Why Bitcoin Using Lots of Energy Is Actually a Good Thing

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Bitcoin (CRYPTO:BTC) is widely criticized for its high energy consumption. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin uses around 0.29% of the world’s energy. That’s a huge amount of energy, but that number doesn’t tell the whole story.

This stat tells us nothing about how Bitcoin uses energy, what type of energy it uses, or the external effects of that energy consumption. Although it may seem counterintuitive, I would say it’s a good thing that Bitcoin uses as much energy as it does.

Image source: Getty Images

What is energy really for?

In order to discuss the usefulness of Bitcoin, we need to cover what the energy is actually used for. Bitcoin has three strict rules for which energy is used:

Keep the maximum bitcoin supply at 21 million coins. Produce a 1MB block approximately every 10 minutes to store transactions on the blockchain. Do not change the first two rules.

In the end, Bitcoin uses a significant amount of energy to secure and protect its network from attack. An attack could theoretically come from an entity that wishes to modify the basic parameters of its protocol. This entity can try to change three main things: supply, block size or block timing.

This entity might want to change the block schedule – and therefore the Bitcoin supply – in order to take advantage of the newly minted Bitcoin. Or, someone may want to increase the block size, which would increase the number of transactions per second Bitcoin can handle (this has been flagged as a potential threat to Bitcoin’s decentralization, as doubling the block size would increase the requirements hardware for node runners, which in turn would reduce the number of people who can run their own Bitcoin node).

It turns out that the ruleset that was configured when Bitcoin launched was calibrated to maximize decentralization. If anyone wanted to change the rules in any way, they would have to acquire more electricity than the grid is already using, and a massive fleet of computers.

Such a task would prove difficult even for the greatest of nations.

What energy is not used for

The energy used by bitcoin is not directly used to process transactions. The network will use energy to produce a block (or a set of packed transactions), whether or not there are transactions in the block. Transaction processing is a by-product of block production, not the goal.

The type of energy Bitcoin uses

The Bitcoin Mining Council estimates that around 58.5% of the network is powered by renewable energy. Bitcoin miners regularly seek out the cheapest forms of energy because they can make more money.

Bitcoin incentivizes miners to find cheaper forms of power generation because to mine Bitcoin all you need are computers that run on electricity. The cheaper the energy, the fewer mining blocks the miner spends. When a miner mines a block, they are rewarded with BTC, which they can then sell to recoup the energy cost. This often leads miners to deploy their operations next to renewable energy sources such as hydro, wind and solar. These renewable energy farms can sell electricity for less than non-renewable sources, which means Bitcoin mining companies can make more money.

A pad for the grid

Bitcoin’s high energy consumption therefore creates greater demand for these renewable forms of energy. Bitcoin can actually be a 24/7 buyer of last resort for these energy farms, when retail and industrial buyers may be offline, asleep, or when the energy would otherwise just have been dumped (known as reduction ). This allows bitcoin to act as a buffer for the network and smooth energy production – and profits. This leads to greater profitability for bitcoin mining operations and green energy providers. Profits can then be used to reinvest in new green energy projects, accelerating the rate at which the world transitions to a greener energy grid.

Recognition of waste

Bitcoin is by no means perfect. It is run by computers that have their own carbon footprint to produce. Solar, hydro and electric power sources also have an environmental cost to produce. Finally, around 41.5% of Bitcoin’s energy consumption still comes from non-renewable sources, such as coal and fossil fuels. But any useful industry produces some kind of waste; no one is exempt. Bitcoin is about the transition to a more sustainable and reliable financial system. I would say it speeds up the rate at which more sustainable power generation sources are used for such a process.

Bitcoin uses energy wisely

Bitcoin uses energy to protect the integrity of the network, ultimately securing approximately $1 trillion worth of bitcoins. But there are also positive externalities that come from bitcoin using as much energy as it does. It buys energy from suppliers that otherwise might not have a buyer. It prefers cheaper and therefore greener energy sources, which facilitates the necessary rapid transition to a greener grid. So I’m comfortable with bitcoin using as much energy as it does.

I also think it’s a good thing that bitcoin uses this energy to secure my own investments, and everyone else uses the network to store, save, and transact.

This article represents the opinion of the author, who may disagree with the official recommendation position of a high-end advice service Motley Fool. Were motley! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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