The Opportunity Cost of Bitcoin
By Harsh Diwan
The day is January 3rd, 2009. The sun shines in the clear skies and the planet wakes up with endless opportunities. Satoshi Nakamoto, whoever they might be, turns on their system and mines the genesis block. The world, for better or worse, has been set on a path of change. Within a small period of just over a decade, Bitcoin reached a market cap of almost $1.2 trillion in April 2021, and over the years, it has grown to be much bigger than, perhaps, what it was supposed to be. The “currency” offers a lot of things that we didn’t have in any one package: privacy, transparency, decentralisation, international transactions, minimal fees, etc; but all of it, like most things in this world, comes at a cost.
Bitcoin operates through a ‘proof of work’ consensus mechanism, where, as the name suggests, the chain which has the most computational work put into it is the one that is accepted by the network. This computational work involves solving a very hard puzzle, which only computers are capable of solving, and whoever solves the puzzle mines some new bitcoins. Thus, the participants are known as miners. Since the currency operates decentrally, anyone can participate in the quest of solving this puzzle. As bitcoin has grown in popularity, so have the miners; and as the miners have increased in number, so has the difficulty of solving the puzzle. This is because the bitcoin software ensures that every puzzle always takes 10 minutes to solve and as the miners keep on increasing, the puzzle has to get harder to take the same amount of time and more computing power needs to be thrown at it. It has been estimated that miners make 160 quintillion calculations every second – that’s 160,000,000,000,000,000,000, in case you were wondering. So, many computers and their incredible power is involved in this essentially useless quest which could otherwise be utilised in productive things such as protein synthesis (finding the cure of cancer). Warehouses of computers are set up with the sole purpose of mining; the use of these computers and the silicon that is used to make them could have in developing countries like ours is ineffable.
Energy and the Environment
Unsurprisingly, running millions of computers to solve ridiculously difficult mathematical puzzles also requires a ton of electricity. According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin currently consumes around 110 Terawatt Hours per year — 0.55% of global electricity production, or roughly equivalent to the annual energy draw of small countries like Malaysia or Sweden. According to some studies by Harvard, Bitcoin could emit enough carbon dioxide emissions to push global warming past 2 °C in less than three decades if it adopts at the same rate as other widely accepted technologies. The question now remains: Does bitcoin deserve to consume so much electricity when only a fraction of the population uses it? The forms of exchange that we usually use might indeed use more energy than what bitcoin does but that system also supports billions of people, exponentially more than bitcoin. As the technology of any industry advances, it’s expected that the operations of that particular industry will become more efficient, however, in the words of David Gerard (author of Attack of the 50 Foot Blockchain), “Bitcoin is literally anti-efficient”. When the mining hardware becomes more efficient, everyone in the network will have to adopt the same technology to remain competitive and as everyone adopts more efficient technology, the puzzles to solve just get more difficult, so nothing is gained from technological improvements in the mining fronts. Then, there is also the fact that since bitcoin does not have any underlying value, the value is completely dependent on our perception. Some consider bitcoin to be nothing more than a Ponzi scheme whose major usage involves money laundering and terrorism. While on the other side of things some believe that bitcoin is the second coming of Jesus, it’ll save us from the monetary repression, inflation, and the centralised wrath of the current system.
So, the answer to the question – if bitcoin deserves the energy that it consumes depends completely on your perception of its utility. But as it currently stands, the system is not sustainable to accommodate bitcoin as a widely used medium of exchange. However, as time goes on, the reward for miners solving the puzzle halves every four years – so, unless the value of Bitcoin always doubles in the same period of time, that share of revenue that miners receive will keep on falling and they will keep exiting the system. Thus, over time, bitcoin will become much more energy-efficient than it is today, however, when that time comes, there will be significantly better alternatives available to use in the crypto world, much more than we already have.
Bitcoin and the technology that it brings adds value to our society and just like everything that adds value, it comes at a cost. Is that cost justified? Completely depends on your perception.