Debate continues to rage around the world about the energy intensity of bitcoin mining and its impact on the environment.
In December 2021, U.S. Senator Elizabeth Warren expressed the view that the energy consumption of digital gold mining was “comparable to that of Denmark, Chile, Argentina and Washington State. In early 2022, she requested environmental impact data from six mining companies.
In June, the Bank of Sweden called for a ban on bitcoin and other Proof-of-Work (PoW) mining cryptocurrencies because of the environmental impact. According to a report by the financial institution, the energy consumption of this method of mining is equal to that of 200,000 households.
It is possible that after the activation of The Merge in the Ethereum network, the environmental debate will erupt with renewed force – bitcoin, which remains the largest PoW-cryptocurrency, will be criticized even more.
How big is digital gold’s energy consumption globally? What will it be like in a few decades if the price of the first cryptocurrency rises to $2 million?
Armed with analysis from Arcane Research and the Cambridge Center for Alternative Finance (CCAF), we found out bitcoin’s share of global energy consumption and its long-term growth prospects.
- There is an ongoing global debate about the impact of mining on the environment.
- The energy efficiency of cryptocurrency mining is increasing over time, and the share of green energy in the mining industry is also increasing.
- Contrary to what critics of mining think, bitcoin’s energy consumption on a global scale is not high at all. However, after a few decades, the situation could change significantly.
Between Kazakhstan and Pakistan
The CCAF website provides an entertaining comparison designed to give an idea of the “voraciousness” of the bitcoin network.
For example, the energy consumption of the first cryptocurrency network is compared with that of gold mining.
The site allows you to compare bitcoin’s energy consumption to different industries and segments – like all refrigerators and televisions in the U.S. or global cement production.
In terms of energy consumption bitcoin network is comparable to such countries as the Philippines, Kazakhstan, Pakistan and the Netherlands.
A figure of 100 TWh may seem impressive. However, on a global scale, it is not that large – less than 1% of global consumption.
Another example: the energy generated by flaring gas would be enough to power seven networks comparable to bitcoin.
According to the Bitcoin Mining Council (BMC), the energy efficiency of mining is improving and the share of green energy in the digital gold mining industry is increasing. However, there are many critics of BMC who question the objectivity of such studies.
How much will the bitcoin network consume in the future?
In the long term, the price of bitcoin tends to rise. This is due to tightly constrained supply, growing acceptance of cryptocurrencies in the world and a systematic decline in issuance rates due to the halving of the reward per block.
It can be assumed that as the price of the first cryptocurrency grows, the mining industry will also grow, increasing capacity. This means an increase in network power consumption, even despite more efficient and green technologies.
Arcane Research researcher Jaran Mellerud modeled bitcoin’s energy consumption through 2040 at various asset prices. He listed the most significant components of his model:
- bitcoin price;
- transaction fees;
- the percentage of income that goes to cover the cost of electricity;
- the average price of electricity.
Mellerud derived the following formula:
Annual consumption of the bitcoin network = bitcoin price * (rewards per block mined + average transaction fee per block) * number of blocks mined per year * percentage of income spent on electricity / average price of electricity in the mining industry
He said the market value of a cryptocurrency is the most important factor determining its network’s future consumption.
“The price of bitcoin multiplied by the reward per block determines the industry-wide income of miners. It covers costs and provides profits. The rise in the price of cryptocurrency increases the industry-wide income of miners and their profits in the short term,” said the researcher.
He stressed that bitcoin mining is a “hypercompetitive” industry with low entry barriers. Consequently, potentially high profitability could attract many players to the segment in the future, increasing energy consumption.
According to Mellerud, most miners pay almost no attention to transaction fee revenues – their share of total revenues is still extremely low.
“So it may surprise you that the level of revenue from commissions is critical to future energy consumption,” the expert added.
Bitcoin miners mine 52,560 blocks per year. That said, according to Coin Metrics, historically the average transaction fee per block is 0.4 BTC.
“Commissions may seem like a small component of the award, but their importance will gradually increase in the future because of halving. The latter occur every four years, halving the reward per block,” Mellerud stated.
His model assumes that the figure of 0.4 BTC will remain until 2040. According to the researcher’s calculations, the share of commissions in miners’ earnings will reach 67% by that time. Halving every four years will reduce the reward per block to 0.195 BTC by 2040.
“Bitcoin miners will spend a certain percentage of their income on electricity. And the higher that percentage, the greater the energy consumption in the industry will be,” the researcher noted.
Mellerud reminded us that costs in any industry can be divided into two major components:
- CAPEX (capital expenditures);
- OPEX (operating costs).
For bitcoin miners, CAPEX includes investments in equipment and electrical infrastructure. OPEX are primarily electricity costs.
Taking into account the total energy consumption of the first cryptocurrency’s network and an average price of $50 per MWh, the researcher concluded that bitcoin miners spend about 50% of their income on electricity.
“I’m confident that miners’ share of electricity costs will increase from current levels as the segment matures,” Mellerud shared a prediction. – Competitive forces are likely to reduce profits over the long term. The exception will be miners with access to very cheap electricity.”
The researcher suggested that the CAPEX component will gradually decline as innovation in ASIC device manufacturing slows.
Given the above trends, the annual increase in the share of miners’ electricity costs will be 2%. By 2040, the figure will reach 71%.
“I estimate the average cost of electricity in the mining industry to be $50 per MWh. I believe the figure will remain at that level for the foreseeable future. There is already high inflation around the world, which is likely to continue. However, the ultra-competitive nature of mining will motivate market participants to search for cheap energy sources over time,” the researcher shared his opinion.
Mellerud is confident that miners will locate in many different parts of the world. Some market participants are monetizing the thermal power of their devices, which will also “offset the impact of inflation.”
“Paying attention to any news headlines about bitcoin mining would have you believe that the industry is a major global energy consumer,” the researcher said.
However, the share of the first cryptocurrency network in the global energy consumption structure is negligible – about 0.05%. The figure, according to Mellerud, is “on the verge of rounding error.
On the other hand, historically, energy consumption has always increased along with the price. Consequently, the bitcoin rally over the next couple of decades could really make the grid a “global consumer.”
The researcher modeled three scenarios:
- bullish: cryptocurrency price rises linearly to $2 million by 2040;
- Neutral: Bitcoin reaches $500,000 by 2040;
- bearish: $100,000 by 2040.
The graph below shows that the future energy consumption of the bitcoin network is highly dependent on the cryptocurrency’s price.
The researcher estimates that when the bitcoin network reaches $2 million by 2040, it will consume 894 TW⋅h annually – about 10 times its current level.
“That’s 0.36% of the estimated global energy consumption in 2040, which implies a significant increase over the current 0.05%,” Mellerud noted.
The neutral scenario assumes annual energy consumption of 223 TWh, just over twice the current level.
The researcher also offered a scenario analysis that took into account not only price, but also transaction fees.
“In the table above, we see that with a bitcoin price of $2 million in 2040, transaction fees have a huge impact on energy consumption. For every additional 0.1 BTC of commissions per block, network energy consumption increases by 150 TW⋅h – a value almost twice the current figure,” the expert explained.
Another interesting finding is that with the historical average transaction fees per block (0.4 BTC) and reaching $200,000 by 2040, energy consumption will remain roughly at current levels. This, according to the researcher, is the result of halvings that cut low-performing players off from the market.
As mentioned above, if the price of bitcoin reaches the $2 million mark by 2040, its share in global energy consumption will be 0.36%. According to Mellerud, the figure, while high compared to the current one, is still far below the “apocalyptic estimates” made by some critics of digital gold.
“With this consumption, bitcoin mining would be considered a rather energy-intensive industry. But it would still be considerably inferior to industries like cement production, which consumes 2 percent of the world’s energy,” the researcher said.
He is also convinced that regular halving will limit the growth of the network’s energy consumption, even though the market value of the cryptocurrency gradually increases.
“The reward is halved every four years. To compensate for this effect, the price of the cryptocurrency must double during each of these periods. Consequently, for the energy consumption of the network to exceed the current level, the market value of bitcoin must be in the neighborhood of $650,000 by 2040,” Mellerud explained.
The energy consumption of the bitcoin network depends on various factors, and it is quite difficult to predict it for the future. However, we can conclude that digital gold will become a really significant energy consumer if its price reaches several million dollars.
An increase in the market value of bitcoin stimulates mining activity and, consequently, increases energy consumption. But regular halving has the opposite effect: in order to increase aggregate electricity costs in the long run, the cryptocurrency’s price must grow extremely fast.
Increasing the share of transaction fees could somewhat mitigate the effects of halving on digital gold miners. But this is only possible if bitcoin is actively used as a means of payment.
The price of the first cryptocurrency is predominantly dependent on market demand for it as a store of value. In turn, the amount of commission is determined by the use of bitcoin as a medium of exchange.
The overall energy consumption of the network will only increase if the first cryptocurrency continues to successfully perform the above-mentioned basic functions of money in the coming decades.
A rate of 0.36% at $2 million in 2040 is not that high, given the usefulness and potential use of bitcoin by millions of market participants around the world.