Breaking ChatGPT’s Bitcoin FUD #7: Energy Consumption

According to ChatGPT, the amount of energy that’s required to secure Bitcoin is concerning because the decentralized Proof of Work network consumes more electricity than other payment systems. As usual, the AI model provides little to no nuance and presents a rather generic criticism. Nonetheless, the fact that we’re given a comparative perspective (worded as “consumes more energy than most other payment systems”) is really useful and we can use it in the FUD deconstruction.

Before we dive into breaking the FUD itself, it’s important to distinguish between two types of mainstream commentary which regard Bitcoin’s electricity use:

– the first one is inherently nihilistic and implies that Bitcoin is useless or should not exist alongside banking services. This type of logic leads to a conclusion that Bitcoin is wasteful, trivial, and too damaging for the environment to receive any kind of credit. This is the most common type of attack, even when it’s presented indirectly under the disguise of “Bitcoin has no utility” and “Bitcoin can’t be money”;

– the second type suggests that Bitcoin should switch to Proof of Stake. It’s a more nuanced, technical, and ultimately destructive argument which is mostly perpetuated by altcoin proponents who seek to undermine Bitcoin’s decentralization and possibly gain a degree of control. Ethereum is often presented as the example of a transition to Proof of Stake that Bitcoin should follow, while Ripple executives actively fund anti-Bitcoin campaigns to damage the system’s reputation. Some of these points sound reasonable to the average person, but it’s important to explain why Proof of Stake can’t provide security in the absence of a concerning degree of centralization.

Both of these arguments are destructive in the sense that they aim to erode Bitcoin’s fundamental properties. The first one benefits bankers, while the second one serves the interests of altcoin proponents whose networks can’t compete with Bitcoin on the free market… so they consequently choose to play the political game.

Now let’s provide a little bit of context to explain how Bitcoin works and why it needs to consume energy to function. Because yes, Bitcoin is a form of money which uses large amounts of electricity to remain secure. The system is bound to the laws of physics, as transactions get thermodynamically protected against future changes. New transactions from users worldwide gets added into a memory pool which gets stored by Bitcoin nodes, while miners take part in a global competition to find a rare number (referred to as “hash”). Once a miner or group of miners discovers that number, a message gets broadcast to the entire network, and a time-stamped block which encapsulates a few thousand transactions from the memory pool gets added to the public ledger.

Only one miner or group of collaborative miners can take the reward. Bitcoin is a “winner takes it all” system which encourages competition and doesn’t favor inefficiency. Miners need to find an inexpensive and reliable source of electricity, use hardware which produces the greatest amount of hashes per consumed kilowatt, and constantly adapt to a dynamic global market which never stops innovating and sometimes gets regulated by local or national governments. In most cases, the best source of energy for Bitcoin miners is also the greenest – renewable electricity production is a burgeoning field, and there are always some excess kilowatts that can’t be stored and therefore gets used to contribute to Bitcoin’s security in exchange for mining rewards.

Bitcoin’s Proof of Work mining is the element which connects the digital money network with the real world and creates a cost for the production and transaction of funds. It provides thermodynamic finality to every operation and makes sure that the history can’t be altered without great costs and permanent evidence. At first, Proof of Work was a mechanism to deter denial of service attacks (as described by Moni Naor and Cynthia Dwork in 1993) and prevent e-mail spam (as implemented by Adam Back in Hashcash). Basically, operations within a Proof of Work system require either a monetary payment or a computation cost: if you want to spam a mailing list, you must use your computer’s processor to run the right amount of hashing cycles.

In Bitcoin, Proof of Work also works as a protection against censorship: if all transactions pay fees and require a miner to include them in a block, then there will always be someone who will accept to take the fee to cover electricity costs. On a global scale, this mechanism circumvents political censorship. If certain users are sanctioned in a certain number of countries, it’s impossible for the entire network to collaborate in censorship because a miner from a free jurisdiction will have no moral or legal issue with taking the fee – therefore include that transaction in a block.

Another advantage of Bitcoin’s Proof of Work mining is the so-called permissionless nature. Anyone can buy a computer which specializes in mining. Of course, not everyone around the world benefits from competitive electricity costs and a friendly jurisdiction. But there is no registration required and there is no need for miners to reveal their identity to the world – all they need is luck or a lot of computation power to discover the rare hash before the rest of the world.

The descriptions presented above should fuel the imagination of any defender of human rights – and should be self-explanatory as to why governments and big corporations dislike Bitcoin and often criticize it for being wasteful. People living in authoritarian regimes need a way to protect themselves too.

Sounds complicated? It’s because the decentralized design uses constant verification. In this money system, all participants check each other’s honesty and rely on math and computer code to settle what is fair and what gets invalidated. Bitcoin mining is part of securing a decentralized network which has no central entity to make the rules. Bitcoin is the most successful attempt to solve the double spending problem – it makes sure that, in the absence of a server which acts as the oracle for everyone else, the same amount of money doesn’t get spent twice by the same participant. It’s like going to the store and trying to pay for a $2 chocolate bar by offering the same $1 banknote twice, before the cashier can put the bill in the register. It can’t work as long as there are verifiers who observe that you’re trying to cheat the system.

Everyone is bound to the same consensus rules, so attempts to cheat are costly: for example, if a miner pretends to have found the right hash and the network’s rule-enforcing nodes disagree, then the miner’s work doesn’t become part of the public ledger. This rejection comes with financial costs, as the miner who tried to cheat has used electricity-intensive computation and must either get in line with the rest or try to convince a 51% majority of other miners to collaborate in cheating.

However, at least up to this moment in Bitcoin history, it was always more profitable to play by the consensus rules than to try to attack the network. Honest miners receive rewards which cover for their electricity costs and other expenses. Dishonest miners haven’t been able to form a dangerous majority due to the geographic distribution of the Bitcoin network and the involvement of a large number of users who believe in this parallel money project and want to see it succeed. Part of the merit belongs to the way in which the incentives were designed to encourage honesty, but we should never disregard human action. It’s the quality of the Bitcoin users that brought it to this point.

Banks don’t have this problem, as they are governed by human politics. Their settlements are also much slower than Bitcoin blocks, they only work from Monday to Friday within a time frame of 8 hours, and all transactions in between are stored in a proprietary version of “memory pool” which gets cleared during office hours. Unlike Bitcoin, banks can reverse transactions and freeze funds with great ease. It’s this censorship dimension which gets taken to extremes even in the most democratic countries with liberal constitutions that theoretically involve free speech – some individuals had their accounts frozen for political speech, while a bunch of Canadian truckers had to choose between financial access and continuing a protest.

A fairer world needs Bitcoin as a financial instrument which empowers the people to opt out from corruption and abuse. For as long as Bitcoin exists in a decentralized way via Proof of Work, it is possible for individuals to invest capital in order to mine it and therefore obtain amounts of it without going through state-regulated procedures. With the coins they get from mining or private peer to peer trades, people from all around the world can vote with their feet: they’ll leave any territory and jurisdiction which insults their dignity, abuses their freedoms, and infringes their fundamental rights in order to settle in a friendlier place. You can find many such examples among Venezuelans – and from amongst Bitcoin Takeover podcast guests, you can hear Alessandro Ceccere talk about escaping tyranny through Bitcoin (season 5, episode 5).

Furthermore, people can use Bitcoin to create parallel black markets which effectively circumvent abusive regulations. Farmers can no longer raise cattle and get pressured into incubating bugs? It’s not like the demand for milk, dairy products, and beef will disappear because a bunch of politicians decided to impose a reduction on the production. So people will be able to purchase the food that they like directly from the farmers, in a peer to peer manner which completely bypasses the control of Big Brother.

There’s also a lot to be said about Bitcoin in the era of cashless transactions and CBDCs. Consider this: central banks will possess unprecedented control over every money transaction, will use a worrying degree of surveillance against everyone, and will be able to manipulate the currency supply/inflation at the flick of a switch. By design, CBDCs are bound to be marked by heavy censorship, discrimination, and political abuse. No financial institution or registered payments service can provide uncensorable and somewhat private money transfers like Bitcoin does.

Bitcoin is an escape from a gloomy authoritarian future, where technological innovations are used to surveil and enforce control of the masses more efficiently than communism and fascism in the 20th century. So of course governmental actors are doing their best to discourage its use. They already try to keep every on-ramp and off-ramp under control, while also surveilling every transaction to try to guess where the money is going. But Bitcoin is every authoritarian’s worst nightmare: a global computer network which works according to consensus rules that no parliament, president, king, or alliance of powerful politicians can change. The people can’t be blocked from sending and receiving BTC anywhere around the world, so political censorship suddenly becomes less effective.

At the same time, corrupt politicians likely also keep part of their wealth in Bitcoin – which is why it probably won’t get banned in a way that can’t be technically circumvented. They can block the Bitcoin-related websites, they can restrict and discourage on-ramps, but they won’t ban Tor, VPNs, and other IP obfuscation services which bypass this restriction. Also, governments will never shut down the internet because it feeds them too much valuable data and it’s useful for propaganda. They can use the network to surveil the citizens and also control their thoughts through news and entertainment.

Based on the arguments presented, we can agree that Bitcoin is certainly useful to a lot of people across all walks of life. So the electric energy which keeps the system secure is clearly not wasted. Furthermore, the fact that a real-life resource gets consumed in order to produce BTC is also part of the reason why there’s so much global demand for the magic internet money. The price of gold takes into account extraction, transportation, and security costs. The price of food includes production, transportation, and storage costs. Bitcoin is valuable because individuals and companies use electricity in order to secure their savings and also receive mining rewards.

Unlike fiat money, which is printed out of thin air and relies on trust in governments and central banks (accompanied by a degree of military enforcement), bitcoin is honest money which everybody purchases at a price that takes into account production cost in hardware and electricity, supply, and demand. Unlike governmental money, you always know how many bitcoins exist in circulation. So when you determine the price, the only real variables are production cost and demand. As I’m writing this article, the price of 1 bitcoin is approximately $30000 – but when fiat money gets replaced, one bitcoin can be priced in hours of labor, scarce natural resources, pieces of land, gold coins, and other human-made products. Time, energy, and resources are finite – why shouldn’t the money that purchases them also be bound to the laws of physics instead of human politics?

Having electricity consumption as a point of reference for evaluation is a feature which works in Bitcoin’s favor. It makes the network secure and it gives the currency more legitimacy. The regular counter-argument is that Bitcoin is computer code that anyone can clone in order to deploy an identical network – however, markets will not assign the same amount of value to that new network over time, and therefore the use of electricity converges towards the most stable and constantly in-demand money network.

Such ambiguiszation attacks against Bitcoin’s supremacy already took place in 2017 and 2018 with various forks: Bitcoin Cash, Bitcoin Gold, and Bitcoin Satoshi’s Vision being three of the best-known attempts which clearly failed. Though they still exist today, they didn’t manage to convince the market that they are the true and most valuable versions of Bitcoin. Consequentially, they constantly lost market share against the original Bitcoin to the point where today BCH has only 0.39% of the real Bitcoin’s mining hash rate.

Not all cryptocurrency mining is created equal. The markets recognize something that has value and, on a long enough time frame, it becomes clear what is truly precious and what gets revealed to be a failure or a scam. As of 2023, Bitcoin has been the undisputed king for 14 years. Clones have come and gone, but only one form of internet money reliably helped people worldwide transact and make savings every day. So there’s clearly a lot of value in this network and it deserves to use that electricity to help individuals around the world gain more freedom against overreaching tyranny.

This is where some would argue that a switch from Proof of Work (the mechanism which uses the laws of thermodynamics to convert electricity to digital money) to Proof of Stake (Ethereum’s approach to security, where newly-minted coins are given to users who lock their ETH tokens in a contract and keep a validating computer online) could reduce Bitcoin’s energy consumption by up to 99%. The point is only valid in regards to the energy consumption, but completely disregards the meaning of decentralization and the idea of fair money.

In Bitcoin, anyone can invest external resources (fiat money, gold) to purchase mining equipment and pay electricity bills in order to acquire BTC tokens without touching any of the coins that already exist on the market. You can secure the network and earn rewards, and thus avoid enriching the early adopters by affecting the price with any potential market buy.

In a Proof of Stake system, you have no choice but to buy your coins from people who created them out of thin air, without any kind of energy expenditure. Not only that, but Proof of Stake function as an oligarchy: the newly-created currency units get distributed to those who staked the largest amounts. The rich always get richer, while the poor are destined to remain poor. Obviously, there’s a lack of dynamism: early adopters can afford to always stake and only spend the rewards they gain. The system was unfair from the get-go, but the ways in which the poorest must buy the coins from the elites to effectively preserve their overlords’ status are despicable and unacceptable for human progress.

At least Proof of Work is dynamic, as proven by the significant shifts in mining pool dominance:

– in 2011, Deepbit became the first mining pool to hit more than 50% of the hash rate and this fact caused some panic among Bitcoin Talk users;

– in 2013, Deepbit was already dead. But BTC Guild was the new kid in town, and users were expressing concerns about its dominance. By January 2015, the pool shut down due to regulatory pressure;

– in 2014, Bitcoin Magazine co-founder Vitalik Buterin wrote an article to complain about GHash.io – a pool which was nearing 50% of Bitcoin’s hash rate. In less than 2 years, GHash went out of the mining business;

– in 2017, bitcoiners were concerned about Bitmain’s unfair advantage as a manufacturer which also runs Antpool. As of April 2023, Antpool only accounts for 23% of the Bitcoin hash rate;

– in 2023, the community frowns upon Foundry USA – a pool which is getting too big after a large chunk of the operation moved out of China. Currently, this relatively new pool provides approximately 33% of Bitcoin’s hash rate. However, Foundry is fragile to two factors: the excessive regulatory concerns in the United States of America, as well as the dynamics of a competitive and global free market which searches for the most abundent and affordable form of energy. A decline is never impossible and there’s always a competing service that can take over the task offering Bitcoin thermodynamic security;

On the other hand, it’s still not clear if Proof of Stake can work without worrying degrees of centralization – when Ethereum switched to this consensus protocol, they enforced a rule which doesn’t allow the stakers (users who secure the network by locking their coins) to withdraw their money from the contract. It’s a temporary decision to prevent major security issues… or so they claim.

Their system, even if it consumes very little electric energy, is unfair and much worse than the banking system we already have. Proof of Stake can’t and won’t work alongside a free global money network which allows anyone to participate with equal chances. Which is why the enemies of Bitcoin insist that the switch of Proof of Work should happen – they don’t want the price of bitcoin to have a real-world equivalent in energy, they don’t want the system to offer everyone equal chances to compete, and they don’t want the decentralization to last. They would rather push for something that they know how to control.

The next level of criticism that they would present (officially or through ChatGPT) would be that Bitcoin is not money, as only governments make decisions in such matters. And once again, there are two distinct layers to debunking this FUD:

– the easiest way is to point the index finger at El Salvador, a country which recognizes Bitcoin as an official currency;

– the more nuanced way is to explain that markets decide what money is, not governments. The former are dynamic and innovative, while the latter are reactive and conservative. It was the markets that picked gold and silver to trade them across national borders, but it was the governments that decided to position themselves in the middle under the guise of simplifying coin verification. It was also the markets that used credit and ownership certificates before governments decided to embrace and centralize this type of accounting.

In the past, governments could ban and confiscate certain types of currency which they deemed dangerous for the elite class. Today, the same governments can’t stop Bitcoin from being used in markets to pay for goods and services. So the only real property of traditional money that Bitcoin really lacks is the ability to be confiscated by the government – and if we define money through this lens, then we can agree that Bitcoin is definitely something else.

Now let’s have a nuanced discussion about Bitcoin’s energy consumption. We already explained that the Proof of Work system has value and produces something useful for humanity in a dynamic free market way, so let’s put the energy consumption in a comparative perspective. After all, there are lots of “wasteful” uses of electricity that governments don’t frown upon but consume lots of kilowatts – ranging from Christmas lights to clothes driers and idle television screens that nobody watches.

People who dry their clothes with dedicated machines, warm their homes with space heaters (electricity-generated hot air), and sleep with their computers or televisions on aren’t considered ecological terrorists. Governments which consume a lot of electricity with military operations and various experiments are never held accountable. Big tech corporations which run server farms get a free pass, as they have enough money to lobby governments and make regulators and environmental activists look the other way. But Bitcoin miners are held to unreasonably high standards and they’re frowned upon for securing a money network that governments can’t control.

Alarmists refer to Bitcoin mining as a wasteful, planet-damaging, excessive carbon-emitting, and ocean-boiling activity. On the other hand, mining advocates and stakeholders describe it as an increasingly-green activity which converges towards the cheapest forms of electricity – which also happens to be renewable. But the truth is always somewhere in the middle: in reality, anyone can purchase mining equipment and run it at home, as part of a mining farm inside a dedicated facility, or in any other place where electricity is inexpensive.

There’s also something to be said about free markets in the energy sector and how prices will change over time to adjust with the supply-demand dynamics. For instance, the electricity produced by burning coal is now expensive, heavily polluting, and undesirable in comparison with nuclear, solar, wind, or hydro energy. However, if the demand for coal reaches such low levels that the resource becomes very cheap to purchase and burn, it’s likely to be used by competitive actors. Not only in mining, but across all energy sectors. After all, even the German government increased electricity production via burning coal in 2022 in order to deal with the energy crisis… which is rather unusual for a country which is ruled by a left-wing coalition of which the Green Party is a member.

On the Bitcoin network, miners get paid 50% fewer coins per block after every 210.000 blocks get discovered. This cycle, referred to as the “halving”, takes approximately 4 years and greatly contributes to the professionalization of the entire mining sector. The inefficient participants, which pay high prices for energy and don’t produce enough processing power to remain competitive, are driven away.

At the same time, the mining hash rate cannot stay constant over time and will not only grow. Once miners take their electricity from power plants where it’s being produced in excess, there aren’t too many places left to go. They can convert geothermal energy, they can turn the otherwise polluting gas flaring into electricity and consequently release CO2 into the atmosphere instead of the heavy polluting methane, and they can even use the kilowatts generated by fermented cow manure. So what happens if the mining hash rate can no longer increase and starts decreasing unexpectedly due to reliability issues in some parts of the world?

After all, Bitcoin’s Proof of Work mining is designed to enable dynamism and allows anyone around the world to join in or leave at any time. How are hash rate drops going to be mitigated? Well, every 2016 blocks (approximately 2 weeks), the mining difficulty readjusts in order to maintain the 10-minute block time – so the difficulty increases after times of high activity (when more miners discover blocks much faster) and lowers after times of low activity (when the miners struggle to discover blocks).

This also means that if more energy gets deployed on Bitcoin at one time, the mining rewards remain the same and the increased number of participants must share them. Which is another brilliant design – if more resources get deployed towards finding and exploiting gold mines or petrol wells, then the amount of resources available on the market becomes more abundent and the prices get lower. But Bitcoin has a programmed inflation system which releases 50 coins per block in the first epoch of 210.000 blocks, 25 coins per block in the second epoch of 210.000 blocks, and so on until the rewards run out and the miners only get paid from transaction fees between participants.

Only the most efficient miners, who can make a profit from the diminishing rewards, will survive. And when the lowest electricity costs get reached and the mining hardware improves to the absolute limit, there’s still a case to be made for ideological mining – people around the world who don’t care much about rewards, but only want to secure the Bitcoin network against attacks.

Bitcoin’s energy consumption is so easy to criticize because it’s even easier to figure out – the mining hashrate is a public metric, the efficiency of the most popular mining hardware is known, so anyone can make a pretty accurate approximation of the amount of electricity being used. In comparison, no other private financial institution publishes such data. You won’t see banks revealing how much electricity their offices and servers consume. You won’t see reports from PayPal and Venmo in which you find out how much they paid for electricity to run their operations (including offices, support desks, servers, and everything that powers their business). And even in the case of governments, not everything is transparent – the military and the secret services only report their overall budget, but don’t publicly justify how they spend it or why they needed a certain amount of electricity for something that produces no results.

Which is why we need to compare Bitcoin’s electricity consumption with that of other industries. According to Statista, between February 2017 and November 2022, Bitcoin hit a peak at 204.6 TWh per year (achieved in the first quarter of 2022). In 2021, the entire world consumed 176431 TWh. Even at the top, Bitcoin accounted for 0.11% of the world’s energy consumption. Which is 100 times less electricity than the World Economic Forum estimated Bitcoin would use by year 2020 in their hilariously terrible article from December 2017, titled “In 2020 Bitcoin will consume more power than the world does today”. The elites in Davos must really hate this money system that they can’t control.

I hope WEF author Adam Jezard is reading this, as growth in mining will not be steady and exponential. In his model, he used the 25% monthly hash rate increase as a constant. But that’s not how it works: for reasons described earlier in the article, if you deploy 25% more power, you don’t get 25% more rewards. The difficulty adjustment algorithm will make the same block reward harder to get. This means that many miners around the world will become unprofitable and shut down their operations. So in the long run, only the ones who run on the most affordable electricity will stay profitable and keep going. Inefficiency is getting priced out constantly, and there’s an incentive to create the kind of hardware innovation which makes machines generate more hashes per watt.

Also, 0.11% of the world’s energy consumption is really insignificant if we want individuals to have the option to be free from tyranny. 204.6 TWh per year is 1/10 of Romania’s energy production from 2022, 19 TWh less than Kenya’s annual energy production from the year 2021, and 1.65% of the United States of America’s reported electricity generation from 2021.

In December 2020, Forbes contributor James Conca did some math to arrive to the conclusion that Christmas lights in the USA consume 3.5 TWh during the month of December. Let’s assume that the rest of the world, through holidays which range from Christmas to Hanukkah and the new year, doubles the amount of electricity that’s being used in the US. That’s 7 TWh globally in the month of December. In comparison and approximately during the same, Bitcoin consumed 6.48 TWh (a number which represents the estimated Bitcoin TWh per year during December 2020, divided by 12).

According to the Cambridge Bitcoin Consumption Index, as of late April 2023, Bitcoin’s annualized consumption estimate is of 129.94 TWh – significantly lower than the peak presented on Statista. If we take a look at other industries, we notice that gold consumes 131 TWh every year, while TVs in the USA consume 60 TWh annually. Most strikingly, fridges in the US consume 104 TWh per year… yet nobody starts a campaign to stop people from buying fridges and only eat fresh food instead.

Data centers which provide internet services to people around the world don’t receive threats of having to pay 30% extra for the electricity they consume (as US miners did). Both of these provide something which is objectively useful to humanity, but only one of them is 100% controllable by the state… and it’s the other one that regularly gets threatened with regulations that make business difficult.

There are lots of double standards in judging Bitcoin mining and it’s not fair. ChatGPT contributes to this FUD, though we must understand that Bitcoin is useful and provides value to human civilization. Take this L, you elite-protecting AI!