Contextualizing the Debate: An Examination of the Energy Consumption of Cryptocurrency Mining

Blockchain Association
6 min readFeb 16, 2021

--

The environmental effects of cryptocurrency mining are hotly debated. One can find articles arguing that the energy consumption of mining cryptocurrencies is not dangerous for Earth’s climate, but one can find just as many articles arguing that the energy used for mining cryptocurrencies will wildly exacerbate global warming and climate change. Yet at the highest level, according to the University of Cambridge’s Center for Alternative Finance, “there is currently little evidence suggesting that Bitcoin directly contributes to climate change. Even when assuming that Bitcoin mining was exclusively powered by coal — a very unrealistic scenario given that a non-trivial number of facilities run exclusively on renewables — total carbon dioxide emissions would… roughly correspond to 0.17% of the world’s total emissions. This is not to say that environmental concerns regarding Bitcoin’s electricity consumption should be disregarded.” This blog post seeks to contextualize this debate by examining why mining requires energy, the sources of energy (i.e. energy mix) used to generate electricity for mining, and mining’s potential environmental effects.

“Mining” and Proof-of-Work Consensus

Some cryptocurrency networks, most notably the Bitcoin network, require computers to compete for the opportunity to add new “blocks” of transactions to the bitcoin blockchain in exchange for newly created bitcoin. The competition involves solving hash functions, which (simplistically) are math problems that can only be solved via trial and error but, once solved, the solution can be easily checked. In essence, this competitive process, known as “proof of work” (PoW), protects the network’s ledger of transactions from manipulation by imposing a high cost — in this case in the form of computing power dedicated to solving hash functions — on participants attempting to change or add data to the blockchain. Participation in this consensus process is colloquially referred to as “mining.” For a more in depth explanation of proof of work consensus, please see this guide from Bitcoin Magazine.

As the popularity and price of bitcoin and other cryptocurrencies have risen, mining has become increasingly profitable, driving private businesses and individuals to invest in sophisticated hardware built with the sole purpose of solving hash functions. Solving hash functions depends on computational power, which requires energy in the form of electricity. Additionally, electricity is needed to cool computational hardware while it is solving these math problems. Today, the best available evidence suggests that mining cryptocurrencies requires 45.8 TWh of energy per year. Without a doubt, this number evidences the fact that mining cryptocurrencies is an energy-hungry endeavor. Yet examining market incentives, the sources of energy used to power mining equipment, and emerging mining practices provides context for this topline number.

Demand for Low Cost, Clean Electricity

Bitcoin mining not only seeks low cost, renewable power, but also actively enhances existing power generation, both non-renewable and renewable. Indeed, a growing trend in North American bitcoin mining is the consumption of flare gas to power onsite mining operations. Consuming a highly insulating pollutant, methane-rich flare gas, with no additional extraction mitigates one of the largest sources of methane in the atmosphere while providing bitcoin miners with an inexpensive source of energy. Flare mitigation strategy employing bitcoin mining could also lead to less pipelines as waste energy can be consumed onsite with containerized solutions. Further, energy transportation is notoriously difficult and bitcoin acts as a demand source. Where renewable producers may face excess generation, bitcoin mining can be used to absorb excess production, thus ensuring limited waste while also providing profit to renewable producers.

Cryptocurrency miners are naturally incentivized to use the lowest cost electricity available to them. While the specific percentage of miners’ revenues spent on electricity will vary between operations, it is undoubtedly miners’ highest ongoing cost, with one estimate pointing to miners spending 60% of revenues to cover energy expenses. While this percentage will fluctuate with the underlying price of bitcoin, reducing energy costs is the most important action a miner can take to increase profits. In practice, this means finding and using the cheapest available electricity.

Encouragingly, miners’ profit motivation for the cheapest sources of electricity increasingly leads them to use electricity from renewable sources. Electricity from solar photovoltaic (PV), geothermal, and on-shore wind sources are already cheaper on average than the most efficient non-renewable source, gas combined cycle. Indeed, the cost of electricity from renewable sources has declined tremendously over the last decade (-92% for solar PV sources), a trend that the U.S. Energy Information Agency expects to continue over the next two decades. As renewable sources of electricity continue to become cheaper to end users than polluting sources, market forces will naturally drive miners to base their operations on renewable sources of energy. While this trend to renewables will intensify over the next decade, today, the geographic distribution and available data on the energy mix of cryptocurrency mining is evidence of the demand for renewable, inexpensive sources of energy among currently operating miners.

The Geography and Energy Mix of Cryptocurrency Mining

There are heavy concentrations of bitcoin mining operations in China, Iceland, Sweden, Norway, Georgia, the Pacific NorthWest, Quebec, and upstate New York, areas rich in renewable, low cost sources of energy. Mining in China offers an interesting case study of the economic incentives of the industry. More than two-thirds of China’s electricity is generated from coal, yet about 80% of Chinese bitcoin mining occurs in Sichuan province, the most hydroelectric rich region in the country. Indeed, according to the International Energy Agency, “these mining facilities may be absorbing overcapacity in some of these regions, using renewable energy that would otherwise be unused, given difficulties in matching these rich wind and hydro resources with demand centres on the coast.” Other regions in which mining is geographically concentrated are likewise rich in renewable energy resources: Iceland (100% renewable energy), Quebec (99.8%), British Columbia (98.4%), Norway (98%), and Georgia (81%). “Voting with their feet,” it is evident that miners’ demand for cheap energy already incentivizes them to seek and use renewable sources of energy.

Recent studies of the energy mix of the bitcoin mining industry suggest that it is an outlier when it comes to renewable usage, yet published statistics vary widely. In a report published by Coinshares, authors Christopher Bendiksen and Samuel Gibbons explain that “our current approximate percentage of renewable power generation in the Bitcoin mining energy mix stands at 74.1%, more than four times the global average.” A lower bound estimate from the University of Cambridge suggests that “on average, roughly 28% of the total energy supply for both small and large facilities is generated through renewable sources,” still well above the average of other industries. In the transportation industry, for example, renewable energy accounts for only 3.4% of the total energy supply. (Estimating the energy mix of bitcoin mining is a research intensive undertaking. Here is a comparison of the methodologies adopted to conduct these studies.)

Computational Efficiencies = Energy Efficiencies

While miners can reduce electricity costs and negative environmental externalities by using renewable sources of energy, they can also reduce energy consumption and costs by employing the most efficient computational technologies available. Between 2009 and 2020, mining hardware has undergone four major iterations that have significantly improved the efficiency of mining equipment. In 2009, standard central processing units (CPUs) were used to mine the first cryptocurrency, bitcoin. One year later, bitcoin miners began using the more powerful graphics processing units (GPUs). By 2011, field-programmable gate array (FPGA) hardware was the equipment of choice for miners. Just a year later, mining operations began to implement application-specific integrated circuits (ASICs). According to the International Energy Agency, “the latest ASICs are both more powerful and more energy efficient — around 50 million times faster (H/s) and a million times more energy efficient (H/J) in mining bitcoin than the CPUs used in 2009.” As industry continues to grow and progress, one can only assume that this drive for energy efficiency will continue, hopefully with similar success. Mining projects currently in development within the industry already evidence the continued demand for energy and computationally efficient projects.

Conclusion

While the mining of cryptocurrencies is an energy-hungry endeavor, it is not necessarily damaging to the environment. Indeed, the energy mix of the crypto-mining industry may be among the most efficient of any industry, and per Cambridge, “available data shows that even in the worst case (i.e. mining exclusively powered by coal), Bitcoin’s environmental footprint currently remains marginal at best.”

Additionally, It is worth noting that bitcoin mining is an easy target for energy usage criticism as it is one of the only industries with energy usage transparency. While exact energy usage is not easily available, it can be easily approximated with the publicly available network hashrate and existing public information. Unlike other industries where energy consumption and mix is obfuscated away from the general public, bitcoin mining because of its global footprint and open network nature make transparency inevitable.

--

--

Blockchain Association
Blockchain Association

No responses yet