Revisiting Bitcoin’s Energy ‘Problem’

Insights, news and analysis for the professional investor

March 20, 2022

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Prices as of 3/20/22 @ 3:07 p.m. UTC

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Welcome to Crypto Long & Short.

Last week marked my first anniversary with CoinDesk, so naturally I revisited some of my earlier work. My earliest was a report titled "Does Bitcoin Have an Energy Problem?" which was published on April 22, 2021 (side note: the price of bitcoin was over $50,000 that day...). This upcoming week is Mining Week, a CoinDesk Layer 2 effort centered around educating our readers about crypto mining through a barrage of feature articles, explainers, opinion pieces and other content.

In the spirit of that (plus the news out of the EU parliament early last week), let's revisit my debut report for this week's newsletter (now featuring better writing).

That (and maybe more) below...

– George Kaloudis, research analyst

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The Briefing

I get really animated when discussing Bitcoin's energy use. And by "Bitcoin's energy use," I mean the amount of energy bitcoin mining uses. I tend to say Bitcoin's energy use isn't a problem and that we should instead focus on Bitcoin's emissions. [Note: we capitalize the blockchain (Bitcoin) and use lowercase or trading symbols (bitcoin/BTC) for the asset.]

Before diving into any details, it's important to make clear what bitcoin (BTC) mining is and why it needs to use a lot of energy. Mining is the mechanism that sustains the financial infrastructure of the Bitcoin network and it is energy intensive by design to provide ironclad security.

The comparison game

In a casual setting, my favorite way to showcase that Bitcoin's energy use "doesn't matter" is to append Bitcoin's energy use to the U.S.'s energy consumption and ask if it looks like Bitcoin is using too much energy (see below).

Read More: How Bitcoin Mining Works

Using this graphic, it looks like the U.S. has an energy problem and, given China consumes 79% more energy than the U.S., China has an even bigger energy problem. Bitcoin only uses an estimated 134 TWh of energy per year, a scant 1.9% and 3.5% that China and the U.S. consume annually. You can imagine the path the rest of the conversation takes.

I included this graphic to illustrate that the comparison game is usually a waste of time. Bitcoiners often do this unproductively, comparing bitcoin mining energy consumption to Christmas light energy consumption or the like, and leaving the argument at that (Christmas lights do use a lot of energy, however). I even did it in a report I published last April comparing it to video games.

I probably committed a cardinal sin in that report by trying to convince the reader that Bitcoin's energy use was "worth it" because Bitcoin is a "global, trustless, permissionless payment settlement network and a digital, aspirational store of value." Let's save the morality lecture for another time and instead assume, for sake of argument, that Bitcoin is worth using energy.

Why does Bitcoin need to use energy? Read the full story.

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Takeaways

The Federal Reserve raised the benchmark interest rate by 25 basis points on March 16.

TAKEAWAY: In a widely telegraphed move, the FOMC of the Fed said that it will lift the fed funds rate by a quarter-percentage point to a range of 25 - 50 bps from the current 0 - 25 bps. The prospect of higher rates has weighed on bitcoin's price in the past, but this time around the price initially reacted positively to the news.

A proposal limiting proof-of-work was rejected in a European Union parliament committee vote.

TAKEAWAY: A proposed rule that could have, in effect, banned the popular cryptocurrency bitcoin across the EU was quashed on March 14. The vote on the provision was a part of the Markets in Crypto Assets (MiCA) framework, the EU's sweeping crypto regulations package which promises to make it easier for crypto firms to expand throughout the EU by facilitating a "passportable" license that would be valid between countries.

Another crackdown in Kazakhstan forced another 106 crypto mines to close on March 15.

TAKEAWAY: Following investigations by the country's financial monitoring agency, 55 mines closed voluntarily and 51 were forcibly shut down. The 51 are suspected of tax and customs evasion and placing equipment in special economic zones without permission, according to the statement. There were notable Kazakh political and business figures involved in the investigations. Kazakhstan has become an important hub for crypto miners since China banned mining last year.

Ethereum application and infrastructure builder ConsenSys closed a funding round that valued the company at $7 billion.

TAKEAWAY: The $450 million Series D round more than doubles ConsenSys' valuation based on its previous $200 million fundraise in November 2021. The firm's increased valuation coincides with its Ethereum wxallet and browser extension, MetaMask, reaching over 30 million monthly active users, while Infura, a widely used infrastructure tool created by ConsenSys, now boasts 430,000 developers.

Meta's CEO Mark Zuckerberg said that NFTs are coming to Instagram soon.

TAKEAWAY: Zuckerberg said at a panel at Austin's South by Southwest Festival that NFTs were coming to Instagram in the "near term" and that Instagram users would be able to mint their own NFTs within the app. His comments align with Meta's ambitions to support NFTs within its own metaverse.