by Dominik Stroukal — Economic Expert at SatoshiLabs and External contributor to Trezor Blog
You’ve heard it before, “Bitcoin burns as much energy as Switzerland, so much that it will accelerate global warming by a few degrees Celsius over the next few years”. Is that true? No, those are both myths. But, like any good myth, they are rooted in reality, and are then twisted into a fantastic tale, featuring giants and unicorns but no heroes; the end of the world will surely come soon. Doomsayers profit off spreading misinformation, so let’s take apart some of the myths related to Bitcoin and energy and take a look at what the reality is.
First myth: Energy
It is electricity, not energy, that matters to Bitcoin. Virtually all articles that you may come across on this topic use the word “energy”. “One Bitcoin Transaction Consumes As Much Energy As Your House Uses in a Week”, writes Vice magazine, for example. Sounds crazy, doesn’t it?
Similar articles build the myths in two emotive ways. First, they conflate “energy” with electricity. I use several energy sources in my house, including gas and gasoline. Does one blockchain transaction consume electricity, gas and gasoline? Only in the fourth paragraph of the Vice article do they start talking about electricity, without any acknowledgment that it is only part of the energy equation as a whole.
It’s not just words. Bitcoin’s energy consumption ‘equals that of Switzerland’, writes the BBC. That’s almost as much as SatoshiLabs’ homeland, the Czech Republic. If you don’t have a car or gas at home, energy consumption may only mean electricity for you, but it doesn’t even remotely apply when talking about a country. Electricity accounts for about a fifth of the world’s energy yet, typically, there are no fuels included in these calculations about Bitcoin. The simple confusion of the word “electricity” with the word “energy” may be negligible in your home but, in addressing the whole economy, we transform the real figure into a mythical giant.
The argument could be just as strong even without such a misleading title but perhaps journalists know that, nowadays, people only read headlines?
The confusion is multiplied by other comparisons, like the one found in Vice magazine, “… As Much Energy As Your House Uses in a Week”. Of course, this leads you to imagine all the appliances, computers, refrigerators, chargers, televisions, and so on. In the article, this is not described in dollars, but in kilowatt-hours (KWh): an incredible 215 KWh. At a price of 13.26 cents per KWh that’s just $28.5. But an article saying that “Securing One Bitcoin Transaction Costs $28.5” doesn’t sound so catastrophic, though perhaps a little pricey. If we were to compare that with the energy (yes, including gas and other fossil fuels this time) expended in sending a bank transfer, which involves multiple institutions, physical buildings with facilities costs, and staff wages, this exercise quickly loses its footing, as shown by this article from 2017.
Myth Two: It will only get worse
On the contrary, Bitcoin has the exact opposite problem — it will burn less electricity in the future than we probably want it to.
You already know that, but let’s repeat it to be sure. In the end, Bitcoin will have almost 21 million units which, in 2009, were produced at a rate of 50 BTC every 10 minutes, on average. Approximately every four years since, this reward to miners is halved. After the last halving, it is now 6.25 BTC. At the time of writing, that’s about $70,000.
If the price remained the same after the next halving in four years, then the reward of 3.125 BTC would only be worth $35,000. The miners would therefore fight for half of the current reward. Why would they burn $70,000 in electricity for only $35,000? That would not be profitable.
In other words, in order to burn the same amount of electricity, the price of bitcoin must double every four years. It is now $11,000. Thanks to COVID-19, we are now all experts in exponential growth, but still, how much would bitcoin have to cost in 2033 to burn as much electricity as it does today?
The reward will be only 0.78125 BTC in 2033. That’s one-eighth of today’s 6.25 BTC. The price would have to be eight times higher, i.e. $88,000. According to the statistics, I will die by the time the reward reaches 0.00076293 BTC. At the end of my life, bitcoin would have to cost over $90 million to burn the same (!) amount of electricity, if we discount fee contributions from for simplicity’s sake (these are currently negligible but will increase). So, is that figure even possible? Maybe.
But crucially, if someone says it will burn a thousand times more electricity in 52 years when I die, just because historically the amount of electricity burned increased, then they implicitly assume that the price of bitcoin will be $90 billion in today’s dollars! Just for comparison, 1000 BTC at that price would buy the entire world GDP. These are, of course, silly numbers, but that’s the point.
Why did I mention the year 2033? In 2018, an article was published in the prestigious journal Nature, or rather its offshoot Nature Climate Change, which calculated that Bitcoin would warm the planet by 2°C by 2033. How did they come to this figure?
We do not learn this directly from the article, but they assume that more electricity will be burned. If you divide their numbers, to pay off the miners, bitcoin will have to cost $160 million in 2033. That would be a nice headline, but of course you won’t find that number anywhere inside the article, because the researchers didn’t study the economic motivations of the miners well. They won’t burn more unless bitcoin costs more.
To be fair, scientists at Nature estimate that Bitcoin will handle more than 100 billion transactions a year at the time. That’s about 2 million transactions in a block (on-chain, i.e. no Lightning Network, but directly in the blockchain). Miners would love to burn more if there were more transactions, and therefore more fees. But if bitcoin didn’t cost $160 million, then each transaction would have to cost almost $80 to make it worth it. It is possible, although it is a lot. Do the researchers think it seems like a lot to pay? We do not know. And do they know that blocks would have to be 634 times bigger and the blockchain would have to grow at 100GB per day? Can we really imagine that?
It seems it’s not only journalists who are spreading Bitcoin myths, but scientists, too.
Bitcoin will have the opposite problem in the distant future: unless there are more expensive on-chain transactions or the price doubles every two years, then less electricity will be burned in the future. Much less electricity.
Myth Three: A Comparison of the Incomparable
“The carbon footprint of a single transaction is the same as 780,650 Visa transactions,” says an article in The Telegraph, unsurprisingly entitled “Bitcoin using more electricity per transaction than a British household in two months.” I hardly know where to start debunking this.
Economists like marginal values. Marginal costs are the cost per additional unit. In contrast, averages are a common arithmetic mean. Did you buy a beer for ten dollars and have another for only a dollar? Then the marginal cost of the first beer is ten dollars and the second one dollar. The average cost is then $5.5.
Sending an on-chain Bitcoin transaction is still almost free. It can be tedious, but it works. Of course, there is already a way to avoid higher fees, and even though the Lightning Network is still in its infancy, journalists now have nothing to divide the total amount of electricity consumed by, because we simply do not know how many Bitcoin transactions are made. And, if we included those managed by third parties (why not? We do it for Visa), like trade transactions on crypto exchanges, for example, the average cost would also be much lower.
In any case, the average cost of an on-chain Bitcoin transaction is really huge. If the reward is 6.25 BTC and, say, another 0.75 BTC in fees, then today it stands at about $77,000 for 2.5 thousand transactions, meaning about $31 per transaction on average (not so different from that Vice article, where it was $28.5). That’s a huge amount, but of course the fees make up only a part of it, currently about 5–10%, so we might actually pay around $3 for a single transaction.
The average price can be high, but the marginal cost is much lower. It’s important to say that journalists like to compare the average cost of Bitcoin with the marginal cost of Visa. They take the cost of the entire Bitcoin and divide it by the number of transactions, then compare it to one simple card transaction. If we do it the other way around, Bitcoin is suddenly cheaper. Take the entire cost of the world banks, their employees, cards, terminals, etc. and divide by the number of transactions. Then, compare it to one Lightning transaction, or with a low-priority on-chain transaction. Unsurprisingly, Bitcoin is now cheaper and your average Visa transaction costs much more than you have ever actually paid for one.
Bitcoin may be expensive but let’s compare like with like: the current monetary system is not cheap. If we were to also include the cost of the entire boom and bust cycle, it would undoubtedly turn out much, much worse than Bitcoin. Let’s not overlook the benefits of having full control of our own money, either, which can be kept safe on a hardware wallet without anyone expending energy to loan it out or audit it for your government.
Perhaps, even if we compare the comparable, Bitcoin is still not a substitute for everything we know from the established world of fiat money. So even that comparison wouldn’t make much sense. It’s something completely different that performs a few of the same functions, but tackles them from a completely different angle.
Bonus Myth: It’s useless
At the time of writing, a total of 18.5 million BTC have been mined since 2009, which at $11,000 represented a market capitalization of over $200 billion. How much energy did it cost us to create those bitcoins? We will never know for sure but, if we look at the sale prices at the time of mining, and assume that they were mined with minimal initial profit, it comes to less than $20 billion. That would mean we put into circulation coins worth $200 billion for a tenth of their price.
It’s a lot of money, but let’s put in context. It corresponds to only about 2% of the US Federal budget for social security. Or 3% of US Federal defense spending. Or 4 presidential elections in the US. (What would you rather have, by the way?)
Why are we doing it? We each have a different answer, so I can only speak for myself and a few of my friends in SatoshiLabs. We are looking for an alternative world of money. How much should such an alternative cost? Historically, there have been people who wanted to establish their system with a bloody revolution. Satoshi Nakamoto instead gave us a peaceful instrument of change, and we alone can decide if it is worth it.
Leave it to the market, not to the revolution. Rely on people looking for energy sources that are as cheap as possible. It is no coincidence that mining is concentrated in places with excess electricity, such as oil extraction sites or areas in China that are home to hydropower plants producing more power than people and companies demand.
Of course, it is still energy consumption and it is by no means small. Let’s talk about it openly and feel free to get emotional about it. We do not want to waste scarce resources but there is no need to invent myths and conjure up fairy tales.