Letter #29: Bitcoin Mining is Going Green

Dear Readers,

Bitcoin has seen near exponential growth in the twelve years since it was created. What started out as a niche interest of cypherpunks and computer programmers has turned into a global phenomenon with a wildly diverse group of users, from citizens in third-world countries like El Salvador to mainstay entities like massive banks and corporations. Due to the design of the technology on which Bitcoin is built, the massive increase in its use has also led to a commensurate increase in the amount of energy used to power the Bitcoin network. In the simplest of terms, the relationship of Bitcoin’s usage and energy growth can be visualized like this:

Use goes up → Price goes up → Mining goes up → Energy footprint goes up

The above relationship has played out in real time throughout Bitcoin’s life cycle. The network started out small, with only a handful of users. As more users joined the network, the demand to buy and use Bitcoin increased, which drove the price higher. As the price increased, more people were incentivized to mine Bitcoin, which allows them to earn Bitcoin. And as more people joined their computers to the network to mine Bitcoin, more energy was used to power their computers.

The Bitcoin network these days uses a lot of energy, so much so that it’s common to hear critics and media outlets compare Bitcoin’s energy footprint to that of small countries. This has recently clashed rather significantly with various ESG (i.e., Environmental, Social, and Governance) initiatives being put in place by companies and governments around the world:

• Elon Musk indicated in May that Tesla would no longer accept Bitcoin as payment for its vehicles due to concerns about the environmental impact of Bitcoin mining.

• China outright banned cryptocurrency mining within its borders in June. As a result, miners of all sizes have fled the country in search of more accommodative locales in which to re-establish their businesses.

While the above are examples of rather drastic actions taken against Bitcoin’s energy usage, they illustrate well the concern that many entities have regarding Bitcoin’s environmental impact. However, truly understanding the level of that impact and, more importantly, the fact that Bitcoin’s benefits are worth that impact, requires us to understand at a deeper level the part of Bitcoin’s technology driving its energy usage.