Bitcoin (CRYPTO: BTC) has received a lot of criticism for its extensive energy use. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin uses about 0.29% of the world's energy. That's a lot of energy, but that number doesn't tell the whole story.
This statistic doesn't tell us how Bitcoin uses energy, the type of energy it uses, or any externalities that result from this energy use. While it seems counterintuitive, I think it's a good thing that Bitcoin uses as much energy as possible.
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What is the actual energy used?
In order to discuss the usefulness of Bitcoin, we need to understand the actual use of energy. Bitcoin has three strict rules for energy use.
Ultimately, Bitcoin uses a lot of energy to protect and defend its network from attacks. Theoretically, an attack could originate from an entity that wishes to change the core parameters of its protocol. This entity might try to change three main things: provisioning, block size, or block scheduling.
This entity may want to change the block schedule – and thus the supply of bitcoins – in order to profit from the newly created bitcoins. Or, someone might want to increase the block size, which would increase the number of transactions that Bitcoin can process per second (this has been flagged as a potential threat to Bitcoin decentralization, since doubling the block size would increase the hardware requirements for node runners, which in turn would reduce the number of Bitcoin nodes that can run themselves).
It turns out that the ruleset configured at the time of Bitcoin's release was calibrated to maximize decentralization, and if someone wanted to change the rules in any way, they would need access to more power than the network was already using, as well as a lot of computers.
Even for the largest countries, such a task is difficult.
What energy is not used for
The energy used by Bitcoin is not used directly to process transactions. The network will use the energy to produce a block (or a packaged set of transactions), whether or not there are transactions within that block. Processing transactions is a byproduct of block production, not an end in itself.
Types of energy used by Bitcoin
The Bitcoin Mining Council estimates that about 58.5% of the network is powered by renewable energy. Bitcoin miners often look for the cheapest form of energy because they can make more money.
Bitcoin incentivizes miners to look for cheaper forms of energy production, because to mine bitcoins, you only need computers that run on electricity. The cheaper the energy, the less it costs miners to mine blocks. When a miner mines a block, they are rewarded with BTC, which they can then sell to recoup the cost of energy. This often leads miners to deploy their operations near renewable energy sources, such as hydropower, wind and solar. These renewable energy farms can sell electricity cheaper than non-renewable energy sources, which means bitcoin mining companies can make more money.
Buffer of the grid
As a result, Bitcoin's massive energy use creates more demand for these forms of renewable energy. Bitcoin can effectively be the buyer of last resort for these energy farms 24/7, when retail and industrial buyers may be offline, asleep, or the energy would have been discarded (called curtailment). This allows Bitcoin to act as a buffer for the grid and smooth out energy production and profits. This leads to more profitability for bitcoin miners and green energy providers. Profits can then be used to reinvest in new green energy projects, thereby accelerating the global transition to a green energy grid.
In any case, Bitcoin is not perfect. It is run by computers with their own carbon footprint. There are also environmental costs associated with the production of solar, hydro, and electricity. Finally, about 41.5% of Bitcoin's energy use still comes from non-renewable sources, such as coal and fossil fuels. But every useful industry generates some form of waste. No one is exempt. Bitcoin is about transitioning to a more sustainable and reliable financial system. I think it's accelerating the pace at which more sustainable energy production is being used in that process.
Bitcoin makes the most of energy
Bitcoin uses energy to protect the integrity of the network, ultimately protecting about $1 trillion worth of bitcoin. But there are also positive externalities from Bitcoin using as much energy as possible. It buys energy from suppliers that may not have buyers. It prefers cheaper, and therefore greener, energy that helps with the rapid transition to a greener grid. So I'm comfortable with Bitcoin using as much energy as possible.
I also think it's good to let Bitcoin use that energy to protect my own investments and everyone else using the network to store, preserve and trade value.