The Cost & Sustainability of Bitcoin — Part X — Discussion & Conclusion
Although this part of the series is titled “Discussion”, there are an infinite amount of sub-discussions that can come out of this research. Enough to maintain a very active YouTube channel, even. But let’s try to stick to a few points about overall environmental impact in the context of our planet and global economy in general.
There is no doubt that the Bitcoin Network uses large amounts of energy, and yes, as the Bank of International Settlements so smartly observed, it uses more power than the country of Ireland[1]. However, as alluded to in Part I of this series, this energy is necessarily required to effectively turn electricity or power into “money”. While emissions are high, this is due to the composition of the world’s energy grid, and over time, emissions will continue to reduce proportionately to the amount of power that has been used.
Some critics have labelled Bitcoin as an environmental disaster[1], but it’s been demonstrated that Bitcoin is dramatically less harmful to the environment than the gold mining industry when other key environmental indicators are assessed. Others have made the very fair criticism that ENERGY COSTS PER TRANSACTION are unruly[2], especially when volume of transactions (about 7 per second[3]) is considered in the context of the total power being used by the network.
As with every single criticism of Bitcoin I’ve read about in the past 5 years however, the criticism is only temporarily fair. Some of these criticisms are made by huge intellects and people whom I greatly admire, so their utter lack of imagination and foresight disappoints me somewhat.
For example, the Lightning Network[4], which allows for effectively unlimited, instant, extremely low fee transactions, now has over 3500 nodes, 12000 channels, a capacity of over 110 BTC[5], and is growing steadily at a good pace. It may not be unrealistic to expect a Bitcoin network that can process several hundred near-feeless transactions per second by the end of 2019, and potentially several thousand by the end of 2020. This would effectively allow Bitcoin to scale its transactional capacity by several orders of magnitude, all without any additional energy consumption. In fact, energy use per transaction will tend towards zero as more people adopt Bitcoin and transact on its Lightning Network.
Another criticism is that ENERGY USE BY MARKET CAP is unusually high. Throughout this research, we can see that the cost to mine (and hence, the price and market cap) is greatly influenced by price of electricity. Now, you won’t find anyone in the world who is more anti-cap-and-trade than me, but let’s say it existed, and external costs needed to be internalised, you may be looking at a global energy cost of around 30 cents per kWh — mostly due to the skew towards coal and oil. If that was the case, cost to mine a bitcoin today would be $25,000 — resulting in a market cap of almost $450bn, at no change in electricity consumption. This $450bn of HARD MONEY, for only a fraction of a percent of our world’s energy production will be proven by history to be a great value-for-money deal.
But what about Bitcoin’s Growth & Increasing Energy Demand?
As Bitcoin’s market capitalisation grows, let’s say two orders of magnitude to bring it in line with Gold’s $7 trillion-dollar market cap, the Bitcoin mining industry will start to drive innovation in the world’s electrical generation market due to the sheer amount of energy that the network will demand. A very stable price would mean less risk in investment, which will contribute towards a virtuous cycle towards a third, fourth and fifth order of magnitude over the coming centuries. Judging by current profits that mining hardware manufacturers currently make, mining companies may even become large enough to vertically integrate and acquire energy companies, and to remain as competitive Bitcoin miners, the energy will need to be very cheap, which means a high likelihood of migrating to hydroelectricity, and other renewables that get cheaper by the kWh every year.
Lastly, over the course of this series, we have also presented some broad assumptions about the composition of the Bitcoin mining market, and the dynamics at play that affect the cost to mine a coin. As the industry grows by an order of magnitude or two and becomes more stable and competitive, the market price of a bitcoin will start becoming more correlated with the cost to mine, just as is the case for traditional commodity producers.
Over the next few months and years, I’ll be expanding this discussion with regular posts on my YouTube channel.
Thanks for following along on what has been a very long series — I will try to compress all 10 parts down to a single story that is a 20–25 minute read.
References:
[1] Carstens, A., 2018, “Money in the Digital Age: what role for Central Banks?”, Bank for International Settlements
[2] Digiconomist, 2018, “Bitcoin Energy Consumption Index”, https://digiconomist.net/bitcoin-energy-consumption#assumptions (accessed 13 July 2018)
[3] Bitcoin Wiki, 2014, “Maximum Transaction Rate”, http://archive.fo/cEbfv
[4] Lightning.network, 2018, “Lightning Network — Scalable, Instant Bitcoin/Blockchain Transactions”, http://archive.fo/ggPPy
[5] 1ml.com, “Lightning Network Search and Analysis Engine” http://archive.is/0t4gN
