In recent months, as the price of bitcoin rose (and then fell), there has been considerable talk about the resource costs of Bitcoin. For those who are unaware, Bitcoin works as follows. Bitcoin is a decentralized network that stores a digital ledger of transactions and balances. Users on the Bitcoin network can send bitcoins to one another. Miners compete to attempt to create an update, or new “block”, on the ledger. The block contains both these transactions and information from the previous block. (The blocks are therefore chained together. Hence, the term “blockchain.”) Miners take all of this information, combine it with a number called a “nonce”, and pass it through an algorithm that generates an output value. The objective is to obtain an output value that is below a particular threshold. The first miner to do so is rewarded with a particular quantity of bitcoins. Since the information is all the same with the exception of the nonce, mining is a competition to find a nonce that, when combined with the other information and passed through the algorithm, generates an output value below the threshold. Successful mining requires finding the right nonce. The ability to find the right nonce is greatly improved by having the computing power to guess nonces very quickly.
As a result, successful Bitcoin mining requires a lot of computing power. One might wonder how much electricity usage goes to this sort of thing. In fact, some people seem convinced that Bitcoin mining is destroying the planet.
Is Bitcoin really having a detrimental environmental impact? This discussion could use a little price theory.
First, when it comes to measuring the costs of Bitcoin mining, one must be careful with the numbers. For example, one estimate that I have seen people use is the quantity of electricity used in Bitcoin mining (estimated to be 134 TWh annually, or 0.6% of electricity usage). This is misleading as an estimate of net additional electricity usage. Bitcoin mining increases the demand for electricity. In doing so, the price of electricity will rise. As a result, some people will cut back on other forms of electricity usage. This is a basic lesson of supply and demand: the increase in the equilibrium quantity will be less than the increase in demand. On this point, it is also important to note that the increase in the price of electricity caused by increased demand for electricity does not have implications for welfare. This is how markets allocate resources.
Second, what people really seem to be concerned with is not so much the electricity consumed, but rather the externalities associated with generating electricity. Some forms of electricity generation are cleaner than others. Electricity generation that produces a lot of pollution or greenhouse gas emissions is costly to society. If the price of a bitcoin continues to rise, this will give further incentive to shift production into Bitcoin mining thereby exacerbating this problem.
To what extent is this something to worry about?
Recall that Bitcoin mining is all about profit-maximization, just like any other form of production. Bitcoin miners have an incentive to keep costs as low as possible. This is especially true given the wild fluctuations in the price of Bitcoin. This is one reason why there is so much Bitcoin mining in Texas, which tends to produce a lot of excess energy (including excess renewable energy). In addition, electricity generated from renewable sources doesn’t line up with the timing of electricity usage. Since we lack a good way of storing energy, this type of energy usage helps to minimize net additional energy use created by Bitcoin mining. Also, since the state of Texas allows people to pay spot prices for electricity, Bitcoin miners can turn on their mining rigs at off-hours and turn them off when electricity use is high.
The need for cheap electricity has also led Bitcoin miners to renewable energy sources. One company, Stronghold Digital Mining, operates by generating electricity from coal refuse. This type of Bitcoin mining actually generates a positive externality (the state of Pennsylvania is compensating them for it).
What all of this suggests is that the cost estimates floating around out there are likely overblown.
Nonetheless, the discussion about costs isn’t really about costs, but rather about the benefits. Many things have considerable costs, but we are willing to deal with the costs because we believe that the benefits outweigh the costs.
What are the benefits of Bitcoin mining? Some people believe that Bitcoin is on its way to being some type of reserve currency to the world. Other people believe that Bitcoin could replace gold as a hedge against inflation. The total value of gold is something like $11 trillion. So, if Bitcoin and gold are really substitutes, we should expect some convergence in their market value. But even supposing that one believes that Bitcoin has reached its peak value, it currently has a market cap of about $800 billion. If this is your view, it would not be hard to argue that a payment network that is worth $800 billion is worth the mining costs.
On the other extreme, there are those who think that Bitcoin is worthless and that it serves no valuable role in society. It is all hobbyists and speculators. Eventually, the bubble will burst and people will realize all this mining was a waste of time. For these critics, virtually any cost would be too high since they see no benefit.
When I see people critiquing the costs associated with Bitcoin, they are typically people in this latter group. Arguably, for these critics, the discussion of costs isn’t really about costs as much as it is about a lack of benefits. Discussion of costs is designed to make it self-evident that we need to limit this behavior.
But whether Bitcoin mining is worth the resources is a different question than whether Bitcoin mining is destroying the planet. Whether Bitcoin mining is worth it, depends on whether its benefits exceed the costs (including the external costs borne by society rather than the miners). Whether Bitcoin mining is destroying the planet is somewhat related, but is primarily about its external costs.
Ultimately, the argument that Bitcoin mining needs to be stopped in order to save the planet is a bit disingenuous. The energy consumption from Bitcoin mining is quite small as a percentage of all energy usage. Furthermore, if electricity generation produces externalities that are harmful, then one should be in favor of taxing the harmful byproducts of electricity production. This is true regardless of whether the electricity is being used to power a hospital, an air conditioner, an Xbox, or a Bitcoin mining rig. To specifically target Bitcoin mining as uniquely bad when it comes to energy usage is not a serious position.