Is Bitcoin mining a waste of energy? Analyzing the significance of energy consumption for Bitcoin

This article is from ChainNews, authored by Gianmarco Guazzo, translated by Li Hanbo, with the original title "Opinion | Why is the energy consumption brought by BTC mining necessary?"

According to researchers at the University of Cambridge, the annual energy consumption of the Bitcoin protocol is approximately 120 terawatt-hours, equivalent to the annual energy consumption of Argentina or the Netherlands. If prices remain stable, this trend is bound to continue. Therefore, let's try to understand why energy consumption is crucial for the security of its protocol and why it is closely related to price.

Image: Federico Beccari

1. Energy Consumption

It is well known that for Bitcoin to function, a large number of distributed computers must be able to allocate their computing power to users to verify transactions. In exchange for energy and computational resource consumption, the Bitcoin protocol rewards "miners" with newly minted coins. The monetary policy of Bitcoin allows miners to create a maximum of 21 million bitcoins through a halving mechanism, making BTC the only truly finite asset in the world. Thus, the protocol's energy consumption comes from computers specifically designed to solve particular "puzzles" to authenticate transactions occurring in the network. The specialization of mining has led to the establishment of buildings and warehouses dedicated to this activity, significantly increasing the average energy consumption in certain regions of the world.

2. Security of the Protocol

As one can easily imagine, mining activities are crucial for cryptocurrencies, which makes Proof of Work their distributed consensus algorithm. Besides the basic layer operations where transactions occur, energy consumption is another critical reason that many overlook. The energy consumed by Bitcoin is necessary to protect the cryptocurrency from network attacks and tampering with data within the protocol. One of the most commonly associated network attacks in the cryptocurrency world is the so-called 51% attack. A hypothetical hacker would need to possess at least 51% of the total computational power of the protocol to arbitrarily modify data within it. Since computational power is equivalent to the energy consumed by machines, the higher the latter, the more secure the network becomes. As Nick Szabo, the creator of Bitgold, pointed out:

"Productive resource consumption and poor computational scalability unlock the security needed for independent, global, automated integrity."

3. Positive Price Drivers

The explicit design of Bitcoin is to make mining competition increasingly fierce, attracting more capital than ever before. Similar to the situation with physical gold and its mining, the higher the asset price rises, the greater the incentive for miners to invest in mining. In the case of Bitcoin, the cryptocurrency's price has risen to nearly $60,000, which has also increased interest in mining. In this sense, mining is undoubtedly a positive driving force for cryptocurrencies and a sign of growing interest in digital assets. Another fundamentally significant point is that for the first time in history, there is an asset whose extraction/construction does not depend on the resources spent by investors, but is predetermined by an algorithm. Energy consumption increases with its price rise, but it does not affect the supply and regulatory laws of circulation at all.

4. Bitcoin, Banks, and Gold Mining

As mentioned earlier, the energy consumption of Bitcoin miners is certainly high, but when compared to the banking system or gold mining, the situation changes significantly. As noted in research by Ark Invest, traditional banks consume 2.34 billion gigajoules (GJ) annually, gold mining consumes 500 million gigajoules, while Bitcoin consumes 184 million gigajoules. The energy consumption of the Bitcoin protocol is relatively small compared to them. For the first time in history, we can turn energy into "money" while making assets more secure.

Source: ARK Investment Management LLC, 2020. Data source: https://medium.com/@danhedl/pow-is-efficient-aa3d442754d3

Therefore, Bitcoin mining is not a waste of energy, but rather allows the network to survive, progress, and provide decentralized services. The higher the price, the greater the energy consumption, and the more reliable it becomes as a protocol. The greater the consumption, the greater the interest in cryptocurrencies. The question is not how much energy Bitcoin consumes, but how much energy usage we accept. This is true for banks and gold, and it will be true for Bitcoin.