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Hi Everyone,
Happy Earth Day!
There's no denying the good that comes from having a global form of internet money that is independent of governments and banks.
However, it is time to start thinking about the impact that bitcoin mining is having on the environment.
On a televised Bloomberg interview last week, anchor Anna Edwards asked me the biggest bitcoin gotcha question. And she got me.
Of course, I'm aware of all the standard maximalist rebuttals to the energy impact question. How BTC mining is done primarily using renewable energy, as it incentivizes cheaper power. How data centers that support the current fiat system are no doubt much worse, as is the government and banking system that back the U.S. dollar.
For some reason, all these arguments raced through my head and went out the window, as I stammered to find a good response. Finally, I conceded that it is a problem.
It may not be right now, but the hash rate has been on a steady climb since Bitcoin's creation, with zero periods of sustained downward momentum in the amount of computing power being used to secure the network.
As we can clearly see in this log-scale graph from blockchain.com, bitcoin's hash rate continues to rise exponentially as it has always done. It's difficult to see how, on a longer timeline, this won't become a problem. |
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Wide mining margins
One thing we can say is that the application-specific integrated circuit (ASIC) technology powering the mining rigs is improving rapidly.
So, much of this rise in hash rate is actually reflecting machines that can get more bang for their buck, or...more hashes for each kilowatt.
Still, the number of new devices being deployed far outweighs the technological advancements, and they are consuming more and more total energy as time goes on.
Furthermore, the argument that bitcoin miners always look for the cheapest energy source is only partially true.
During periods when bitcoin's price is comparable to the cost of mining a unit of the digital currency, miners have very thin margins and will indeed actively search for the cheapest possible energy.
However, when the price of bitcoin far surpasses the mining cost, who's to say that the miners will necessarily take these same precautions?
In this chart, we can see the approximate cost to mine a bitcoin for various mining machines.
Those using the latest technology are able to produce a unit of bitcoin for under $15,000 a pop right now, and even those using older machines like the Antminer S9i still don't seem to have much incentive to nickel and dime their power source right now. |
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Potential solutions
Don't get me wrong. When looking for enemies in the war against climate change, bitcoin is far from being the worst culprit out there.
However, two wrongs don't make a right. So saying that bitcoin is better than the alternatives is not a great excuse for being content with it's current trajectory.
We're certainly due for a course correction, and now is a great time to start the conversation.
This is why I was delighted to see that ARK Invest and Square worked together to put out a research paper that claims to be "the beginning of what we hope will be a fruitful exploration of solutions to help usher in an abundant, clean energy future." |
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To be clear, Jack Dorsey and Cathie Wood, the CEOs of Square and ARK Invest, certainly have every incentive to ensure that bitcoin is seen as a clean energy solution.
Although it may be better than the alternative, the main focus of the paper doesn't seem to seek out solutions so much as justify Bitcoin's massive energy consumption and paint a rosy picture of how it might positively impact the clean energy sector.
Clean energy is rapidly becoming cheaper and more efficient than the alternative. This is not a bitcoin narrative. It's a simple fact.
According to Square/ARK Invest, bitcoin mining will end up enticing energy operators to "overbuild" capacity, because any excess can easily be monetized. That doesn't sound like much of a solution, so much as an energy-intensive feedback loop to me.
Kevin O'Leary, of Shark Tank fame, has been the first asset manager on record to state that he will only buy bitcoin if it has been mined using clean energy and produced outside China, and I think this is a wonderful first step.
Taking this a bit further, One River Asset Management has proposed carbon neutral bitcoin funds, which could ease the minds of some crypto curious asset managers.
For you and me though, we do need to understand that while bitcoin may be heads and tails better than the alternative, it's by far not an ESG investment.
Have a pleasant evening. |
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Mati Greenspan Analysis, Advisory, Money Management |
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