A Closer Look at the Environmental Impact of Bitcoin Mining

01Bitcoin is a Settlement System, not a Payments Aggregatorchevron02Electricity as an Objective Source of Timechevron03Electricity Cost Prevents Counterfeitingchevron04Electricity Use Enables Otherwise Unavailable Monetary Propertieschevron05Value and Wastechevron06Externalitieschevron07Bitcoin + Renewables = Truechevron08Meanwhile, Miners are Actively Reducing Emissions from Oilfieldschevron09It is in Humanity’s Benefit to Consume More Energy, not Lesschevron
  • Bitcoin is a settlement system like FedWire, not a payments aggregator like Visa

  • It uses energy to deliver that function independently of central authorities

  • Global energy production continues to rely on fossil fuels

  • However, cryptocurrency mining is mobile and global — constantly seeking out the cheapest available electricity, often stranded renewables

  • Bitcoin mining has a substantial role, both in the present and the future, in eliminating waste and in load balancing power systems based on intermittent renewable energy

We’re officially back at our favourite time of the market cycle. The time when new cohorts of journalists — clearly annoyed that Bitcoin, no matter how many times it’s been declared dead, still refuses to die — find themselves forced to cover their least favorite and most confusing technology.

And they’re very upset by their findings.

But in life, many things are actually not what they first seem. This is one of those things. In fact, it is not only not what it seems. It is the exact opposite.

I’ll spend the remainder of this article explaining this curious circumstance. It’s a bit of a journey, but a fun and interesting one offering the potential of some real “aha!” moments. It’s not too hard to get to the bottom of this, but it does require a synthesis of knowledge and context that is somewhat rare to observe in the wild, so to speak. I’ll try to collect all these necessities in one single piece — here’s the plan:

First, we need to establish some contextual groundwork. This is a critical step, because lack of clarity on what Bitcoin is and is not, has the potential to muddle an entire subsequent analysis. It’s kinda like looking at a rocket on a launch pad and mistaking it for a skyscraper. You’d consider it ugly, useless and horribly misplaced. In that light it seems stupid. But as soon as you know the thing is meant to fly into space, everything immediately makes a lot more sense.

Next, we need to understand the role of electricity in the Bitcoin settlement system. Electricity comes at a cost, and we therefore need to make sure we understand what Bitcoin gives in return for this expense. Who are the people actually paying for this electricity, and why are they willing to do so? These are important questions.

Then we need to consider that the concept of waste is subjective. While I personally think the energy directed by our society at following and broadcasting the life of the Kardashians is an utter and total waste, others disagree and their choices are none of my business. We have elected to live in a society where people are free to make their own choices, and there are good reasons for that.

I’ll then show you how the concept of Bitcoin as a threat to a renewable future actually has things exactly upside down. Far from being a blocker of a decarbonated future, Bitcoin mining can play an invaluable part as a building block in such a system. It is actually an incredible opportunity for us to increase the share of intermittent renewable generation in our electricity grids, without ruining the economics.

Finally, I’ll make the argument that while reducing our carbon footprint is a good idea, reducing our energy consumption is not. Energy consumption is the key to our prosperity and progression up the Kardashev Scale. It is in our interest to consume more energy not less.

As you might already suspect by now, there’s actually a lot more depth to this issue than the average news story will have led you to believe. And when applied to the overall picture, that depth just might cause a significant shift of perspective. So let’s dig in.

First things first. What is Bitcoin[1] and what is it not?

Bitcoin is a settlement system like FedWire, it is not a payments aggregator like Visa. I constantly see Bitcoin compared to Visa, MasterCard or PayPal, and this is a main source of mathematical atrocities whereby Bitcoin’s overall electricity cost is divided by its transactions and then compared to something it’s not. Energy use per settlement transaction is a nonsensical metric by which to judge Bitcoin’s energy use.

Just like the 800,000 or so daily FedWire transactions are not a good measure of the total amount of daily Dollar (USD) transactions, Bitcoin’s 325,000[2] or so daily transactions are not a good measure of the total amount of daily bitcoin (btc/xbt) transactions. Most bitcoin transactions are not visible. They take place inside the payment aggregation systems of exchanges, on the Lightning network, and yes, even inside of actual aggregators like PayPal, Square, or MasterCard. Only periodically are they settled onto the Bitcoin blockchain as visible transactions.

Solutions like this are referred to as network layering. This is a tried and tested approach to separating casual retail transactions from heavier settlement transactions and it is exactly how we already do things in the fiat monetary and payment systems. In such a system, the base layer, like FedWire (or Bitcoin), only acts as the final arbitrator of settlement transactions, everything else, and that is the vast majority of all transactions, happen in higher payment aggregation layers, which are often entirely different systems.

In other words, Bitcoin is not a competitor to Visa, MasterCard or Paypal. Bitcoin is an independent monetary system that aggregators can make use of.

Presenting Bitcoin’s electricity consumption in terms of its daily number of settlement transactions is a red herring.

Fine, but why is all this electricity needed at all?

As you probably know by now, Bitcoin adds new transactions to its ledger every ten minutes or so. These batches of additions to the transaction record are called blocks and they form an ever-elongating chain containing Bitcoin’s entire transaction history. Network-wide agreement on this single shared transaction history is what allows a decentralised monetary system to exist. Without it, we need a central authority to decide which transactions came in what order.

Electricity enters the picture during the block addition process. You’ll seldom hear it explained like this, but Bitcoin uses electricity for a relatively simple purpose: To prove, based on an objective metric independent of the system itself, in a way that anyone can verify for themselves, that a certain amount of time has passed between a new block and its predecessor. As a fun fact, consider that Bitcoin’s creator never once used the word blockchain. He called it a timechain.

This model of decentralised agreement is so revolutionary within the field of computer science that it has been named after the creator of Bitcoin. It is called Nakamoto Consensus and the technique used to achieve it is called Proof-of-Work. In this process, the electricity does the actual work, and the proof is the presentation of a rare hash function output which could only have been found by repetitive guesswork, proving the input of work.

For those who remember high school physics, work is a time-dependent concept. If work has been done, time must have passed. Via this fundamental relationship, Proof-of-Work enables the Bitcoin network to cooperate on a decentralised clock, which is what enables its otherwise uncoordinated participants to agree on a shared history of transactions.

So long as enough time has passed since the last block, as proven by the input work, a new block can be added to the chain (so long as it doesn’t break any Bitcoin rules). The consideration by all network participants of the chain with the most accumulated work as the correct and agreed-upon chain is a fundamental consensus rule of Bitcoin.

That’s already an incredible breakthrough, but there’s even more to it:

Using Proof-of-Work as a decentralised clock also generates an excellent side-effect. It makes counterfeiting and record tampering prohibitively costly. Writing a fraudulent history is as costly as writing a true one, and so in order to create a dishonest timechain, a malicious actor must expend more energy on the task than the entire honest network combined.

With that as context, another way to think about Bitcoin’s overall electricity use is like this: When you hear phrases like ‘Bitcoin uses as much electricity as Norway’, what this means in practice is that if those pesky conspiring Norgies wanted to get together and mess with Bitcoin’s transaction record, even if they mustered the country’s entire electricity supply, they would stand absolutely no chance of pulling it off.[3]

Now this is actually a bit of an understatement, but for a global, freely available, politically independent monetary system, the ability to resist country-sized attackers is an incredible and obviously necessary feature, not some bug that needs fixing.

Makes you think..

And with that we’re actually at the crux of this discussion. The entire ‘debate’ around Bitcoin’s usage of energy fundamentally rests on whether or not one recognises the need for a politically independent monetary system as a voluntary and freely available alternative to permissioned and often outright weaponised government monies.

If your answer to that is no, then no argument would suffice to convince you that Bitcoin is anything other than a complete waste, whether it consumes one GWh per year or a million. However, in such a case there should also be nothing to worry about: If Bitcoin serves no purpose and is a bubble, then surely no one will be willing to pay its electricity costs over time and it will die, taking its consumption with it.Problem solved, no?

If on the other hand the answer is yes, the story is quite different. Because in return for its electricity consumption, Bitcoin provides a set of unique monetary properties to its users—properties that cannot be replicated by politically dependent monies nor by physical commodity monies.

This is what its users are paying for, and they all think it’s worth the cost.

Consider that:

  1. Bitcoin is permissionless, meaning no one can stop anyone from using it no matter how much political power they wield.

  2. Bitcoin is provably scarce and new coins can only be created at or near market price, meaning that no one can inflate you out of your money holdings, no matter which university they went to.

  3. Once you hold bitcoin, the only way to prevent someone from spending their coins is to purchase more electricity than the entire system combined, for the single purpose of stopping them (talk about waste…), meaning its users have absolute freedom to trade with literally anyone else in the entire world.

  4. Anyone can audit the entire transaction history of the system with a $200 computer, removing the need to trust governments, institutions or anyone else whatsoever when making monetary transactions.

I could go on, but it should be clear at this point that the utility of such a system is enormous, the global market for its services is huge, and the energy required to run it is the necessary cost of achieving these properties.

Next, let’s talk a bit about waste. The overall point of this section should already be clear from the previous one, but for clarity’s sake I’ll spell it out, waste, just like value, is subjective.

Some people value mascara, others value junk food, others value watching the Kardashians, others again value flying to exotic places for their holidays, and yet others value going to stadiums to watch grown men in spandex pretend to fight. I happen to only belong to one of those groups, but it’s a big world out there and who am I to tell you what to do with your life.

But guess what, all the above things require energy. Which, then, shall pass our threshold for waste vs. value? Which ones shall we suggest is morally reprehensible on the basis of its wastefulness?

Nowhere else in our society do we apply similar scrutiny to the moral legitimacy of energy usage. Neither in private consumption nor in the production of goods or services. This is true even though many other global uses of energy are clearly much less ‘necessary’ or ‘morally defensible‘ than Bitcoin. And there is a good reason for this.

Try to take the premise to its necessary consequence. If this is to be an approach to reducing our carbon footprint, where exactly do we draw the line? Who gets to decide? And how long until you find yourself dragged into the streets and put up against the wall for some unspeakable consumption crime?

In fact, perhaps those who feel righteously indignant about [whatever product or service], and consider it another consumerist evil to be morally assaulted, should have a long hard think about the effects of a global deflationary money on mindless credit-driven consumerism and its detrimental effects on the environment.

Makes you think..

At the end of the day, calling Bitcoin wasteful requires one to either: not understand the function of mining as it relates to Bitcoin’s provided properties; not acknowledge the usefulness of Bitcoin at all; or, acknowledge some value, but consider it insufficient to justify the cost. The latter two of which amount to an outright dismissal of the possibility that others might value something differently than yourself, or the belief that your value judgements are somehow more important than theirs.

It is not even possible to argue against any such positions. They are either based on lack of comprehension which must first be rectified, or on fundamental disagreements about individual freedom and liberty. The former will slowly take care of itself as protocol-level knowledge of Bitcoin continues to grow among the population, but the latter is a much deeper issue and something each individual has the responsibility to consider before advocating for the suppression of other people’s freedom or the marginalisation of their voluntary choices.

What on the other hand is quite easy to understand, is why this is such an emotional issue in the first place.

This is where people tend to get hung up. Pretty much everyone agrees that carbon pollution is a serious problem, and the fear of causing significant damage to the ability of our species to sustain itself within the bounds of our planet is a cause for worry in a lot of people. Being a highly transparent system, it is therefore relatively easy to have a surface-level look at Bitcoin, calculate its power consumption, realise that it is significant, and then become fearful of its environmental impact.

The problem with this type of approach however, is that it tends to conflate dirty electricity production with agnostic electricity consumption, while simultaneously and necessarily disregarding any and all utility. From the people applying this approach we’re told Bitcoin generates ungodly amounts of externalities through CO2 emissions. Well, yes and no.

‘Yes’, in that the electricity Bitcoin uses is the same as the electricity that powers everything else in the world, and that production is unfortunately still dominated by fossil fuels, which generate negative externalities.

‘No’, in that, unlike pretty much every other industry, Bitcoin mining is extremely competitive, but even more importantly, mobile, and therefore tends to cluster around the unwanted (read: cheapest) energy sources of the world. These sources happen to be largely composed of stranded or otherwise underutilised renewables, particularly hydro power. And while its use of renewable energy is not by any means exclusive, it is still somewhere between double and quadruple the global residential, commercial and industrial average. So while Bitcoin might use the same amount of electricity as the Netherlands, its comparative carbon footprint would be somewhere between half and a quarter.

The other critical thing to understand is that Bitcoin is as green as an electric car. Nothing about Bitcoin requires emissions. It will take whatever electricity you feed it. If the world goes green, so does Bitcoin.

What detractors are effectively doing then, is dressing our carbon pollution problem up in a Bitcoin costume, shouting profanities at it and beating it with a stick. This is not an effective strategy for reducing our emissions, it is completely unhelpful scapegoating. Barring a reversion to pre-electricity technological eras or otherwise reducing our standard of living, the only strategy that can achieve that end is building out more renewable generation.

Rather than decrying Bitcoin as some archetypal representative of our carbon pollution problem, we really should be paying closer attention here because as it turns out, Bitcoin mining can actually be a critical building block in a carbon-minimised future. And it’s an opportunity we’d be absolutely silly to miss out on.

Anyone who’s done their homework with regards to the problems posed by grids with high penetration of intermittent renewables, such as solar and wind, will be acutely aware of the issues they suffer both from over- and underproduction.

Underproduction and the common necessity of fossil fuel powered generation is something pretty much everyone understands because it represents the standard situation in nearly every place on Earth. In such areas we require a standby capacity of fossil fuel power plants to step in when renewable generation and power consumption happen on different schedules. This is less than ideal and drives up the cost of electricity.

What is less commonly understood though is the problem of overproduction with renewables.

We cannot decide when the wind or clouds show up so we can never match the pattern of wind and solar generation to our power usage. This means that if we are to mainly, or at the very least, significantly rely on such generation we need to build out enough capacity that the lowest level of intermittent renewables production is at or higher than our peak demand. That means that most of the time we’d be producing electricity way in excess of our needs. Unless we can find a buyer for this electricity such a system would simply not be economically viable.

In what is by now the worst kept secret of the industry, Bitcoin mining actually offers an incredible opportunity to optimise renewable-heavy grids. Miners, being supremely mobile and flexible, can act as demand response systems. They can sit right near the renewable resource (even moving with the seasons) in question — avoiding the need to excessively beef up grids — and dynamically consume excess energy whenever more is being produced than the non-mining market needs (meaning prices are low). This allows for immediate monetisation of energy that would otherwise be wasted, driving down overall electricity costs. In other words it can act as a monetary battery.

Conversely, whenever electricity production is low compared to the needs of the non-mining market (meaning prices are high), miners can be contracted to shut down, directing the electricity to other sources of demand (who are also in general willing to pay more). This ensures reliability for critical infrastructure when production is strained or demand is unusually high.

Miners are already performing this task in Texas’ ERCOT power market and more are at the planning stage. One can only wonder if the recent Texan grid strain may have been alleviated if peak power production capacity was higher, a goal which is much more economically feasible in the presence of a large demand response capacity.

A similar dynamic is taking place on the other side of the world, in China. Over the last 20 years, China has built out the largest capacity of hydro electric power generation in the world. Much of this capacity is concentrated in the mountainous southwestern provinces of Sichuan and Yunnan which receive both river runoffs from the vast Tibetan Plateau, and copious, but seasonal rainfalls.

This buildout was heavily fuelled by state subsidies aiming to make China the world’s premiere aluminium smelter. That goal was achieved, and more, leaving some Chinese provinces with vast overcapacities in their hydroelectric generation. Curtailment of hydroelectric power has been particularly bad during the rainy season when dams have flows which can produce at levels multiple times higher than in the dry season.

Miners take advantage of this state of affairs by moving entire mining operations in and out of these provinces in line with the rainy season. During these periods, miners take otherwise wasted energy off the hands of overproducing dams, improving their economics while securing Bitcoin. When the dry season hits and electricity prices rise, they pick up their operations and move them to other provinces where prices are lower (during the dry season, China’s policy of state subsidies to coal power plants often make such sources the cheapest alternative).

Bitcoin’s ability to be mined literally anywhere in the world where there’s an internet connection has spurred the emergence of another fascinating industry subset. Oil producers have realised that mining offers the opportunity to monetise their unwanted dry gas, on site. This avoids flaring, and to a shockingly large degree, even direct venting of methane into the atmosphere, causing a reduction of harmful emissions and lower energy prices.

Dry natural gas, or methane, is around 40 times more potent as a greenhouse gas than CO2. This means that every cubic foot of methane that is combusted into CO2 as opposed to leaking directly into the atmosphere, has a large net negative impact on the greenhouse effect.

What’s important to realise in this context is that even when methane is flared, the combustion is often inefficient due to the effects of wind on the flaring tower. In windy conditions, more than half of the methane can escape directly into the atmosphere, but when the gas is combusted in the controlled environment of engines, little to no methane is released.

Large international oil and gas companies are waking up to this opportunity. A good illustration is last year’s investment into Crusoe Energy by Norwegian energy giant Equinor, famous for their long-term ESG focus, and more recent announcements by Russian major Gazprom Neft that they too are reducing their flaring waste by monetising gas directly through Bitcoin mining.

Every single step change in human development has required more energy put towards technological improvements than its previous phase. Consuming and channeling energy into useful work is the very foundation of modern civilisation. Sure, a horse uses a lot less energy than a car, but no one in their right mind would argue that we abandon the technology of automobiles to reduce our emissions. Cars vastly improve our standard of living and frees up human time for other useful work. The solution is obviously to ensure as many cars as possible are electric, like Bitcoin, and make the generation green.

Our problem as a civilisation isn’t the amount of energy we consume. Consuming lots ofenergy is a good thing and raises us ever further up the Kardashev Scale of technological advancement. Our problem is the manner with which we produce it. This should be glaringly obvious to any economically-oriented thinker.

Decrying Bitcoin for wasting energy is nothing but a subjective value judgement,and it is an opinion I should be very much interested in seeing expressed right to the face of millions of people using Bitcoin as a monetary life raft in their ongoing battles for basic human rights, economic liberty, political freedom and democracy.

The overall point we’re making here is that there is a lot more to this topic than you might have initially thought. Not only is mining by definition not wasteful to the people who value it — perhaps for reasons you may never know or fully appreciate — but when you look a little deeper into how this industry actually works, incredible opportunities emerge and it becomes clear that Bitcoin is by no means the climate sinner you might have been led to believe it to be.

For the size of its energy requirement, the emissions of the power production it draws from is comparatively small — between half and a quarter the global norm. Meanwhile, mining is reducing global methane emissions, a fact that tends to be conveniently forgotten by detractors.

If we hope to actually get anywhere in solving our sustainability problem, we are better served by investing more heavily in renewable energy, not in condemning those that use it to solve their problems. Bitcoin mining has the potential to play an important role in this transformation by solving one of the largest outstanding problems in renewable grid architecture. Unless we’re all willing to spend just a little more time and effort analysing this issue in necessary depth, we risk missing out on an incredible and time-sensitive opportunity.

That would be a waste.

[1] This is upper case Bitcoin, the protocol, network, and monetary system. Not to be confused with lower case bitcoin (btc/xbt), the native asset of Bitcoin.

[2] Bitcoin transactions can have multiple outputs so total transactions is not a perfect measure of total settlement transactions. A bank or financial institution can for example use a single Bitcoin transaction to pay hundreds or even thousands of clients.

[3] And this doesn’t even consider the trouble they’d have getting their hands on more hardware than the entire honest network of miners, which imposes a significant additional cost.


The information contained in this document is for general information only. Nothing in this document should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.

This document is directed at professional and institutional investors. Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. This document contains historical data. Historical performance is not an indication of future performance and investments may go up and down in value. You cannot invest directly in an index. Fees and expenses have not been included.

Although produced with reasonable care and skill, no representation should be taken as having been given that this document is an exhaustive analysis of all of the considerations which its subject-matter may give rise to.This document fairly represents the opinions and sentiments of CoinShares, as at the date of its issuance but it should be noted that such opinions and sentiments may be revised from time to time, for example in light of experience and further developments, and this document may not necessarily be updated to reflect the same.

The information presented in this document has been developed internally and / or obtained from sources believed to be reliable; however, CoinShares does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions and other information contained in this document are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Third party data providers make no warranties or representation of any kind in relation to the use of any of their data in this document. CoinShares does not accept any liability whatsoever for any direct, indirect or consequential loss arising from any use of this document or its contents.

Any forward-looking statements speak only as of the date they are made, and CoinShares assumes no duty to, and does not undertake, to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Nothing within this document constitutes (or should be construed as being) investment, legal, tax or other advice. This document should not be used as the basis for any investment decision(s) which a reader thereof may be considering. Any potential investor in digital assets, even if experienced and affluent, is strongly recommended to seek independent financial advice upon the merits of the same in the context of their own unique circumstances.

CoinShares Capital Markets (UK) Limited is an appointed representative of Strata Global Ltd. which is authorised and regulated by the Financial Conduct Authority (FRN 563834).The address of CoinShares Capital Markets (UK) Limited is Octagon Point, 5 Cheapside, St. Paul’s, London, EC2V 6AA.

The CoinShares Astronaut is a trademark and service mark of CoinShares (Holdings) Limited.

Copyright © 2021 CoinShares. All rights reserved.