How many times have you read something like this, “Bitcoin uses as much electricity as Malaysia or Sweden or Denmark or Chile….”. What a bore. Have you ever wondered, however, why the comparison is to countries? Why don’t they ever tell you what would seem to be a more natural comparison which is how much “Bitcoin” spends on electricity?
The reason is that electricity is incredibly cheap so Bitcoin electricity expenditures priced in dollars don’t look very large. Bitcoin uses something like 100 terawatt hours (TWH) of electricity annually (depending on the price of Bitcoin) but a TWH costs less than $100 million (10 cents per KWH times 1000000000). Thus, Bitcoin spends say $10 billion on electricity annually. (In fact, it’s less than this since bitcoin miners can be located in places where electricity prices are especially cheap.)
$10 billion in spending isn’t a lot. It’s less than the world spends on toothpaste ($30b), much less than the US spends on cigarettes ($80b), and considerably less than the US Federal government spends in one day ($18.65 billion).”–Alex Tabarrok. “Bitcoin and Electricity.” Marginal Revolution. November 29, 2021
One argument, one that you see everywhere in popular media, is that cryptocurrencies use a lot of electricity, and it’s not a productive use of resources. Rarely, you’ll see apple-to-apple comparisons, such as this response to trying to make a comparison to the electricity use of the VISA network, which is a strange comparison considering all the payment terminals, ATMs, bank mainframes, and many other things are treated as externalities.
“While no one can argue that Bitcoin (and other altcoins) mining consumes a lot of electricity (in absolute numbers) given that you need to run a network of few hundreds or thousands of very powerful computers all the time, the right way to look at this problem is not about the total consumption but to compare how efficient is Bitcoin relative to the alternative traditional centralized systems that we are predominantly using today and that one day crypto might replace.
However, the only comparison that seems to always pop up everywhere is against VISA transaction costs which was included in the article that trigger the above tweet and in other articles as well. As expected, VISA looks way more efficient which adds to the rhetoric that Bitcoin is a very inefficient system and it is just a Ponzi scheme that is polluting the world. In my view, this comparison is flawed and it is not comparing apples to apples. Besides the fact that Bitcoin is not simply a piece of a payment network like VISA but a full currency system, VISA itself requires the banking system for its payment system to work so you need to actually include some of those costs there to make a meaningful comparison. So let’s look first at how VISA works…
…”According to the article that trigger this discussion, Bitcoin annual Twh consumption is 28.67 , so currently more than 3 times more efficient than a very conservative calculation of the cost of the global banking system. Of course you will argue that the banking systems does more than handling a currency which is true but the difference is large enough that I do not think is that relevant. Even if only 30% of banks electricity consumption was the comparable part to Bitcoin, that will still make Bitcoin more efficient.”-Carlos Domingo, “The Bitcoin vs Visa Electricity Consumption Fallacy.” Hackernoon. November 29, 2021
And, the simple fact is that it is very difficult to price in externalities to determine the real price of any energy production.
“All energy production has environmental and societal effects. But calculating them — and pricing energy accordingly — is no easy task.”-Erica Gies, “The real cost of energy.” Nature. November 29, 2017.
And, this is true when assessing energy use as well. It’s difficult to measure the benefits of energy expenditure. What is the value of street lights relative to the energy and infrastructure required to have them on? This is true of practically everything. What is the true cost and benefit of international shipping and transportation? Of the cement poured for a playground? The establishment of a new church or temple? You could continue this line of questioning down any avenue you like, and the answer is it is impossible to make this kind of calculation beyond the costs and perceived benefits.
Enter cryptocurrencies. The problem with the arguments against cryptocurrencies is that they generally take this form.
1. If an activity provides no benefit and uses resources, it is a wasteful activity. 2. People should not do wasteful activities. 3. Mining Bitcoin provides no benefit and uses resources. C. People should not mine Bitcoin.
This is the extreme argument. The less extreme argument makes some kind of comparison between the benefit relative to use of resources. But, as we know from the above it is difficult to take into consideration the externalities involved. On the face of it, the argument that mining cryptocurrencies have no benefit is belied by the fact that every day billions of dollars worth of transactions are conducted using cryptocurrencies. None of that has any value? How do we evaluate the benefit relative to resource use or other ways this energy might be used? But, we really cannot make that kind of comparison. What is the relative value of Bitcoin mining versus the amount of power used in casinos on an annual basis? Online gaming? How does one make those kinds of comparisons? Is it even right to make them?
The reality is people don’t even try to make that sophisticated of an argument. Instead, it is something simplistic like: Bitcoin uses as much electricity as a country, the implication is that people would otherwise use this electricity, or the electricity they do use would be less expensive.
We also don’t make these kinds of calculations for other activities. The reason there’s the difference hinges on a value judgment that the activity, same as the implicit argument above mentioning casinos implies they have no value. But, even casinos have plausible arguments supporting their value.
The interesting thing, for me, in looking at these arguments closely is ho political arguments. The reason that the environmental argument is used is because it can plug into concerns that people have about climate change, and short circuit a reasonable assessment of the claims being made.
Same is true of claims that cryptocurrencies are used only for crime. Criminals may be an innovator in the space, but it isn’t only good for crime, just as it is not true that VHS and internet streaming is only good for porn. Porn pioneered the technology, but it didn’t stop with porn. YouTube isn’t porn.
There’s also a deeper agenda. It’s a simple fact that the more money that makes its way into cryptocurrencies, the less money that will be available to buy stocks, bonds, U.S. Treasury instruments, and so forth. Less money in traditional financial vehicles means lower prices for them.
The Bitcoin “debate”, if we can call it that, really helped me to understand how much of our dialogue is shaped using concepts from our political orthodoxies. A claim like, Bitcoin mining hurts the environment, is an emotional appeal, not a reasoned argument. The anti-Bitcoin argument is above, and it is problematic both because it has benefits and it is difficult to assess the costs and benefits without engaging in motivated reasoning.
Another point worth making here is that it wasn’t until this year that cryptocurrencies emerged that created a marketplace of cryptocurrencies, where they will compete. Network efficiency and cost will be one dimension of this competition, and it will drive both electricity use down and provide for many more benefits. And, where something like Bitcoin’s energy-intensive proof-of-work algorithm is used, it will be because it provides a capability that isn’t available in other approaches that justifies the cost.
When all of that happens, what will be the new reasons people will be against cryptocurrencies? It’ll be the need for regulation, to provide customer guarantees, or something else. But, the one thing that I am certain of is that there will be other reasons, other agendas that these kinds of arguments will be serving to obscure. And, this is how everything is, there’s always another or series of issues hiding behind the one that’s used as justification.