All Financial Wisdom
Bitcoin is an Absolute Energy (and Environmental) Disaster (pt 2)
continued from part 1…
Why does high energy consumption imply an environmental disaster in the case of Bitcoin?
Well, the previous question is not trivial, far from it. And those who raise it are in their full right to formulate it. Really, a high energy consumption does not necessarily have to imply a high environmental impact, it all depends on the energy mix of each country, or in other words, on what energy sources each national energy system uses to generate all the electrical energy that it flows through its distribution network. But this reasoning does not remain here. There is more.
Indeed, the cost of energy is key in the profitability of Bitcoin mining. That is why, for example, there are mining farms that are established in the same hydroelectric generating plants because the small differences in cost of being wall to wall with the energy source can mean an apprecial differential of profitability. You can read how, for example, there is an Austrian company that is included in the stream of miners that advocates feeding the Bitcoin ecosystem with renewable energy, as the publication The Verge explained in this article.
But without subtracting a bit from merit or vision to initiatives like the previous one, the fact is that Bitcoin is a global crypto-currency that orbits around an ecosystem and a global community. This means that all socioeconomic agents of this ecosystem, in the absence of a global regulation that seems more than difficult to achieve, will seek the greatest efficiency in mining. And this happens inevitably and almost exclusively by mining where the energy is cheaper.
And this reasoning is not theoretical. It is a verifiable fact supported by reality and the configuration of the current crypto-mining community today. Currently, the vast majority of those huge Bitcoin mining farms, which have proved to be the most profitable and almost exclusive way to mine Bitcoin today, are located in China. And the Chinese generation energy mix is not characterized precisely by its status as renewable or sustainability – rather it is quite the opposite.
According to Bloomberg, 58% of Bitcoin’s mining farms are located in China. You can read as well as the energy sources of these mining farms, they will be cheap, but they are very polluting. In fact, the cases that abound most are cases such as the cited Bitmain Technologies Limited, which has a mining farm in the region of Inner Mongolia where there are 8 mammoth metal ships of 100 meters long each, which house no fewer than 25,000 servers that mine Bitcoins 24 hours a day.
The entire Bitmain installation consumes energy generated with one of the most polluting energy sources: carbon black. And so there is a long list of mining facilities that do nothing but contribute in an important and lethal way to the terrible global warming that we have been suffering, in addition to raising the harmful levels of environmental pollution. This is the reality of the generation of most of the energy that feeds the Bitcoin ecosystem, which we have already seen before, which is nowadays a considerable energy consumption.
So this is the current picture…How about we talk about future projections?
But what if we now introduce the fact that currently the massive adoption of Bitcoin is barely residual as a means of payment, and really has a long way to go in terms of growth both in utilization by the population in general, and of growth of its infrastructure to serve so many millions of future potential users. Undoubtedly the only “but” to all this analysis may be that when the day comes that the maximum amount of 21 million Bitcoins has been mined, then the energy and environmental drain will cease. Right?
First of all, we must bear in mind that the complexity of Bitcoin mining increases considerably as more miners and fewer bitcoins are being mined, and with the complexity, energy consumption increases. That is why the scenario until reaching this limit of 21 million represents a non-negligible time horizon, in addition to an exponentially growing consumption until then.
We also have to, once the mining is finished by design, Bitcoin will continue to face a design inefficiency that, while it may not be as inefficient (worth the redundancy) as the mining itself, it is true that its Proof-of-Work design makes it equally inefficient in its daily operations, which together with the massive adoption will probably make the problem not only persist, but increase exponentially.
Paradoxically, it is the distributed nature of Bitcoin that has made it a future solution for so many things, but now it turns out to be its own Achilles heel: the distribution makes each transaction imply that the same operation (not mined, but a mere transaction of a payment) of Bitcoin involves a computational load that is multiplied proportionally to the size of the distributed network.
And the implications on the crypto-economy as a whole would be…
That Bitcoin is in its current design is a real environmental and energy disaster does not have to imply that it will continue to be in the future. The design of Bitcoin can be modified in different ways, and it can not be ruled out that in the not too distant future, we can see a fork that radically changes the current terrible carbon footprint of the Bitcoin ecosystem.
That’s not to mention other alternatives and ecosystems that exist in the crypto-economy and to this day, whose design is really efficient in terms of energy. In environmental terms, really, little can be done if the future mining or operation conglomerates are located in countries with low energy costs but with a black energy mix such as coal.
Here, there could only be a halo of hope with some kind of international regulation that seems complicated with a crypto-ecosystem decentralized by nature, and which is also one of its great advantages. Although the truth is that, if the ecosystem is efficient, we already gain enough in general computations.
In conclusion, the issue is that, as I always say, we should not abandon ourselves to the current, and the future should be shaped by paddling in the right direction to make it sustainable in many more aspects. Bitcoin brings enormous advantages under its belt, but, far from achieving the golden perfection sought by some, it also has its drawbacks. Like everything in our ever-changing world today, crypto-economics also has to continually reinvent itself in order to survive, and Bitcoin must start with energy efficiency.