Welcome to Money Reimagined.
It’s an all-bitcoin newsletter today, with a deep dive into the resurgent discussion around the leading cryptocurrency’s energy consumption (brought about by a rising price, ballooning hash power and interest from ESG-minded investors).
Because it’s such a rich, important topic, you get a twofer.
Our weekly “Money Reimagined” podcast is also about the energy debate. Sheila Warren and I talk to the always interesting Meltem Demirors, who made the case earlier this year that bitcoin can be thought of as a “money battery.” And we added in Harry Sudock, vice president of strategy at GRIID, which is co-locating mining operations with renewable energy providers, increasing their revenue and helping develop their wider businesses.
Have a listen after reading the newsletter.
Bitcoin can go green and help fund clean energy
However much regulators and crypto advocates might wish the other didn’t exist, neither governments nor Bitcoin will disappear in our lifetime. It’s time they started working together on the planet’s most urgent issue: a sustainable global energy system.
Contrary to those who see it as “a giant smoldering Chernobyl,” there’s an alignment between Bitcoin’s underlying economics, which drives miners to low-cost energy sources, and the ongoing efficiency advances in renewable energy technologies.
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As we’ll see, market dynamics are already making that alignment happen. But to accelerate it to the pace needed to beat the climate crisis requires proactive measures at national, regional and city levels, as well as inside corporations. Society needs a deliberate strategy to incorporate bitcoin mining into a system-wide framework for renewable energy development.
The crypto industry’s free market purists might disagree but policy-based intervention is needed, precisely because energy markets are already plagued with distortions: misguided subsidies, illegal power access, inefficient electricity grids and geographic factors that hinder the integration of renewable sources.
Miners will go where they can make money. Without incentives that counter those market distortions, too many will continue contributing to a frightening acceleration in climate change.
Thankfully, lots of smart ideas are emerging to address this.
Carbon-heavy, but compared to what?
Although a 2019 CoinShares survey found an impressive 73% of all bitcoin mining powered by renewable energy, there’s no denying that Bitcoin, in its current state, contributes significantly to greenhouse gas emissions.
Cambridge University’s Bitcoin Energy Consumption Index’s midpoint estimate puts total energy consumption at 129 terawatt hours, accounting for 0.7% of total world consumption. Assuming the proportion from non-renewable sources remained at 27%, that means the network is still gobbling up 35 tw/h of carbon-intensive electricity, more than Denmark consumes from all sources. (See further discussion on these assumptions in the section below.)
On its own, the overall size of bitcoin’s consumption is meaningless. With the possible exception of geothermal-powered Icelanders, all communities using on-grid energy are by, default, contributing to greenhouse gas emissions. The real question is: What value is derived from the activities for which that energy is used?
In the case of Bitcoin, the answer hinges on a subjective cost-benefit analysis of two alternative financial systems. We could phrase it as: How much value per kilowatt hour do you place on a decentralized, censorship-resistant system for exchanging provably scarce digital assets versus your per-kw/h value for the traditional, centralized financial system?
The global financial sector’s energy use is impossible to calculate. But we know it employs more than 20 million people, relies on sprawling, inefficient legacy computing systems and deploys extensive physical and cybersecurity measures. One can argue those measures include the U.S. military because its protection of global trade is fundamental to the dollar’s dominance.
How much energy does all that consume? And is it worth it?
Even without knowing the energy number, critics will argue, with sound logic, that the traditional system delivers much greater utility if you measure its value solely in dollar terms. The international payment system SWIFT, which forms just one part of that global financial system, averaged around $6 trillion a day worth of transactions in 2019, a thousand times the current average daily amount processed by the entire Bitcoin network.
But a future, massively scaled Bitcoin transaction network would not be nearly as energy-intensive, as it would incorporate more computationally efficient “layer 2” solutions such as Lightning.
More importantly, the dollar assessment doesn’t take into account the externalities of the traditional, gatekeeper-controlled system that Bitcoin’s open-access model seeks to overcome. These include barriers to innovation, financial exclusion and, arguably, the human cost of U.S. wars funded by it. Your view on relative energy value will vary depending on how you feel about these.
Proactive policy
Regardless of who’s right, mainstream concerns about Bitcoin’s massive energy “wastage” – a gross misnomer for an activity best described as the cost of securing the system – cannot be ignored.
As the price rises, along with hashrate and energy usage, Bitcoin’s ballooning carbon footprint is sowing nervousness among prospective investment institutions that are bound by ESG (environmental, social and governance) compliance. Pressure will grow for change or regulatory action.
To respond solely by highlighting the legacy system’s own energy intensity – as I did above – can look like “whataboutism.” Bitcoiners should instead engage with these concerned investors to promote Bitcoin-focused energy governance that serves everyone’s interest. They should enlist their help to persuade policy makers to take an outside-the-box, system-wide view of our energy challenges and of Bitcoin’s place in it.
The alliances already forming between the bitcoin mining industry and developers of green energy infrastructure pose a useful starting point for those discussions.
Speaking on the latest episode of our “Money Reimagined” podcast, Harry Sudock, vice president of strategy at mining infrastructure company GRIID, said his company is getting requests from developers of wind farms, large and small hydro dam generators, nuclear plants and other renewable providers to colocate bitcoin operations with their plants. “Everybody is looking for revenue-enhancement strategies that will support the growth and resilience of the energy they produce,” he said.
There are various ways in which governments, grid operators and municipal authorities could accelerate this trend, whether via subsidies or power purchase agreements.
Such policies would be doubly effective when contracts between cities and bitcoin miners are designed to help grid operators manage the peak-to-trough inefficiencies of base load energy production. Miners like Layer1 have struck deals where they’re paid to stop mining during demand peaks to free up electricity for consumers.
This model can be applied to solar energy’s “duck curve” problem, essentially a misalignment between power production and consumption. Miners act as natural buyers of the abundant power produced during daylight hours and sellers during high-demand early evenings. Indeed, miners that sold unused power back to the grid played a small but noteworthy role in helping Texas mitigate its recent storm-induced blackout.
Now, add to this a role for sustainability-conscious investors.
They can buy carbon credits to offset the impact of their bitcoin purchases, driving sustainable energy development in the process.
“Shark Tank” star Kevin O’Leary is being even more direct. He recently told CoinDesk TV he is choosing his bitcoin carefully by investing in the rewards earned by select bitcoin miners so “I can know that my coin is clean.” O’Leary suggested such strategies would help the growing ranks of ESG-driven investors assuage their concerns about Bitcoin’s carbon footprint.
Investors can go one step further by spending the purchasing power of their “clean bitcoin” on other renewable energy resources. This partly explains the decision of Aker SA, a Norwegian conglomerate, to go all-in on bitcoin.
Firing up the money battery
Meltem Demirors, the other guest on this week’s podcast episode, offers an outside-the-box analogy for how all this is coming together. She says Bitcoin is a “money battery.” It stores energy produced in remote places with abundant renewable energy, such as the windy regions of Morocco, in the form of digital money. The holders of that money can then seamlessly transport it to other locations, effectively making an energy transfer without the need for costly transmission lines.
That functionality is a result of bitcoin mining’s unique geographic-agnostic approach to energy usage, an idea whose sweeping potential Stone Ridge Asset Management founder Ross Stevens laid out in his widely cited 2020 shareholder letter.
“Imagine a future with Bitcoin mining firms, unsubsidized, in extraordinarily isolated locations – visualize a waterfall in a largely population-free part of an African country suffering from abject poverty – easily connected to the Bitcoin network, building serious energy infrastructure to monetize the local clean energy source for mining,” Stevens wrote.
Mining revenue could even help build roads, schools and housing, he argued.
It’s an appealing vision. But it won’t happen organically, at least not fast enough. To beat the climate time bomb, we need policy makers on board.
Rising price, rising energy bill
Here, courtesy of CoinDesk’s Shuai Hao, is our own chart of the Cambridge Centre for Alternative Finance’s bitcoin consumption index. The Cambridge team first calculates upper and lower bound estimates by multiplying the Bitcoin network’s total hashrate by the per-hash electricity consumption of the most efficient machines available and by that of the least-efficient. Then it produces an estimate in the midpoint of the two extremes.
The Centre’s midpoint estimate of Bitcoin’s energy intake has increased, relatively steadily, over time. That tells us that, although mining rigs have become increasingly energy-efficient, with their core application-specific integrated circuit (ASIC) chips able to calculate ever more hash functions at a faster pace, the overall growth of mining activity has outpaced that. That’s a direct result of the rising price, which draws waves of miners into the business.
However, the most striking element of the chart is the volatility of the upper bound estimate, a metric that assumes the network is using the most inefficient mining hardware available. (The lower bound assumes the network is running solely on the three most efficient machines.) Note that the spikes in the upper bound estimate coincide with periods of rising prices: in 2017, from mid-2019 through to March 2020, and, most notably, over the past four months to currently stand at 443 tw/h – six notches below France’s energy consumption in 2019.
This mostly just tells us that the hashrate is surging as miners fire up rigs to earn higher-priced bitcoin and that, if they were to meet that solely with work done by the oldest, least efficient mining rigs available, it would equate to a massive electricity drain. Clearly, that is not the case. Most are likely using more modern, efficient machines.
However, it’s worth speculating that, in this rising price environment, the network is more inefficient than normal and therefore that total energy consumption is higher than the midpoint estimate – maybe not at France’s 449 tw/h, but perhaps in line with Italy’s 242 tw/h.
Higher margins encourage miners to tap older, less-efficient ASIC machines, boosting their hashing power in search of bitcoin rewards. Supply delays from leading ASIC chip-makers such as Bitmain and Canaan, which struggle to meet surging demand for new machines, will further compel many to revive their older machines.
The bottom line: Bitcoin is an energy-gobbling colossus and rising prices will naturally increase that footprint. We must drive more of it to renewable sources.
The Conversation: Powell’s Soothing Message
In the most important economic event of the week, Federal Reserve Chair Jerome Powell gave a post-rate decision press conference that took markets back from a knife edge and boosted a bunch of risk assets, including bitcoin.
It was a lesson in the nuances of the Fed’s expectation management strategy and it underscored how financial conditions have become especially sensitive to Powell’s utterances.
The discussion around bitcoin’s response also illustrated how the cryptocurrency has been mainstreamed this year. It is now an asset class worthy of consideration as part of a wider conversation about how Wall Street responds to macro policy matters.
The markets were relieved that Powell went out of his way to pre-emptively warn markets not to overreact to early signs of a post-pandemic bounce in economic growth and inflation.
For Craig Torres at Bloomberg, the clincher was not just what the Fed chief said. It was also that he made it abundantly clear that stronger economic data would not prompt the Fed to consider tightening rates. The Fed is working to a longer time frame so it can assess more “tangible” evidence of a post-COVID recovery before doing so.
The FOMC’s statement on keeping rates steady contained no surprises. If anything, the committee members’ forecasts of a future post-COVID rebound might have signaled a more hawkish stance toward tighter policy.
And yet, market expectations were leaning toward something more negative on the rate outlook. So as investment strategist Lyn Alden pointed out, the net effect was a “dovish tilt” that shifted all risk assets into the black while the dollar fell. And there it is: bitcoin in there with the big boys.
If Lyn Alden is a macro strategist who has discovered that bitcoin is relevant to macro analysis, Avi Felman of BlockTower is a crypto analyst who is finding his earlier thesis on bitcoin’s lack of correlation with other asset classes might need some tweaking. To him, bitcoin’s price behavior after the Fed news looked decidedly “macro” – a “pure rates play.”
Relevant reads (and listens): Bitcoin stimulus
The recent passage of the Biden Administration’s massive $1.9 trillion stimulus package was big news for everyone, including the Bitcoin community. It feeds into the crypto thesis that when the COVID-19 bill falls due for the U.S. government, and for others, policy makers will ultimately decide that the only way to cover the cost is through inflation – repaying debts denominated in today’s dollars with the lesser-valued dollars of the future. It also sparked a narrower but intriguing discussion in our coverage about whether people would literally invest their $1,400 stimulus checks into bitcoin.
- The discussion first arose on the “Breakdown” podcast. In his show last weekend, NLW explored the package’s wider crypto implications – including the rather extreme thesis that it’s a precursor to full-blown modern monetary theory (MMT) – and flagged evidence from the last stimulus package.
- On our “All About Bitcoin” TV show, CoinDesk’s director of data and indexes, Galen Moore, explored that evidence, which stems from data out of Coinbase, which saw an unusually large number of bitcoin purchases during the last stimulus distribution that exactly matched the size of the checks.
- It turns out this is a serious enough possibility that Mizuho Securities conducted a survey on the matter, finding about $40 billion worth of stimulus checks would be spent on bitcoin and stocks, with about 60% going to the former. Jamie Crawley reports the investment bank estimates this would add about 3% to bitcoin’s value. (Don’t get too excited about that; we’re regularly seeing daily moves of that size.)
