At the time of writing, the price of a single Bitcoin is £24,208, having dropped more than £20k in value and counting from its all-time peak price of £44,865/BTC which occurred earlier this March. Early 2021 saw progressively higher prices in rapid succession; each month seeing the Bitcoin price break all-time high records, peaking at £29,400/BTC in January and £41,452/BTC in February, and £43,021 in March. Simultaneously, the University of Cambridge’s Bitcoin Electricity Consumption Index estimated annualised electricity demand of the network peaked at a whopping 144 TWh in the same period. The present plummeting of the price of Bitcoin has plunged cryptocurrency into what long-term investors fear as a bear market and caused a slight dip in the estimated annualised electricity demand to 121 TWh, mainly attributable to strong developments in China’s regulatory battle with Bitcoin mining occurring last week. And yet such volatile behaviour appears to be the norm in the erratic world of cryptocurrencies, with the vision of Bitcoin as a state-less, peer-to-peer transaction mechanism instead superseded by a speculative and energy-exhaustive digital asset, seemingly used for no more than the private pursuit of wealth creation.
To better understand the nuance of Bitcoin arguments an appreciation for the concept of security derived from proof of computational work at the heart of blockchain technology’s protocol is needed. As outlined in the whitepaper, after a fixed number of computational hashes (energy-intensive mathematical hash functions) on the bitcoin network are solved, the number of bitcoins which are afforded to the lucky miner is halved. With the network mining algorithm set with the target of generating a new block every 10 minutes, the difficulty of solving another hash is automatically adjusted, requiring additional computational power to mine new blocks. This ultimately encourages exhaustive energy use, with the added incentive to develop singular purpose mining hardware in our market-based economies. However, in a resource constrained world supposedly set on net-zero ambitions, one may argue that the resulting drain on key rare earth materials and consequent increases in price of crucial semiconductor devices only prevents the proliferation of low-carbon technologies.
What is more, it is becoming increasingly clear how the environmental costs of Bitcoin’s blockchain technology are being socialised for an increasingly concentrated group of large holders commonly referred to as ‘whales’- investors who continue to own most of the digital asset. In fact, about 2% of the anonymous ownership accounts that can be tracked on the cryptocurrency’s blockchain control 95% of the digital asset. In addition, since Bitcoin’s whitepaper highlights the requirement for total transparency ensuring anyone on the network can see their entire transaction history, crypto-currency ‘mixing’ services have prevailed, ensuring the ability to obfuscate your crypto-wallet’s address in the blockchain. A major study released last May found that the value of the amount of Bitcoin being transferred between darknet entities and crypto mixers saw a ‘staggering spike’ compared to Q1 of the previous year, indicative of the growing utility of bitcoin for illicit practice.
Despite these significant environmental and social costs, the Bitcoin Clean Energy Initiative (BCEI) released last month has received public support from high profile figures such as Jack Dorsey and Elon Musk. The BCEI whitepaper asserts that the cryptocurrency could instead accelerate the energy transition, claiming the Bitcoin network is capable of being leveraged as a unique buyer of clean energy. This instead posits the bitcoin mining apparatus as a flexible and interruptible load, one which can reduce grid congestion through quickly reducing electricity demand within a variable response time. This interesting concept may also function to drive down costs associated with operating battery storage and solar farms: if the energy system is coupled with mining hardware, the system could assess whether it is more profitable to store energy in the battery or to mine bitcoin based on trailing profitability levels.
The immense and growing electricity consumption of Bitcoin deeply implicates it in the energy transition, with competing pathways for the digital currency being offered by a variety of powerful entrenched actors. However, with emissions already rebounding from 2020’s pandemic supply and demand shocks and last week’s IEA net-zero 2050 roadmap further reiterating the immense emissions reduction potential from behaviour change, policymakers should deeply question the rationality of remaining complicit regarding the regulation of future energy-intensive, proof-of-work blockchain technologies.