Modern Mining

April 5, 2018

“Wow, if I had invested $1,000 in Bitcoin last week, today I would have… still no idea how Bitcoin works.”[1] If you share Stephen Colbert’s sentiment or think blockchain sounds like a good name for a kid’s toy, don’t sweat it.

There are two things you need to know about Bitcoin. First, it’s a digital currency. So, there’s nothing tangible like a dollar bill or quarter. Second, Bitcoins are created[2] through a “mining” process. But instead of a pickaxe, these “miners” use computers.

The mining process needs a lot of computing power and a lot of energy. A lot.

Here’s some context. The Bitcoin network consumes power at an estimated annual rate of 44.54TWh, which exceeds the rate of many countries such as Peru and Iraq.[3] In a per-transaction comparison with VISA, Bitcoin requires several thousand times more energy.[4]

The recent spike in Bitcoin’s energy use is linked to its surge in value because an increase in value incentivizes more mining activity.[5] One projection claims that in 2020—merely two years from now—the Bitcoin network could consume more energy than the entire world consumes today.[6] Naturally, that’s raised some eyebrows.

Exactly how problematic is Bitcoin’s energy consumption? Some say it’s not. These contributors argue that such notions are nothing more than smear tactics.[7] After all, Bitcoin uses less than 1% of the total energy used by the United States.[8] Plus, comparing the simple payment network of VISA to the full currency system of Bitcoin is comparing apples to oranges.[9]

Nevertheless, some interested observers are asking what would decrease Bitcoin’s energy consumption. Two answers emerge in response: a decrease in Bitcoin’s price or a change to the mining process.

Some forecast that the first possibility, a decrease in Bitcoin’s price, is not only feasible but highly probable.[10] If the price suffers a sufficient blow, fewer miners would be incentivized to mine. Furthermore, remaining miners could find their mining operations unprofitable and, in an attempt to reduce costs, would be compelled to discontinue use of their least energy-efficient equipment.[11]

What constitutes a blow sufficient to dissuade individual miners varies greatly. Miners in China have arguably some of the greatest resilience to Bitcoin’s price fluctuations.[12] This is due in part to these miners’ access to cheap electricity from Chinese hydropower and coal plants.[13] Such miners’ operations could remain profitable even if Bitcoin’s price fell a whopping 50%.[14]

The second possibility requires a change to the fundamentals of the mining process. This change could come to fruition by modifying the miners’ incentive schedule in a way that makes mining less lucrative or transitioning the mining process to an alternative algorithm.[15]

Such avenues for changing the fundamentals of the mining process would face predictable opposition from Bitcoin miners and traditionalists.[16] Not only could the changes render hefty investments in customized mining hardware useless,[17] but they could have large security implications.[18]

At the end of the day, the speculation regarding Bitcoin’s energy consumption is rivaled only by the speculation regarding its market performance. While it’s widely agreed that Bitcoin uses a lot of energy, the significance of this characteristic is hotly disputed. Moreover, the potential cause of any change to Bitcoin’s energy use remains uncertain. Regardless of the mysteries surrounding Bitcoin, one doesn’t need a PhD in computer science to understand that Bitcoin is relevant in the global energy market, and it’s time to pay attention.

[1] Stephen Colbert (@StephenAtHome), Twitter (Dec. 8, 2017, 8:47 PM), https://twitter.com/stephenathome/status/939355676551376896?lang=en.

[2] To describe mining as a creation process is helpful for a rudimentary conceptualization. A more sophisticated description would explain how mining is a “mechanism used to introduce bitcoins into the system.” Bitcoin Mining, Saint Bitts LLC., https://www.bitcoin.com/bitcoin-mining (last visited Feb. 1, 2018) (emphasis added).

[3] Bitcoin Energy Consumption Index, Digiconomist, https://digiconomist.net/bitcoin-energy-consumption (last visited Feb. 1, 2018).

[4] Id.

[5] Eric Gimon, Bitcoin Mining’s Energy Use Won’t Eat the World – If Prices Stay Below 19% Annual Growth, Forbes (Jan. 18, 2018, 8:00 AM), https://www.forbes.com/sites/energyinnovation/2018/01/18/bitcoin-minings-energy-use-wont-eat-the-world-if-prices-stay-below-19-annual-growth/#64964b864dc7.

[6] Id.

[7] Carlos Domingo, The Bitcoin vs Visa Electricity Consumption Fallacy, Hacker Noon (Nov. 30, 2017), https://hackernoon.com/the-bitcoin-vs-visa-electricity-consumption-fallacy-8cf194987a50.

[8] Paul Payam Almasi, Bitcoin’s Energy Consumption Overblown?, Medium (Dec. 28, 2017), https://medium.com/@PAAlmasi/bitcoins-energy-consumption-overblown-31a4eded91f3.

[9] Domingo, supra note 7.

[10] Mark Hulbert, The Chance of a Bitcoin Crash is Greater than 80%, Market Watch (Nov. 29, 2017, 6:28 PM), https://www.marketwatch.com/story/the-chance-of-a-bitcoin-crash-is-greater-than-80-2017-11-27.

[11] Timothy B. Lee, Bitcoin’s Insane Energy Consumption, Explained, Ars Technica (Dec. 6, 2017, 6:30 AM), https://arstechnica.com/tech-policy/2017/12/bitcoins-insane-energy-consumption-explained/.

[12] See Dan Murtaugh, Bitcoin Can Drop 50% and China Miners Will Still Make Money, Bloomberg (Jan. 9, 2018, 11:42 PM), https://www.bloomberg.com/news/articles/2018-01-10/bitcoin-can-drop-50-and-china-s-miners-will-still-make-money.

[13] Gimon, supra note 5.

[14] Murtaugh, supra note 12.

[15] Lee, supra note 11.

[16] Id.

[17] Id.

[18] Digiconomist, supra note 3.

About

Justin Stone is a third-year law student at The University of Texas School of Law. He graduated from Texas A&M University in 2014 with a Bachelor of Arts. He will be working at the Dallas office of Sidley Austin following graduation.