Why Will Bitcoin's Power Consumption Continue To Grow, But Isn't It a Problem?

Why Will Bitcoin's Power Consumption Continue To Grow, But Isn't It a Problem?

Every four years, the price of Bitcoin is growing at an explosive rate. This year she approached $ 60. A year ago she was $ 000, two years ago $ 8000.

At the same explosive rate, the power consumption of Bitcoin mining is increasing. The work of miners is necessary for the Bitcoin network to function. Miners solve complex mathematical problems that consume a lot of energy. These tasks are solved in order to determine which of the miners will write the next block into the blockchain. And whoever writes the next block will receive the newly created bitcoins and transaction fees.

Writing a block to the blockchain itself is a trivial procedure. Most of the calculations go exactly to solving these mathematical problems. And since the Bitcoin protocol requires a new block to be written every 10 minutes, the difficulty of these tasks is adjusted every two weeks (more precisely, every 2016 blocks). If the miners solved the problem for these two weeks in less than 10 minutes, then it becomes more complicated. If it took more than 10 minutes to find a solution, then the task is simplified. But the general trend is that the task becomes more and more difficult, because over time, faster computers become available and the price of bitcoin rises.

All this is well known. Now I want to show you three things:

  1. There is a very simple, crude way to calculate the amount of energy used by miners.
  2. A huge amount of energy is being used now, and it will continue to grow.
  3. We needn't worry.

I realize that given the first two points, it will be difficult to convince the third. But I am sure that I will succeed. And yes, I hold bitcoins and consider myself environmentally conscious. So let's get started.

Calculating the energy used by miners

How to calculate the energy used by miners? At every moment there are thousands of computers trying to solve these complex mathematical problems. How much energy do they all consume? Of course, the exact figure is not known to us. But we know the following:

  1. Bitcoin price.
  2. The number of bitcoins created per block.
  3. Average commission.
  4. General commissions earned by miners.
  5. The dollar amount miners receive for each block.

The value (5) is simply the product of (1) and (2) plus the product of (1) and (4). If we ignore the commissions and take the recent all-time high of about $ 57, then for each block miners receive 500 * $ 6,25 = $ 57. Commissions must be added to this. That's roughly $ 500 + commissions per hour, or $ 359 + commissions per day. Let's call this value E.

E = $ 51 + commissions

How much are miners willing to pay for electricity to earn these bitcoins? We don't know how many miners there are. But we know that in order to be profitable, all miners together must spend less than E. But what if they spend more than E? They will not be able to make a profit, so they will have to sell the equipment, close the shop and do something else. What if they spend a lot less than E? New miners will appear, or old miners will buy more hardware and consume more power. In other words, all miners together will usually spend slightly less than they earn. You can round this to E and to say that miners usually spend E on their operations.

How much energy can E buy? It all depends on where you are. But, as a rule, miners are concentrated where energy is cheaper.... If determining how much miners are willing to pay for electricity is more or less straightforward, but calculating how much this gives energy is not so easy. But it doesn't matter for now. We'll come back to this later. We know that miners are willing to pay E. How does E change over time?

Bitcoin's future energy consumption forecast

A graph of the monthly number of blocks on the Bitcoin network.

Stock to Flow model, which was first introduced on March 22, 2019. The black line represents the predicted behavior. The dots show the real historical value. : Medium

At the moment, the most promising Bitcoin price model is the ratio of stocks to inflows. It was introduced by an anonymous Dutch investor with experience in PlanB pension funds. The model demonstrates that the value of Bitcoin is increasing in stages. Every 4 years (more precisely, every 210 blocks), miners begin to create half as many coins as in the previous four-year cycle. For the first 000 years (4-2009) they created 2012 bitcoins each block. In the next cycle (50-2013) 2016 bitcoins. Then 25 bitcoins (12,5-2017), and now 2020 bitcoins (6,25-2021). In 2024-2025 every 2028 minutes they will create 10 bitcoins, etc.

It is interesting to read: "Halving" or "halving"?

This model predicts that the price of Bitcoin is proportional to the ratio of coins already mined to the number of newly mined bitcoins. Thus, every time the amount of bitcoins being created falls in half, the price gets shocked. It grows, goes into a bullish run, turns into a bubble, and then falls and finds balance. We saw this happen in 2013, then in 2017 and 2021. Each time the balance found is higher than in the previous period.

This is what this behavior looks like: The behavior of the price of Bitcoin very closely matched the values ​​predicted by the stock-to-inflow ratio model. The blue line represents the 463 day average that has been found to be better predictors of behavior.
: Medium

Thus, the actual price behavior of Bitcoin is very close to the stock-to-inflow ratio model.

Therefore, throughout the rest of this article, we will assume that Bitcoin will also follow this pattern for the foreseeable future. If so, then we can calculate not only how much miners are spending now, but also how much they will spend in the future. And it can scare us. After all, the stock-to-inflow ratio model predicts that every 4 years the price of bitcoin will grow by about 10 times. But also every 4 years there will be half as many bitcoins to be mined. Hence, mining every 4 years should cost 5 times more and consume 5 times more energy on average. In fact, this is an optimistic estimate, given that commissions do not halve every 4 years, but, on the contrary, tend to grow over time.

Thus, Bitcoin consumes a lot of energy and will consume even more in the future. I totally agree that using electricity from national power grids for mining may not be desirable. But not all energy comes from the electrical grid.

Energy types

illustration: BitNews

So far, we have talked about electricity and energy as if they were one and the same. But this is not the case. Energy transportation is expensive. Energy is dissipated during transport. If 1 kW is sent, then less will be received, sometimes much. That is why we do not see, for example, large solar power plants in the Sahara that would sell energy to Europe. And that is why oil is transported around the world, instead of burning it where it is mined, and storing and transporting the generated energy. The transportation of stored energy has always been a deterrent in the energy business.

That is why it is so important that there are countries like Icelandwhere there is excess energy that can be used to produce something that requires a lot of energy, which can then be sold.

Iceland is the 11th largest exporter of aluminum in the world. Yes that's right. This tiny country competes with the giants. Since Iceland has a lot of energy and cannot export it, it exports aluminum instead. Why can't it export energy? 99,9% of the energy produced in Iceland is renewable, and almost all is geothermal (volcanoes) and hydroelectric (dams). And this cannot be exported. At the same time, the export of energy in the form of electricity is disadvantageous due to dissipation, as already mentioned. What happens to the cost of energy where there is an excess of it? She falls.

So, we learned that there are energy sources that cannot be exported, which are located in a certain place. And such places often have a surplus of cheap energy.

But there are also places where a lot of energy is consumed. Energy is needed there. this energy is transported there or somewhere close. Energy is then produced and delivered to the "last mile" where it is needed. Any local energy is also used.

What kind of energy is usually used in such places? Mostly non-renewable. Coal can be transported, but it is not renewable. Likewise with oil. As a consequence, energy in such places is usually more expensive.

Related Interests: Three Reasons Why Bitcoin Is Greener Than Altcoins

It is worth noting that in some parts of the world there are electrical contracts that allow you to pay a fixed tariff for any amount of energy. Such contracts are very dangerous in cases where users can use electricity to mine Bitcoin and should be illegal.

But shouldn't all mining using electricity from the grid (when it competes with day-to-day electricity use) be illegal? Not necessary. A side effect of mining is heat. In many countries, electricity is used for space heating or cooking. In some countries it is even forbidden to use gas stoves for safety reasons. In such places, it will be very useful if the heating system is mining, which can be turned on or off at any time. If the cost of electricity is high enough, it will simply reduce the cost of heating, and people will not turn on the heating just to mine.

So we said that Iceland cannot sell its energy sources. This is the general trend: renewable energy sources cannot be transported, and non-renewable energy sources can.

Therefore, it can be expected that the surplus of energy is usually where there are renewable sources.

Why is all this important? Because Bitcoin miners around the world have a fixed budget to fund their activities. Consequently, they will gravitate towards cheaper forms of energy. Or rather, to the cheapest. Therefore, they can be expected to gravitate towards places with a surplus of energy if they cannot afford to finance their activities elsewhere.

The notable exception is Venezuela. Energy in Venezuela is very cheap. But this is due to US sanctions preventing Venezuelan companies from selling their oil. In other words, the surplus of energy in Venezuela is due to political reasons. And the Venezuelan authorities are responding to this by converting energy into bitcoins and selling them on the market.

Related Interests: Why Bitcoin's Power Consumption Is Good For The Planet

Another interesting case is atomic energy

: Unsplash

Nuclear power plants cannot be turned on or off so easily. It takes several days to shut down the nuclear power plant. And it is not always easy to store excess energy produced by a power plant when it is not needed.

Historically, hydroelectric power plants have been able to store excess energy. Hydroelectric power plants can extract energy from water currents. But they can also pump water into a reservoir, which becomes a kind of huge accumulator.

Thus, nuclear power plants and hydroelectric power plants can work in tandem. During the day, both will produce energy. At night, the nuclear power plant will continue to produce energy, and the hydroelectric power station will store it.

This is, again, a place where there is excess energy and where mining can be profitable. But, of course, cheap energy may not get into the grid. The only way it can be used for mining is if the company that maintains the nuclear power plant does it. Has nuclear power ever been used for mining? Apparently, yes, but since it was done illegally, the computers were confiscated by the authorities .: Unsplash

And the last example - big dams in China... China has been building ghost towns for decades. Some believe that this is the most useless product of corrupt central authorities trying to provide employment for their population and prevent the country's GDP from falling. Others argue that these cities are in key locations that will be optimal when global warming strikes with full force, and that they are the most forward-thinking product of a largely engineering government. Opinions vary. But be that as it may, it is planned that these cities will use electricity from huge hydroelectric power plants. Power plants that are already available, but not used at full capacity. In some cases, this energy was temporarily channeled into Bitcoin mining.

Interesting to read: Bitcoin's upcoming hash wars will be the next space race

It is worth noting that although the market seeks to find a solution to the surplus of energy in the form of selling energy-intensive products or storing in a reservoir, this comes with huge costs. It is expensive to transport aluminum around the world. And when water is pumped into the reservoir, there is significant energy dissipation. Mining presents a good alternative solution.

Conclusion

So, the general trend is as follows. Bitcoin mining uses a lot of energy. The amount of energy required to mine Bitcoin will continue to grow. Bitcoin will gravitate towards using the cheapest energy available on the planet. There are places on the planet with an excess of energy. Basically, this is energy from renewable sources, because non-renewable energy sources can be transported (if this is not prevented by sanctions). Thus, Bitcoin mining will use surplus renewable energy from all over the planet that cannot be used in any other way.

It is easy to conclude that energy is precious and that we must conserve it. This is simple reasoning, what mathematicians would call "first approximation." And as a first approximation, this is true. But a deeper analysis shows that energy cannot be transported and that in some places energy is precious, while in others it is in abundance. Bitcoin mining will always use the cheapest energy on the planet, which will inevitably come from where it is in abundance.