Bitcoin Energy Rant

Confused “environmentalists” and Elon Musk have made it popular to bash bitcoin for its energy use. Unfortunately, they are clueless about how the network works and oversimplify everything.

Firstly, bitcoin does not have cost per transaction. The network has the same throughput all the time regardless how much energy is committed to mining. The network doesn’t depend on how much mining goes on. More miners just means more security and finality to the transactions, and miners want to mine because they get paid by the network.

Here is an article from popular crypto news site Coindesk featuring “MRB” (whoever they are) and providing a typical misunderstanding: “To reduce the negative environmental impact, crypto mining systems would need to allow miners to produce tokens for significantly less cost compared to their current price. Increased mining efficiency could lead to lower energy consumption, which typically occurs during corrections in the price of bitcoin”. Uhm no. Increased mining efficiency will lead to more hashing (mining) power per unit of electricity, but it does not at all incentivise using less electricity overall. Bitcoin will almost inevitably consume more electricity the higher the price, and miners will always seek to be as efficient as possible.

This is how the market really works: Price goes up -> mining profit goes up -> miners expand operations and new miners join -> mining profit goes back down to equilibrium. The same holds true in the reverse case when the price goes down in stead. And here is how the market works for efficiency: New efficient miners join temporarily enjoying better than average profit-> less efficient miners leave because they have less profit -> efficient miners keep joining until profit reaches equilibrium. These processes playout all the time in overlap with themselves and each other.

If the above has not spelled it out for you yet, and I don’t blame you if it hasn’t, the key point is that efficiency does not matter! Efficiency just incentivizes even more mining. Overall, Bitcoin miners will use more electricity the higher the price, and that is okay. If the world has something better to do with spare electricity, then it will pay better to do that other thing, and it does. The global economy still finds balance for everything else it wants to use electricity for. And while I am against arbitrary regulation, governments can choose to charge miners some extra tax on electricity. Mining will trend towards a smaller industry size equilibrium, and we can all pretend we saved the polar bears! And of course, due to bitcoin’s constant throughput, it won’t even matter to the network itself.

Finally, we should also consider the halvings in bitcoin block rewards occurring once every 4 years. All things equal, they lower mining incentives, so that’s one way the bitcoin network lowers energy use by itself.

Disclaimers:
I like bitcoin.
Yes, I know Elon is also just trying play his cards right so that the environmental overlords give Tesla license to sell renewable fuel credits etc. Why should a company building cars hodl bitcoin it receives as revenue when that stuff should be part of operating cash flow anyhow? It should be spent on the business.