Elon Musk criticises Bitcoin for its enormous energy consumption of fossil fuels. Without further ado, he drops it as a payment option at Tesla, whereupon the Bitcoin price falls rapidly. Musk is mostly right about the greenhouse gas emissions involved in Bitcoin mining, but he is mostly wrong about the trend.
Creating and destroying values of billions with a few tweets – that is what Tesla CEO Elon Musk has been doing in recent months, proclaiming his opinion on the cryptocurrency Bitcoin via Twitter and changing it again soon after.
At the end of January, Musk revealed himself as a supporter of the market-leading cryptocurrency Bitcoin: with a simple #bitcoin in his profile description, he contributed to the digital currency’s price rising by around 20 percent. A week later, he also announced that Tesla had invested around $1.5 billion in Bitcoins. Soon, Tesla electric cars should also be available for purchase with Bitcoins.
When he followed up on his announcement on March 24, the price of the cryptocurrency rose again, landing temporarily at the previous high of more than $64,000 before stabilizing at around $55,000 in May.
Cryptocurrency goes up – and down again
But then the turnaround: Elon Musk tweets on May 13: “Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.”
Within a week Bitcoin plummeted by one-fifth. Since then, the currency has been unable to recover from this shock, settling at around $35,000.
But what is there to his thesis? Has Bitcoin’s energy consumption really risen as rapidly between Musk’s first and last statement as he claims? And how big is the share of fossil fuels, especially coal, of Bitcoin mining and transactions actually?
Bitcoin consumes more energy than some countries
Bitcoin is based on the blockchain technology “proof of work”. The digital coins are produced through a process called mining in which computers must solve complex calculations. The more computers participate, the more complex the calculations become. Companies and private miners around the world run high-performance computers, sometimes in entire warehouses, to mine the lucrative coins. Also, transactions are checked by all computers within the network. This is how security is ensured. However, all of this requires enormous computing power and therefore a lot of electricity.
The “Cambridge Bitcoin Electricity Consumption Index” (CBECI) shows how much energy this is. The index determines how much energy the currency consumes, based on nine parameters, including the current price of the Bitcoin: The more expensive the Bitcoin, the more lucrative the mining and the more computing power is required. The daily values are used to estimate how much energy the Bitcoin network would consume within a year if the current conditions persisted. Thus, the index is partly subject to strong daily fluctuations and should only be read as an orientation.
The CBECI models a worst-case scenario which assumes that all Bitcoin miners work with outdated, energy-intensive computers as well as a scenario with the lowest possible energy level. This best-case model would be achieved if miners used only the most modern and efficient technology. The reality is somewhere in between. To be able to verify Musk’s statement, one should orient on the estimated actual value of the CBECI.
As of May 13, the day Musk announced his withdrawal, CBECI estimated the electricity consumption of Bitcoin about 140 TWh per year, which would be higher than those of the Netherlands, whose industry and residents consume just 119 TWh annually. Currently, the index estimate is 66 TWh, which would still be equivalent to a country like Austria.
It should be assumed that Musk viewed electricity consumption as unproblematic when he invested in the cryptocurrency and announced vehicle purchases with Bitcoin in early February. At that time, CBECI’s estimate was around 117 TWh. As the Bitcoin price rose, energy consumption also climbed to as much as 151 TWh on May 13. This represents a growth of about 34 TWh (or by 29 percent) within three months. However, in the previous three months from December 2020 to February 2021, electricity consumption had more than doubled – from circa 55 to 117 TWh. Therefore, a sudden rapid increase, as Musk claims in his tweet, did not take place.
Climate killer Bitcoin?
It is hard to exactly determine how high the CO2 emissions of Bitcoin are. If only renewable energies were used, Bitcoin mining would not be critical. For an approximate estimate, one should take a closer look at the countries in which Bitcoin is mainly mined, especially their electricity budgets.
According to the latest data from Cambridge University, about 65 percent of Bitcoin mining takes place in China. Countries with low electricity prices such as Kazakhstan, Malaysia and Iran become more relevant too. Within the first half of 2020 their stakes of Bitcoin mining rose about eight percent. All these countries rely mainly on cheap coal-fired power, which produces the highest CO2 emissions of any energy source. Other studies assume that still 75 percent of Bitcoin mining is done in China. Therefore, China’s electricity usage can be seen as representative of Bitcoin’s carbon footprint. A movement in China’s electricity market would also significantly impact the Bitcoin network’s emissions. Within the last few years China has increased to power the country by renewable energy – most notably hydropower – yet coal energy still clearly predominates at around two thirds. In fact, in the first two months of 2021, China’s coal production increased significantly by one quarter in comparison to 2020.
After all, Musk’s claim needs to be put into context. The technology behind the Bitcoin blockchain – proof of work – has always been extremely energy intensive. Which is why Bitcoin was never considered as a particularly ecologically friendly currency. Moreover, the cryptocurrency’s overall energy consumption grew faster in the months before Musk professed to be a Bitcoin supporter than in the same period until he changed his mind. It was also long known that China, the driving force behind Bitcoin mining, gives little consideration to their carbon footprint. Behind the multi-billionaire’s statement therefore may lie a rash action or a long-term strategy.
RESEARCH | ARTICLE © Timon Herwig and Niclas Reichelt, Hochschule der Medien Stuttgart, Germany
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