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As Mining Expands, Will Electricity Consumption Constrain Bitcoin?

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Since the modern economy has gone digital, it has come to require more electricity. Peter Kelly-Detwiler, co-founder of NorthBridge Energy Partners, LLC, a consulting firm that helps companies connect assets to power grids, examined the impact that expanding cryptocurrency is having on energy consumption in a recent Forbes article. He raises the possibility power supply could  constrain bitcoin’s growth.

Detwiler noted that while cryptocurrencies are ethereal, they depend on a very real support in electricity. He noted hundreds of megawatts of electricity are used to produce bitcoin, although there are few estimates available on the exact amount.

Miners Are Elusive

One reason the exact amount of electricity used to power bitcoin is uncertain is that the miners that produce bitcoin maintain a low profile. Bitcoin mining centers are big datacenters that are dispersed globally. The datacenters are clustered in places with cheap electricity.

China has the largest number of datacenter mines. The largest share of Chinese mines are close to Tibet in an area with abundant, cheap hydropower. Datacenter mines also exist in Iceland, Malaysia, Venezuela, the Republic of Georgia and other countries.

Electricity can comprise 90% to 95% of mining costs, Detwiler noted. He compared energy and computers to fuel and bulldozers that claw away at hillsides for gold. The computers have specialized chips designed to solve math problems using open source software.

How Mining Consumes Power

Cryptocurrency mining is complex, Detwiler observed. A miner can create currency by solving math problems that seal off transaction blocks in the publicly visible bitcoin blockchain ledger. If a miner solves a problem, they are awarded bitcoins.

Every 10 minutes, bitcoin transactions (of which 150,000 to 250,000 occur daily) become locked and filed into a single block in the blockchain. Computers compete to gain credit for sealing off the latest block in the chain.

To gain this credit, miners must make millions of attempts to create the hash with the required characteristics to solve the problem. Hence, speed is critical to solving the problem. Special computers can run in the “tera-hash” range, a trillion inputs per second.

The more miners involved in the process, the greater the level of difficulty required to win credit for sealing off the latest block in the chain. This increasing level of difficulty is by design in order to slow the bitcoin creation process. The increasing difficulty builds the need for faster machines that consume more electricity.

The Bitcoin Supernetwork

Reuters reported that the bitcoin computer network is estimated to be 43,000 times more powerful than the top 500 supercomputers in the world combined.

Estimates indicate that by 2020, bitcoin mining could consume 14,000 megawatts of electricity, comparable to half of New England’s generating capacity or all of Denmark’s consumption.

The seignorage, the difference between money’s face value and the cost to produce it, could become minimal or negative, challenging the currency’s viability. The marginal power costs could outstrip the newly-minted bitcoin’s value.

The 14,000 megawatts is a worst-case estimate based on the existing technologies. The same source noted that 417 megawatts would be possible if better equipment replaced existing machines. This indicates one bitcoin would need 5,500-kilowatt hours, comparable to half the yearly electric consumption of an average U.S. household.

Mining Power Estimate: 600 Megawatts

A senior executive at a mining firm who did not want to be named estimated global bitcoin mining power at 600 megawatts. This is based on the number of calculations being performed and the average energy efficiency involved. That number is constantly improving.

The question naturally arises: could electrical supply constrain bitcoin’s growth?

New mining chips are expected to be three times faster than current ones, according to one executive. In addition, tight industry margins will draw attention to energy efficiency.

The bitcoin executive estimated the industry spends $250 million yearly on electricity. Added to capital costs, the annual cost to operate the network is between $400 million and $500 million. Compared to around $525 million in yearly revenue (1.4 million bitcoins released at an average price of $375), the margins are not high. Hence, continued growth is not likely without better efficiency.

Also read: BTC mining proof of work costs: large, wasteful but fair

Bitcoin Is Here To Stay

Nevertheless, the efficiencies of bitcoin bode well for its future viability, Detwiler noted. The cumulative value of bitcoin transactions in 2015 was slightly above $60 billion at a system network cost of half a billion dollars

PayPal, by contrast, reported $2 billion in expenses for 1.4 billion transactions totaling $81 billion in payments. Bitcoin is more efficient when considering the value of payments against costs. The comparison is not perfect, Detwiler noted, but it highlights bitcoin’s inherent efficiencies.

Detwiler did not answer the question of whether energy supply will constrain bitcoin’s growth, but he noted it is a trend that merits observation.

Images from Shutterstock and LinkedIn.

TheBitcoinNews.com – leading Bitcoin News source since 2012

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