Bitcoin mining consumes so much energy, should we continue to support it?

Have you ever had this experience? Every time you take a commercial flight, the airline will play a passenger notice before the plane takes off (even though you are already familiar with it), which includes that in case of an emergency, passengers traveling with children should put on their own oxygen masks first, and then help the children put them on.

Logically, it makes sense to first ensure that you can breathe, so that your children who depend on you can also breathe with your help. The same principle applies to the coordination function of money in a particular economy, and the resources required to protect that function.

Let’s cut to the chase. We’ll never understand why Bitcoin consumes so much energy without first recognizing the fundamental role that money plays in coordinating economic activity and all the things we take for granted.

What is money? How does it work? How should it work? What is its role in society?

If you don’t understand these issues, you won’t understand the magnitude of the problem Bitcoin is trying to solve. If you don’t realize this, the energy cost of Bitcoin will never be corrected!

Many concerned onlookers have raised alarms about the amount of energy consumed by the Bitcoin network, with their concerns stemming from the idea that the energy consumed by the Bitcoin network could be used for more efficient functions or that this energy consumption is harmful to the environment. Both of these overlook the significance of Bitcoin’s energy consumption.

In the long run, perhaps the biggest and most important use of energy is to ensure the integrity and constructiveness of monetary networks, and this is also true for Bitcoin. Although this does not stop those who do not understand this from raising their so-called concerns.

“Bitcoin mining is inherently wasteful, which means there is no easy technological solution for Bitcoin.”

——The Guardian

“In an environment of climate change, raging wildfires, and record-breaking hurricanes, it’s important that we ask ourselves some tough questions about Bitcoin’s impact on the environment.”

——Vice Media

Bitcoin’s Energy Consumption

Let’s start with some basic information. Bitcoin is secured by a decentralized network of nodes (computers running the Bitcoin protocol):

Economic nodes in the network generate, verify, and relay transactions, and also verify and relay Bitcoin blocks (i.e., groups of transactions ordered by time);

Mining nodes perform similar tasks, but also generate, solve, and transmit blocks to the rest of the network by executing Bitcoin’s proof-of-work function.

By performing this work, miners verify transaction history and provide a "clearance" function for current transactions, after which other nodes in the network verify the validity of the transaction.

We can compare it to the clearing function performed by the New York Fed, except that the "clearing" performed by miners is completed in a decentralized manner on average every 10 minutes.

This work requires miners around the world to provide a lot of computing power 24*7 non-stop to complete, and this computing power consumes energy. Specifically, if the computing power of the Bitcoin network is 75 exahashes per second, the Bitcoin network consumes about 7-8 gigawatts of electricity per second. If the marginal cost per kilowatt-hour is 5 cents (roughly estimated), the Bitcoin network consumes about $9 million per day (equivalent to about $3.3 billion per year) of energy.

Bitcoin network computing power growth trend chart

How can such high energy consumption be justified? If the Bitcoin network grows to 1 billion users, how much energy will it consume? These resources are used to solve real problems that most people do not understand, which makes it difficult to justify Bitcoin's high energy consumption.

To ease the pain of environmentalists, we often present a series of countervailing arguments to make Bitcoin more acceptable:

• A large portion of Bitcoin's energy consumption comes from renewable sources.

• Bitcoin will drive innovative development of renewable energy technologies and resources.

• If the energy consumed by Bitcoin is used elsewhere, it will be burned into the atmosphere (causing air pollution).
  

• Bitcoin simply consumes energy that the free market can afford, at a free market price.
  

• Bitcoin consumes energy resources. If these resources are not consumed, there will be no economic development.
  

• The very nature of Bitcoin’s energy requirements will improve the efficiency of the transmission grid.

These considerations help explain why the idea that Bitcoin’s energy consumption is necessarily wasteful or harmful to the environment doesn’t hold water, but they are not enough to overturn such concerns.

Without recognizing the magnitude of the monetary problem that Bitcoin seeks to solve, the marginal costs of energy consumption can never be justified.

Bitcoin represents a solution to systemic problems that exist within our traditional monetary framework and functions by relying on energy consumption.

The stability of an economy depends on the functioning of money, and Bitcoin provides a more sound monetary framework, which is why nothing is more important than securing the Bitcoin network in terms of long-term energy usage.

So rather than dwell on arguments that compete with mainstream concerns (such as those listed above), it is better to focus on the overarching issue itself: the problem of traditional currencies, or the problem of global quantitative easing.

Functions of Money

The monetary problem of global quantitative easing is huge, even though most people are not aware of it. Most people feel it in their daily lives but cannot identify the root cause: working harder, working longer hours, but still in debt and still barely getting by.

There has to be a better way! But in order to identify the solution, the problem must first be seen and understood. The problem is our currency, and its impact on society is pervasive.

This article will not go into the specific details of what money is (readers can read Saifedean Ammous’ book The Bitcoin Standard[1] and Nick Szabo’s article Shelling Out: The Origins of Money[2]), but we can briefly describe the function and role that money plays in society.

Money is a commodity that facilitates economic coordination between parties. Without money, there is no basis for cooperation between parties. In short, it is the commodity of money that makes society work, allowing us to accumulate capital and make our lives better. This capital serves different people in different forms.

It’s been said that money is the root of all evil, but as the famous British economist and political philosopher Hayek more aptly described it in his book The Road to Serfdom, money is the agent of freedom.

“Money is one of the greatest instruments of freedom ever invented by man.”

— Hayek, The Road to Serfdom

The above picture is excerpted from Hayek's "The Road to Serfdom"

More specifically, money is a commodity that drives specialization and the division of labor. Money allows individuals to pursue their own interests, is the way individuals communicate their preferences to the world, and creates the “range of choices” we take for granted.

Our modern economy is built on the freedom that money provides, and the end result of money is a highly complex and specialized system.

To simplify this concept, Milton Friedman, a famous American economist, explained the complexity of the pencil manufacturing process [3].

He explained in detail that it is impossible for any single person to produce a standard pencil, because countless workers are involved in the production of a pencil, from the processing of wood, the production of graphite to the lead, rubber of eraser, brass ring, yellow paint, glue, etc., all of which require the efforts of a large number of workers.

Friedman explained that making a single pencil requires the coordination and cooperation of thousands of people, including people who don’t speak the same language, who may practice different religions, and who may even hate each other if they met. He said the ability to facilitate coordination and cooperation is a function of the price system and the economic good we call money.

Abstracting from the pencil example, now consider the complexity of our modern economy. From cars to airplanes, from the internet to cell phones, and even to your local grocery store. Modern supply chains are so complex and specialized that they require the coordinated cooperation of millions of people to perform these basic functions. The coordination of all of these activities that drive global trade is only possible through the function of money.

Real-life example: Venezuela

Venezuela provides us with an example of the important role that money plays in economic coordination, and the subsequent loss of this coordination function when the monetary commodity fails.

The net result of the devaluation of one of the world’s most oil-rich countries is that Venezuela’s currency has recently become over-inflated. As the country’s fiat currency has lost value, its basic economic functions have collapsed to the point where buying food at a grocery store or basic healthcare is no longer a benchmark.

This is a full-blown humanitarian crisis that has essentially deprived Venezuela of the ability to have a stable currency to coordinate economic activity and produce the goods the country needs to trade in the global economy.

What does this have to do with Bitcoin and its energy consumption?

As an energy-rich country, oil was (and is) Venezuela's main export, or rather, oil is the commodity the country produces in order to trade. Despite being one of the most energy-rich countries in the world, Venezuela's oil production has plummeted.

Venezuela's oil production has fallen to its lowest level since 2003

Venezuela is unable to import the technology or coordinate the resources needed to extract its main traded commodity, oil. This has led to a severe deterioration in the local economy and has weakened the country’s ability to power its own energy grid, causing widespread blackouts and hampering the delivery of basic services such as electricity, clean water, and healthcare.

What is happening in Venezuela is devastating, the result of hyperinflation of an unstable currency causing a deteriorating economy.

Currency depreciation distorts the price mechanism of money, thus creating economic imbalances. As the role of money in economic coordination deteriorates, complex supply chains are disrupted and the supply of real goods (such as goods on shelves, oil production, etc.) is reduced, creating an imbalance between supply and demand.

As more fiat money is created, real goods become relatively scarce compared to the money supply, which causes the function of money to break down. As real goods become increasingly scarce, individuals have less incentive to hold onto money, and instead choose to sell it as quickly as possible, causing a rush on basic necessities and causing excessive monetary inflation. Government manipulation of currency leads to a deterioration in the country's economy.

The situation in developed countries

Now, many people living comfortably in developed countries may look at Venezuela and think, “That would never happen in my country,” but this thinking ignores all first principles.

Whether people fully understand it or not, the market structure for the Venezuelan Bolivar or the Argentine Peso is the same as the market structure for the dollar, euro, or yen. Maybe the Fed, ECB, or BoJ (for now) are better at managing stability than Venezuela or Argentina, but that doesn’t change the fact that the foundations of all fiat currency systems are the same.

The US dollar's monetary base growth curve. The red area is the US dollar's monetary base before the Federal Reserve implemented three rounds of quantitative easing policies.

In the above figure, taking the United States as an example, the Federal Reserve expanded the monetary base from $180 billion in 1984 to a peak of $4.2 trillion after the third round of quantitative easing (QE3), a 23-fold increase. Due to the nature of the Fed's credit-based economy, the economic distortion caused by the depreciation of the dollar occurred gradually until the financial crisis occurred suddenly.

[Note: The monetary base refers to the planned amount of currency issued by the central bank and the total amount of currency purchased by overseas students. It includes the currency in circulation and the reserves in the commercial banking system for traded goods.]

If you think the situation in the developed world is not as unstable as in Venezuela, or subject to a similar monetary base, I respectfully point you to these “Patient Zeros”: the Federal Reserve, the European Central Bank, and the Bank of Japan, among others.

Often, people place blind trust in these institutions, which causes people to ignore basic principles and common sense. But after the financial crisis, the Fed is creating $3.6 trillion in new money as part of its quantitative easing policy, but one Fed-based economist responded:

“I want to highlight that I think there are huge gaps in our understanding of the interaction between the financial sector and the real sector.”

--David Wilcox, Federal Reserve economist

If we look back at history honestly, we will see the impatient temperament of those who manage our economy through central command. While admitting that there are huge gaps in their ability to understand the impact of their actions on the real economy, their response is to continue down the same path (i.e.), but on a larger scale and in a way that reshapes people's definition of insanity.

Our current choice is to choose between two distinct options:

• A) a centrally planned form of currency designed to depreciate, or

• B) Decentralized Currency with Fixed Supply

The latter incurs costs in the form of energy consumption, but brings long-term economic stability.

Economic stability through energy consumption

Future economic stability is the most important underlying reason why the energy consumption required for the security of the Bitcoin monetary system is important, especially since current alternatives (fiat and gold) are structurally flawed.

If we wait for signs of hyperinflation, it will be too late. But Venezuela is not only an example of what happens when hyperinflation strikes, it is also a living example of how important energy production is to the functioning of a society.

Everything we consume in our daily lives requires some energy input, and the coordination of these energy inputs depends on the reliability and stability of the currency we use.

Forget your morning coffee for a moment and think about the basics: clean water, sanitation, food, medicine, basic healthcare, etc. The coordination of resources to provide these basic services depends on an efficient monetary system.

When a monetary system collapses, as happened in Venezuela, social coordination and even social structure begins to collapse with it. If the basis of all trade is energy, and if we need money to coordinate trade, then the highest and best use of energy is to protect the monetary system in the first place.

Put on your oxygen mask first, then help your child. Secure the fundamentals of trading first (i.e. the monetary system), then focus on all the derivatives.

Any concerns about how much energy Bitcoin consumes or will consume are a red herring. It’s not that we should sacrifice electricity that could power our homes, it’s that we will never be able to power those homes if we don’t have a reliable monetary system to coordinate economic activity and mobilize resources.

In reality, Bitcoin does not compete with the energy resources needed to power basic production and construction in the economy; rather, Bitcoin’s function as a monetary system will ensure that these energy needs can continue to be met.

What is harmful to society is that more countries degenerate into economic and humanitarian disasters like Venezuela, where basic health and public services cannot be reliably provided. This is not a grim fantasy or a dystopian future, but rather an attempt to illuminate the importance and interconnectedness of monetary functions and energy consumption in highly specialized, complex economies.

“If Bitcoin can prevent hyperinflation in countries like Venezuela, then its energy consumption will be the best bargain humanity has ever made.”

——Saifedean Ammous, "The Bitcoin Standard"

Bitcoin represents an alternative to the current architecture of the global financial system and will soon become its primary engine. Putting aside the systemic risks that currently plague our financial system, Bitcoin is a fundamentally more sound monetary system.

Moreover, Bitcoin is secured by the production and consumption of energy. You don’t need to believe that the future of the dollar will be the present of the bolivar to recognize the importance and interaction between the stability of monetary functions and the production of energy to provide basic economic necessities. And in the face of the potential risk of hyperinflation, Bitcoin’s energy consumption is not worth mentioning at all.

Bitcoin will consume the necessary energy to ensure the security of its currency network, which is essentially driven by the fundamental demand for holding Bitcoin. The more people value the long-term stability that Bitcoin provides, the more energy it consumes.

Ultimately, this energy consumption will ensure that all other energy consumption derivatives will continue to be met, which is why nothing is more important than protecting the Bitcoin network in the long term.

The economic stability and economic freedom that Bitcoin brings to the stable currency system is the real reason why Bitcoin should and will continue to consume energy.