It's been one year since Bitcoin peaked
On 7 December 2017, John McAfee, founder of the eponymous computer security company, tweeted the following: “Bitcoin now at $16,600.00. Those of you in the old school who believe this is a bubble simply have not understood the new mathematics of the Blockchain, or you did not cared [sic] enough to try. Bubbles are mathematically impossible in this new paradigm. So are corrections and all else”. This is not to ridicule Mr. McAfee but to show that many investors – in particular millennials – probably learned a lesson this year: bubbles exist, and they always will as long as human beings are trading with each other. The interplay of greed and fear, (over-)optimism and pessimism will create bubbles and crashes again and again and again. There is no stopping this.
As I write these lines, the price of bitcoin is $3,234, down 77.4% in 2018 and down 82.7% from its all-time high one year ago today. The damage this crash in cryptocurrencies has done to investors gullible enough to buy into the hype since 2017 is large, but the damage cryptocurrencies cause to the environment and our planet is still ongoing.
As cryptocurrencies have become more popular, the number of computers used to mine new Bitcoin, Ethereum etc. has grown exponentially. Mining cryptocurrencies is very energy intensive because of the stupid way these currencies are designed. In order to generate one new Bitcoin, for example, a block is added to Bitcoin’s blockchain once every ten minutes or so. This new block goes to the first “miner” who produces the first valid “nonce” – a 32-bit field with a value that is lower than the current target value of the Bitcoin network. Because these nonces cannot be targeted but are essentially created randomly, generating a valid nonce, and thus a valid new Bitcoin, is like playing a lottery. And the lower the target value for the network, the harder it is to win this lottery. In order to maximise the chance of winning in this lottery, one has to invest in computers that can generate as many lottery tickets per second as possible. And since the target value for Bitcoin is lowered every ten minutes, it gets harder and harder for the computers to successfully mine a new coin.
The end result is shown in the chart below. The website Digiconomist.com has created an algorithm to estimate the total energy consumed by computers mining Bitcoin. Their methodology estimates the likely electricity consumption as well as a minimum electricity consumption that is needed to generate the amount of newly created Bitcoin in the world. Throughout much of the second half of 2018 the energy consumed to mine Bitcoin was a whopping 73TWh per year – more than the entire electricity consumption of Austria. The minimum energy consumed to mine Bitcoin was about 58TWh per year or about the same as all of Switzerland. Add to that the c. 20TWh per year consumed to mine Ethereum and you end up with roughly one quarter of the annual electricity consumption of the UK. Luckily, the decline of cryptocurrencies has put some miners out of business and as a result, energy consumption to mine Bitcoin has dropped to c. 45TWh per year since November, which is still roughly the amount of electricity all of Portugal uses annually.
To make things worse, the carbon footprint of Bitcoin is likely to be massive. Because most of the computers used to mine Bitcoin are located in China, where the cost to run them is small, they are likely run predominantly by electricity generated in coal power plants. Digiconomist estimates that per Bitcoin transaction 239.84kg of CO2 are emitted which means that at the current run rate Bitcoin mining may emit 21.9Mt of CO2 per year – the same amount as all of the cars in Germany combined.
As the cryptocurrency craze fades, all I can say is “good riddance”.
Bitcoin energy consumption
Source: Digiconomist.