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How much energy does a sector of the economy have the right to consume? At this very moment, organizations all over the globe are being put under pressure to reduce their usage of non-renewable energy sources and their release of carbon into the environment. However, determining how much consumption is excessive is a difficult subject that is intricately connected to discussions over the priorities that we as a society hold. At the end of the day, a question of values has to be asked in order to choose which products and services are "worth" spending these resources on. Because of the rising popularity of cryptocurrencies in general and Bitcoin in particular, the topic of energy consumption has emerged as the most recent contentious issue in the broader discussion over what and who digital currencies are really beneficial for.

The inquiry about the use of energy seems to be a reasonable one at first glance. The Cambridge Center for Alternative Finance (CCAF) estimates Bitcoin's current annual energy consumption is around 110 Terawatt Hours. This represents 0.55% of the world's total electricity production and is roughly equivalent to the amount of energy consumed annually by smaller countries such as Malaysia or Sweden. This seems like it would need a significant amount of energy. To answer this question, how much power should a monetary system use?

Your response to that question will probably determine your feelings about Bitcoin. If you believe that Bitcoin serves no purpose other than that of a ponzi scam or an instrument for money laundering, then it would only be reasonable for you to conclude that utilizing any amount of energy is pointless. If you are one among the tens of millions of people throughout the globe who are utilizing it as a weapon to escape monetary repression, inflation, or capital restrictions, then it is quite probable that you believe the effort is exceptionally well spent. How much value do you think Bitcoin provides for society? That's the question that will determine whether or not you believe Bitcoin has a legitimate claim on the resources that society has to offer.

However, if we are going to have this discussion, it is important that we have a clear understanding of how Bitcoin truly uses energy. Understanding Bitcoin's energy usage may not resolve issues regarding the cryptocurrency's utility, but it might help put into perspective how big of an effect Bitcoin proponents are really talking about having on the environment. To be more specific, there are a few major misunderstandings that need to be cleared up.

Energy Consumption Is Not Equivalent to Carbon Emissions

To begin, it's vital to note that the amount of energy a system uses and the amount of carbon it releases are not the same. If you don't know the precise energy mix, which is the proportion of different energy sources that are used by the computers mining Bitcoin, you can't extrapolate the associated carbon emissions. This is because determining energy consumption is relatively straightforward. However, you can't extrapolate the associated carbon emissions. For instance, the environmental effect of one unit of energy generated by hydropower will be far lower than that of one unit of energy generated by coal.

The amount of energy that Bitcoin uses may be roughly calculated as follows: You need just take a look at its hashrate (which refers to the entire aggregate processing power that is utilized to mine Bitcoin and process transactions), and then you can make some informed predictions as to the energy needs of the gear that miners are utilizing. However, it is significantly more difficult to determine how much carbon it emits. As a result of the cutthroat nature of the mining industry, its participants are notoriously secretive about the inner workings of their businesses. The CCAF has collaborated with large mining pools to compile an anonymised dataset of miner locations. These efforts have resulted in the best available estimates of the geolocation of energy output. From these estimates, an energy mix may be derived.

On the basis of this statistics, the CCAF can make educated guesses on the energy sources miners were using on a national and, in some circumstances, a provincial level. However, their information does not contain all mining pools and is also not up to date. Because of this, we are still largely in the dark regarding Bitcoin's true energy mix. In addition, a large number of prominent studies make the mistake of generalizing the energy mix at the national level, which results in an erroneous portrayal of nations like China, which has an enormously diversified energy environment.

Consequently, there is a broad range of estimates on the proportion of Bitcoin mining that employs renewable energy. According to one analysis published in December 2019, 73% of Bitcoin's total energy usage was carbon neutral. This was primarily attributable to the presence of hydro power in key mining centres such as Southwest China and Scandinavia. On the other side, according to an estimate provided by the CCAF in September 2020, the percentage is probably closer to 39. However, even if the lower amount is right, it is still roughly twice as much as the U.S. grid, suggesting that looking at energy usage alone is hardly a credible way to evaluate Bitcoin's contribution to carbon emissions.

Bitcoin Can Use Energy That Other Industries Can’t

Bitcoin Can Use Energy That Other Industries Can’t The fact that Bitcoin may be mined in any location is another important feature that sets Bitcoin's energy usage apart from that of the vast majority of other enterprises. Miners of Bitcoin can employ power sources that are unreachable for most other applications since this constraint does not apply to the cryptocurrency. Virtually all of the world's energy consumption must be generated within a reasonable distance of its final consumers.

Hydro is the best-known example of this kind of resource. During the rainy season in Sichuan and Yunnan every year, tremendous amounts of hydropower that might have been used instead goes to waste. The production capacity in these locations much exceeds the need in the immediate area, and the state of battery technology is not nearly as advanced as it needs to be for it to be profitable to store and transmit energy from these rural regions to the metropolitan centers that are in need of it. As a result, it is not a surprise that these provinces are the heartlands of mining in China, accounting for roughly 10% of worldwide Bitcoin mining during the dry season and 50% of global Bitcoin mining during the rainy season.

Natural gas that has been burned off is another potentially fruitful option for carbon-neutral mining. The modern method of oil extraction results in the emission of a sizeable quantity of natural gas as a waste product. This gas emits energy that is harmful to the environment but is never used to power anything. The vast majority of conventional applications have not been able to successfully exploit that energy for its full potential in the past since it is restricted to the location of distant oil mines. But Bitcoin miners all across the world, from North Dakota to Siberia, have jumped at the chance to capitalize on what would otherwise be a squandered resource. Some businesses are even looking at more ways to cut emissions by burning the gas in a more managed fashion. Naturally, this is still a minor player in today's Bitcoin mining arena; however, some rough calculations suggest that there is enough flared natural gas in the United States and Canada alone to run the entire Bitcoin network. This is despite the fact that this aspect of Bitcoin mining is still relatively new.

To be true, monetizing surplus natural gas with Bitcoin still results in emissions. Furthermore, some people have suggested that the practice even functions as a subsidy to the fossil fuel sector by encouraging energy corporations to spend more in oil production than they otherwise could. However, the revenue from Bitcoin miners is negligible compared to the demand from other businesses that depend on fossil fuels, and this external need is not going away any time soon. Considering that oil is now being extracted and will continue to be done so for the foreseeable future, making use of a natural byproduct of the process and maybe even lessening the environmental effect of the process is a beneficial development overall.

It's interesting to note that the business of aluminum smelting provides a startling similarity in this regard. Since producing usable aluminum from natural bauxite ore is a very energy-intensive process, and since the costs of shipping aluminum aren't always prohibitive, several countries with an abundance of energy have constructed smelters to make use of their extra resources. Countries like Iceland, Sichuan, and Yunnan, which have the ability to produce more energy than can be consumed locally, became net energy exporters through the production of aluminum. Today, the same conditions that encouraged those countries to invest in smelting have made those locations prime options for mining Bitcoin. There are also a few old aluminum smelters that have been converted into Bitcoin miners, such as the hydro Alcoa factory that is located in Massena, New York. These facilities are located in the United States.

Mining Bitcoin Consumes a lot More Energy Than Using It

One part of the equation is the method through which energy is generated. But there's another area where people often get things wrong, and that's when it comes to how Bitcoin really uses energy and how its energy needs are expected to vary over time.

Although journalists and academics have a lot of discussion about Bitcoin's high "per-transaction energy cost," this statistic is not accurate. The process of mining Bitcoin accounts for the overwhelming bulk of the cryptocurrency's total energy usage. After coins have been distributed, the amount of energy necessary to validate transactions is very low. Since this is the case, it does not make sense to simply look at Bitcoin's total energy draw to date and divide it by the number of transactions; the majority of that energy was required to mine Bitcoins, not to enable transactions. And this brings us to the last significant misunderstanding, which is the idea that the energy costs connected with mining Bitcoin will continue to increase at an exponential rate.

Runaway Growth Is Unlikely

Since Bitcoin's energy footprint has expanded rapidly, some people have the misconception that it will someday take control of whole energy networks. This was the premise of a widely publicized research from 2018 that was recently highlighted in an article published by the New York Times. The study made the startling assertion that Bitcoin might cause a two-degree Celsius increase in global temperature. However, there are many reasons to assume this will not occur.

To begin, Bitcoin's energy mix is becoming less dependent on carbon every year, which is a trend that is becoming more widespread across many different businesses. In the United States, publicly listed mining companies with an increased emphasis on environmental, social, and governance concerns have been gaining market share. Meanwhile, China has just outlawed coal-based mining in Inner Mongolia, which is one of the major remaining coal-heavy areas. At the same time, various groups within the mining sector have created projects like the Crypto Climate Accord to advocate for and commit to decreasing Bitcoin's carbon impact. The Paris Climate Agreement inspired these activities. Of course, Bitcoin might be a significant incentive for miners to develop various renewable technologies as they get more efficient and, as a result, more feasible for mining. This is because renewable solutions like as solar are examples.

In addition, it is very improbable that miners will be able to grow their mining operations at the same rates for an endless period of time. The Bitcoin protocol subsidizes mining, but there are restrictions on the increase of those subsidies incorporated into the system. Miners are compensated today via a combination of tiny transaction fees for the transactions they verify while mining (which account for around 10% of miner income) and whatever profit margins they can get when they sell the bitcoins that they have mined.

However, the protocol is designed to half the issuance-driven component of miner income every four years. This means that unless the price of Bitcoin doubles every four years in perpetuity (which, according to economics, is very impossible for any currency), that portion of miner revenue will ultimately decay to zero. And with regard to transaction fees, the expansion potential of this particular income stream is limited due to Bitcoin's fundamental restrictions on the amount of transactions it can execute (less than a million per day), as well as users' limited tolerance for paying fees. We may anticipate that some miners will continue to operate anyway, in return for these transaction fees alone — in fact, the network relies on it to remain running — but if profit margins fall, the financial incentive to invest in mining will, naturally, decline. This is because mining requires a lot of specialized equipment and a lot of electricity.

There are, of course, an infinite amount of elements that have the potential to affect Bitcoin's effect on the environment; yet, underlying all of these aspects is a question that is far more difficult to answer with numbers: Is it prudent to invest in Bitcoin? It is essential to have a solid knowledge of the fact that many environmental worries are overblown, based on incorrect assumptions, or stem from a misunderstanding of how the Bitcoin protocol operates.

This implies that when we question, "Is Bitcoin worth its effect on the environment?" the real negative impact that we're discussing is probably a lot less scary than you would think it would be. However, there is no getting around that Bitcoin, just like practically anything else that contributes value to our society, uses up resources. It is up to the cryptocurrency community, just as it is for every other enterprise that relies on the consumption of energy, to recognize and address these environmental issues, to strive in good faith to lower Bitcoin's carbon footprint, and eventually to show that the social value that Bitcoin delivers is worth the resources that are required to maintain it.

That's all for today, see ya tomorrow

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