Is Bitcoin an Energy Hog

Almost since bitcoin’s inception, there has been much hand-wringing over what some see as the cryptocurrency’s excessive consumption of electricity. According to the detractors, mining bitcoin consumes too much electricity, is bad for the environment, and raises electricity costs for everyone else. Newsweek even went so far as to claim in a headline that bitcoin is on track to consume all the world’s energy by 2020!

Will bitcoin cause an energy crisis? Will electricity consumption be its Achilles’ heel?

No. As has happened many times before, alarmists are missing how markets avert such disasters.

Does bitcoin consume lots of electricity?

Yes, but there is more to the story. Bitcoin is a cryptocurrency that uses a technology called blockchain to validate transactions (i.e., to ensure that when person A commits to sending bitcoins to person B, person A actually has the bitcoins to spend). Bitcoin’s blockchain works by having computers called miners solve complex mathematical puzzles about every 10 minutes. Each puzzle includes information on a block of transactions that have occurred since the last puzzle. So when a miner solves a puzzle, and at least 51 percent of the other miners agree that the first computer really did solve the puzzle first, the miner is rewarded with new bitcoins, and the new block is added to a chain that includes all the bitcoin transactions that have occurred since the beginning. Thus the name blockchain.

The puzzles get harder as the total computing power of miners increases, so solving the puzzles requires even more computing power — which means more and more electricity.

How much electricity? Estimates vary, but the numbers are impressive. Digiconomist estimates that miners consume about as much electricity as the country of Qatar and require several thousands of times more electricity per transaction than do traditional electronic payment systems, such as Visa. Power Compare believes that miners consume more electricity on an annual basis than do 12 US states (Alaska, Hawaii, Idaho, Maine, Montana, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Vermont, and Wyoming).

Is there cause for alarm?

No. The worriers are following a tradition of predicting catastrophes that never happen because markets adapt to changed circumstances.

One famous example of a fear being overhyped is the 1970s and ’80s fear of overpopulation. The hype led to a 1980 bet between biologist Paul Ehrlich (author of “The Population Bomb”) and economist Julian Simon on whether overpopulation would result in overconsumption, scarcity, and famine. Their wager was on the future prices of five metals whose prices would escalate if Ehrlich was right. He was not. Ehrlich’s fundamental error was that he failed to recognize that flexible markets, technological change, and human ingenuity resolve challenges.

The predictions about bitcoin’s energy problems include that same error and more. There are less energy intensive ways to validate transactions, which the bitcoin community could adopt if energy costs get too high. Miners have already found less energy-intensive computing technologies and could find more. And if bitcoin gets too costly to mine, it will be replaced by another cryptocurrency or other means for transactions.

Economists at the University of California at Berkeley worry that utility regulators misprice electricity, which creates subsidies for bitcoin. They are right that regulated electricity prices do not follow best practice in regulatory economics, but it is unclear that this constitutes inefficient subsidies to bitcoin given that the traditional financial system against which bitcoin competes is replete with its own subsidies and inefficiencies.

And then there is the problem of zeroing in on one aspect of a system and missing the bigger picture: If bitcoin is such an inefficient user of resources, why are its overall costs so much lower than many of those of the traditional financial system?

So when considering the forecasts of doom, it is important to remember that people respond to incentives to solve problems and that flexible markets empower innovations.

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