Bitcoin: how the huge energy spent can make the cryptocurrency 'bubble' explode
Bitcoin uses more energy than many countries
We've all heard the stories of new millionaires because of bitcoin.
Elon Musk is among the last to join the purchase of the cryptocurrency.
His electric car company Tesla made a profit of more than $ 900 million after buying $ 1.5 billion in bitcoins in early February.
This announcement helped push the cryptocurrency's quote to more than $ 58,000.
And it led to a question by Musk, as the scale of the currency's environmental impact became clearer.
It also led to new high-profile critics questioning the digital currency this week, including U.S. Treasury Secretary Janet Yellen.
President Joe Biden's chief economic adviser described bitcoin as "an extremely inefficient way of doing transactions" and said that "the amount of energy consumed in processing these transactions is impressive".
The potential energy expenditure i to
It is unclear exactly how much energy bitcoin uses.
Cryptocurrencies are, by default, difficult to track, but the consensus is that bitcoin mining is a business that consumes a lot of electricity.
The Center for Alternative Finance at the University of Cambridge (CCAF), which studies the growing crypto business, estimates that bitcoin's total energy consumption is between 40 and 445 terawatt-hours (TWh) per year, with an average estimate of around 130 terawatt hours.
The UK's electricity consumption is just over 300 TWh per year, while Argentina uses approximately the same amount of energy as CCAF's best estimate for bitcoin.
And the electricity that bitcoin miners use comes predominantly from polluting sources.
The CCAF team surveyed the people who run the bitcoin network around the world about energy use and found that about two-thirds come from fossil fuels.
The Tec i to
The enormous computing power, and therefore the use of energy, is embedded in the way the blockchain technology that underpins the cryptocurrency was designed.
It is based on a vast decentralized computer network.
These are the so-called "miners" that allow the creation of new bitcoins, but they also independently verify and record each transaction carried out in the currency.
Bitcoin mining produces high energy costs
In fact, bitcoins are the reward that miners receive for maintaining this record accurately.
It works like a lottery that runs every 10 minutes, explains Gina Pieters, professor of economics at the University of Chicago and a researcher on the CCAF team.
Data centers around the world are competing to compile and send this transaction log in a way that is acceptable to the system.
They also need to guess a random number.
The first to submit the application and the correct number wins the prize; this becomes the next block on the blockchain.
At the moment, they are rewarded with six Bitcoins and a quarter, valued at around $ 50,000 each.
As soon as a lottery ends, a new number is generated and the whole process is restarted.
The game
The higher the price, says Professor Pieters, the more miners will want to play the game.
"They want to get that revenue and that is what is going to encourage them to introduce increasingly powerful machines to guess that random number, and therefore you will see an increase in energy consumption," he says.
And there is another factor that drives bitcoin's growing energy consumption.
Elon Musk was one of the last billionaires to invest in cryptocurrency
The software ensures that it always takes 10 minutes to solve the puzzle, so if the number of miners increases, the puzzle becomes more difficult and more computing power is needed.
Therefore, bitcoin is designed to encourage greater computing effort.
The idea is that the more computers compete to keep the blockchain, the more secure it becomes, because anyone who wants to try to undermine the currency must control and operate at least as much computing power as the rest of the miners together.
What this means is that, as bitcoin becomes more valuable, the computational effort invested in creating and maintaining it, and therefore the energy consumed, inevitably increases.
The rastre i the
We can track how much effort the miners are making to create the currency.
Currently it is estimated that they are doing 160 quintillion calculations per second, that is, 160,000,000,000,000,000,000, in case anyone is wondering.
And that vast computational effort is the cryptocurrency's Achilles heel, says Alex de Vries, founder of the Digiconomist website and a specialist in Bitcoin.
All the millions and millions of calculations that are needed to keep the system running are not really doing any useful work.
"These are calculations that do not serve any other purpose, they are immediately discarded again. At the moment we are using a lot of energy to make these calculations, but most of them also come from fossil energy", says de Vries.
The huge effort it requires also makes bitcoin inherently difficult to scale, he argues.
"If bitcoin were adopted as a global reserve currency, the price would likely be in the millions, and these miners will have more money than the entire [US] federal budget to spend on electricity," he adds.
"We would have to double our global energy production just for Bitcoin."
The dark side
Vries says he also limits the number of transactions the system can process to about five per second.
That does not make it a useful currency, he argues.
And that view is shared by many eminent figures in finance and economics.
The two essential characteristics of a successful currency are that it effectively allows for exchanges and serves as a stable store of value, says Ken Rogoff, professor of economics at Harvard University in Cambridge, Massachusetts, and former chief economist of the Fund International Monetary Fund (IMF).
And he believes that bitcoin is nothing like that.
In recent weeks, the price of bitcoin has reached historic levels
"The fact is, it's not used much in the legal economy right now. Yes, a rich person sells to someone else, but that's not an end use. And without that, you really don't have a long-term future."
For him, bitcoin exists almost exclusively as a vehicle for speculation.
Is the bubble about to burst?
"That's my guess," says Professor Rogoff, and pauses. "But I really couldn't say when."
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