelerate this movement, including subsidies or contracts to purchase electricity.
The policy effect would be doubled if a contract was signed between the city and a bitcoin miner to solve the problem of inefficiency caused by the maximum-lowest power demand caused by the baseload energy production system in the power grid operator. Miners such as Layer 1 have already signed contracts in which mining companies such as Layer 1 are paid in exchange for stopping mining during peak times when power demand is greatest to secure power to be supplied to consumers.
This model can be applied to solve the’duck curve’ phenomenon (a problem caused by the difference between power generation and consumption), in which power demand rapidly decreases during the daytime as the proportion of solar power generation rapidly increases. Mining companies buy surplus electricity produced during the daytime, conversely, selling unused electricity during the early evening when demand for electricity is high. In fact, when a power outage occurred in the state of Texas due to a typhoon, mining companies sold unused electricity back to power grid operators, which was a small but very helpful at the time.
There is also a role that sustainability-conscious investors can play.
It is to help sustainable energy development by purchasing carbon credits to reduce the environmental impact of purchasing Bitcoin.
Kevin O’Leary, star of the reality show “Shark Tank,” expressed his opinion more straightforwardly. In a recent interview with CoinDesk US TV, he carefully invests in bitcoin by investing in the mining rewards received by some miners, and through this, “I can see that the coins I invested are environmentally friendly.” Said. He added that this investment strategy will help reassure ESG investors who are concerned about Bitcoin’s carbon footprint.
Investors can go one step further and use the purchasing power of the’green bitcoin’ purchased in this way for other renewable energy sources. This also seems to be the reason why Norwegian conglomerate Aker SA decided to go all-in to investing in bitcoin.
‘Money battery’
Meltom Demirus, another guest of this week’s’Rethink Money’ podcast, explained all of these plans from a fresh perspective. He called bitcoin a kind of’money battery’ and said that it is the concept of storing energy produced in rural areas rich in renewable energy, such as rural Morocco where wind blows, as digital currency. Those who hold this currency can easily send energy to other regions, and in fact, it is possible to transmit energy without installing expensive transmission lines.
This is possible because the energy for mining bitcoin is independent of the region, and Ross Stevens, founder of asset management firm Stone Ridge Asset Management, detailed the potential of the idea in a letter to shareholders sent last year.
“In the future, a bitcoin miner located in a remote, remote area (think of a few inhabited waterfalls in an African country afflicted with extreme poverty) will have easy access to the bitcoin network, making local cleanliness. Imagine building an energy infrastructure that can mine bitcoins using energy sources.”
He said that the profits from mining can be used to build roads, schools, and even houses.
It must be a very attractive vision. But, at least in the near future, this won’t happen by itself. To tackle the pressing problem of climate change, we need the help of policy makers.
Increased energy consumption due to rising bitcoin price
We have created the Bitcoin electricity consumption index of the Cambridge Center for Alternative Finance as the CoinDesk US version. The Cambridge research team first calculated the lower and upper estimates, respectively, by multiplying the power consumption per hash of the most efficient and less efficient miners by the total hash rate of the Bitcoin network. Then the median estimate, which corresponds to the median between the two, was obtained.
The median estimate of Bitcoin’s energy consumption increased relatively slowly over time, although the energy efficiency of the miner gradually improved, such as the ability to calculate the hash function at a much faster rate thanks to the ASIC chip. Nevertheless, it means that the size of the entire mining activity itself has grown faster than that. This is because the number of companies engaged in mining activities increased due to the increase in bitcoin prices.
However, the most striking thing in the chart above is the high volatility of the upper limit estimate, assuming that the least efficient miners are used for the Bitcoin network (the lower limit estimate assumes that the network operates only with the three most efficient miners. do). When looking at the steeply soaring period of the upper limit estimate graph, you can see that the coin price coincides with the surge in 2017, mid-2019 to March 2020, and the last four months. Currently, Bitcoin’s energy consumption is 443 TWh, which is only 6 TWh less than the total amount of electricity consumed by France in 2019.
This means that as the price of bitcoin has risen, miners have run more miners, so the hash rate has skyrocketed, and if you try to mine only with less efficient old miners, it will lead to enormous energy loss. But in reality it is not. Because most miners mine with the latest and most efficient devices.to be.
However, it is good to see that the network efficiency will fall more than usual in an environment where the coin price rises, and the total energy consumption will exceed the median estimate (not as much as France (449 TWh), but Italy (242 TWh)).
When profits increase, miners try to get bitcoin rewards by increasing the hash power with old ASIC miners with low efficiency. If the supply of leading ASIC chip makers such as Bitmain and Canaan is delayed as demand for miners increases, many companies will have no choice but to use older miners.
The bottom line is that bitcoin consumes a lot of energy, and if the price of bitcoin rises, it will naturally increase its carbon footprint. Therefore, moreover, we must turn Bitcoin’s energy source into renewable energy.
Article Young: Joonhyuk Lim Edited by CoinDesk Korea
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