Bitcoin’s energy expenditure has faced increasing criticism in recent years. Bitcoin uses more energy than most countries. At last count, bitcoin’s energy expenditure would place it around #50 on the list of energy consuming countries.
Is that a problem? Bitcoin evangelist and engineer Hass McCook set out to answer that question in a series of blog posts called, “The Cost & Sustainability of Bitcoin.” In those blog posts, McCook analyzed whether or not bitcoin could keep running – or if it’s economic and environmental costs would outweigh its benefits.
The 10-part series was published online throughout August and September 2018, with McCook taking a comprehensive look at bitcoin’s economic and environmental costs.
Over the series of posts, McCook looks at the economics of bitcoin, perfect competition, managerial economics, economic inputs and drivers on the bitcoin network, calculating the cost of bitcoin, and gold versus bitcoin.
Bitcoin Mining Technology Has Changed Significantly Over the Past 3 Years
McCook collected all data used in his project on July 29, 2019. In the first post, McCook compares bitcoin mining data from July 2018 to bitcoin mining data in January 2015. Here’s how the two periods compare:
- January 2015: $0.65
- July 2018: $0.037
- Change: -94%
- January 2015: 0.89
- July 2018: 0.098
- Change: -89%
Network Hash Rate
- January 2015: 295.4
- July 2018: 4258.7
- Change: 14317%
- January 2015: $200
- July 2018: $8,200
- Change: 4000%
McCook adds that the estimated average cost to mine one bitcoin is about $6,450, using the bottom-up estimate method. Realistically, the average cost of mining is between $5400 and $7500 per bitcoin for most miners.
When McCook ran these numbers again in mid-August, he found that his model revealed a surprising pattern: the cost to mine bitcoin, according to McCook’s model, was $6200. That was the exact price on the day on which McCook ran the calculations:
“Running the model again on 11/8/2018, using the exact same assumptions and methodology yielded an average mining cost of $6200 — which happened to be the market price at the time. Cost to mine has decreased due to the launch of the Bitmain Antminer S9j last week. A second confirmation of our rough estimate’s assumptions.”
Bitcoin Doesn’t Meet the Definition of a Perfectly Competitive Market – At Least Not Yet
Bitcoin doesn’t meet the definition of a perfectly competitive marketplace. Economists identify nine conditions that define a perfectly competitive market, including:
- Homogeneous products
- Guaranteed property rights
- Non-increasing returns to scale
- Zero transaction costs
- Perfect factor mobility
- No barriers to entry or exit
- Many buyers and sellers
- Perfect information
- No externalities
McCook acknowledges that bitcoin is built on economic competition. However, the bitcoin mining market does not meet all of the above conditions, which means that the bitcoin mining market isn’t in a state of pure competition:
“When compared with real world data, the Bitcoin mining market (BMM) does not meet all aforementioned conditions of perfect competition, due to a relatively low number of ecosystem participants, currently resulting in wealth and information asymmetry. However, the BMM is trending towards becoming perfectly competitive as the wider Bitcoin macroeconomy grows.”
McCook believes that the bitcoin mining market currently meets six criteria of a perfectly competitive market, including guaranteed property rights, homogeneous products (due to the open-source, encrypted, and distributed ledger), near-zero transaction costs (limited transaction and storage costs on bitcoin), mobile factors of production (labor, equipment, and capital), and non-increasing returns to scale (as a miner approaches 50% of network hash rate, it starts experiencing non-increasing returns to scale).
Over Time, Bitcoin Will Enter a State of Near-Perfect Competition
Over time, McCook believes that bitcoin will become increasingly competitive. As more people join the bitcoin network, bitcoin will meet the market conditions above to create perfect competition. Bitcoin will also be closer to a perfect state of competition when all of the bitcoins have been mined:
“Since the future appears full of opportunities for the digital macroeconomy, one should expect digital microeconomies to become more perfectly competitive as time passes. Should long amounts of time, say, 50 years pass, when all bitcoins have effectively been mined, and the ecosystem is still healthy and has entered the redistribution stage, microeconomies such as the bitcoin mining market will start to resemble the textbook examples of perfect competition.”
At this point, miners will vertically integrate backwards by acquiring data centers, chip fabricators, research and development teams, and renewable power plants. Miners will also integrate forwards by acquiring exchanges, brokers, and other places to sell what they have mined. They can horizontally integrate as well by buying entities that enrich the value of their commodity – like wallet hardware and other product manufacturers or financial services companies.
During this state of near-perfect competition, bitcoin will be dominated by a few major figures:
“80% of the market will be controlled by the 20% of the largest and most integrated market participants, with the other 80% providing the niche and evolving needs of the market. As time goes on, the makeup of the microeconomy will evolve until its extinction and replacement.”
New Mining Technology Drives a State of Pure Competition
Next, McCook brings up the fact that Bitmain is the world’s largest crypto mining hardware manufacturer, and that they also administer 40.2% of hash power on the bitcoin network between AntPool and BTC.com.
According to McCook, this shows the beginnings of chip fabricators dominating the bitcoin market, which will lead us towards a better state of pure competition:
“Due to the laws of perfect competition discussed earlier, it can be assumed that only the most profitable miners are switched on at any given time, and that when a new generation of mining equipment is released, equilibrium is reached very quickly where all miners are operating at a similar cost basis.”
What’s the Total Environmental Impact of Manufacturing One Bitcoin ASIC?
Next, McCook discusses the environmental impact of bitcoin mining, including how much energy it takes to create and recycle a bitcoin miner. Here’s the data he found from various aspects of the manufacturing process:
- Semiconductors: 252.5 kWh of total energy (including direct fossil, electricity, and total energy)
- Semiconductor Manufacturing Equipment: 138.3 kWh
- Passive Components: 40.6 kWh
- PCB: 15.1 kWh
- Bulk Materials: 213.9 kWh
- Silicon Wafers: 38.1 kWh
- Assembly: 61.0 kWh
- Transport: 97.4 kWh
- Packaging: 38.1 kWh
- Total Energy Required to Manufacture an ASIC: 895 kWh
Keep in mind that these statistics exclusively show the cost of producing an ASIC. It doesn’t consider the cost of running or mining on that ASIC, something that could be defined under “operational expenditure” or OPEX. Here’s how McCook describes that:
“Environmental Impact from operations is effectively pure energy use. If miners are using cheap hydroelectricity to mine, emissions are insignificant. If miners are using dirty coal with no carbon capture, environmental impact is much higher.
It is assumed that the average miner will use power that emits a weighted average value of CO2 based on the world’s average energy mix — which is, 600g of CO2e/kWh as per Part VI of this series.”
In other words, the environmental impact of bitcoin mining itself is virtually nothing for some miners – including miners that situate themselves near hydroelectric dams – but may be higher for other miners – like miners using non-renewable resources.
How Do Bitcoins Toxins and Chemicals Compare to Gold Mining?
In a comprehensive post in part 8, McCook analyzed the toxins produced during the bitcoin mining process, the ASIC manufacturing process, and other stages of the creation of the bitcoin mining ecosystem.
Next, McCook uses that data to compare bitcoin mining to gold. Does bitcoin generate significantly more toxins and environmental waste than gold?
You can view the full statistical analysis of bitcoin versus gold here. McCook looks at gold mining data from 2014 and 2017 to calculate CO2 emissions and other environmental costs.
“From our study, it is clear that Bitcoin uses a substantial amount of energy — now closing in on the entire Gold industry, and due to its reliance on the electrical grid, CO2 emissions are high. As the electric grid moves towards renewable energy sources, Bitcoin’s figures for CO2 emissions will continue to improve, however there will be little improvement in the gold mining industry.”
In other words, bitcoin’s efficiency will continue to improve over time, while gold’s efficiency isn’t likely to improve significantly over the same time period. Nevertheless, the total energy expenditure of the bitcoin network will continue growing to a point where it’s higher than gold:
“That said, Bitcoin’s energy use will continue to grow in line with the Network’s computing power growth, and will most likely eclipse the Gold Industry within this decade.”
McCook also added something interesting: we spend more energy making bitcoin hardware than we do making gold mining equipment:
“Another interesting statistic is that more energy goes into building Bitcoin hardware than goes to producing the world’s gold mining equipment. But since a large part of ASIC manufacture is tied to the electrical grid, Bitcoin’s emissions proportional to its energy use will reduce.”
Conclusion: Is Bitcoin Sustainable?
By the end of McCook’s 10 part blog post and video series, he seeks to answer a simple question: is bitcoin sustainable? Can we continue mining bitcoin for 5, 10, or 20 years into the future? Will bitcoin eventually be the world’s largest energy consumer?
“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. 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.”
McCook refutes the idea that bitcoin is “an environmental disaster” as claimed by certain people. He claims that bitcoin is “dramatically less harmful to the environment than the gold mining industry.”
McCook does, however, admit that energy costs per bitcoin transaction are unruly, “especially when volume of transactions (about 7 per second) is considered in the context of the total power being used by the network.”
This is a crucial point: we’re spending a huge amount of money and energy running the bitcoin network, and in the end, we’ve created a network that can only process 7 transactions per second.
That’s why McCook sees a future in the controversial Lightning Network scaling upgrade for BTC. McCook claims that Lightning Network will reduce the cost per transaction significantly, allowing bitcoin transactions to take place off-chain.
McCook also acknowledges that bitcoin will become more efficient over time. As bitcoin mining giants grow, and as chipmakers grow, they’ll become dominant spaces in the marketplace. They will horizontally and vertically integrate their business. A state of near-perfect competition, meanwhile, will prevent these giants from forming a monopoly.
Ultimately, the bitcoin network’s energy consumption is high. That part cannot be denied. However, based on McCook’s analysis, the future looks bright for bitcoin.