Retirement Puzzle

BITCOIN AND THE ENVIROMENT

Bitcoin’s recent extraordinary rally has brought it to the attention of investors. Simultaneously, the drive for sustainable investing and environmentally friendly (or at least neutral) investment continues to grow. Are they compatible?

So what do the numbers say? It’s difficult to contextualise, so we show the figures for VISA, an alternative but more traditional form of digital currency, alongside it.

How much Bitcoin is traded varies wildly (both trade amounts and price), so the numbers are quite unstable, but it’s now jumped to around $60bn per day , or around $22tn annually. VISA processes a much more stable amount, around $8-9 trillion USD per year, and Mastercard covers about $6tn. So more is now traded on Bitcoin than on VISA and Mastercard combined.

However, it takes a lot to power Bitcoin. For Bitcoin, we have to make a lot more estimates, but we can probably get the right order of magnitude if we assume most of the energy is used mining bitcoins (trying different random options to see if, when hashed (coded in a complicated way that means very similar inputs give very different outputs), the result passes some easily tested criteria (eg starting with ten zeros)

• Currently, bitcoin mining software completes around 150 terahashes per second

• The most efficient programs run at 19 gigahashes/joule

• That would suggest at least c70TwH per year are used by Bitcoin

• As corroboration, more sophisticated estimates put it at c80TWh For context, VISA uses about 200GWh each year, so around 0.25% as much as Bitcoin. As a different way of contextualizing Bitcoin’s use, it’s about ¼ as much as the entire UK.

• On a volume-adjusted basis, even with the price so high, that’s still around 200 times more energy per $ traded than VISA

• That’s on a volume basis. On a transaction basis, VISA implements 65,000 transactions per second , whereas Bitcoin implements around 400,000 per day

• On this basis, VISA is roughly 50,000 times more efficient than Bitcoin, which is not suited to small trades.

Unfortunately that’s not all of it. Bitcoin miners tend to position themselves where energy is cheapest. That tends to mean China. Unfortunately, China also uses a lot of coal, and Bitcoin miners seem to use a disproportionate amount of coal. And the future is probably worse, for two reasons:

• The price has jumped recently, meaning the pull of supply-demand probably hasn’t kicked in fully yet. We might expect more miners and higher electricity use

• By design, each block takes more and more work- so each bitcoin is harder to mine than the last. We should expect the energy usage to continue to rise dramatically.

There are mitigants. Bitcoin further incentivises cheap electricity, and could lead to more efficient computing or self-sustaining facilities.

Right now though, there are some serious environmental concerns. If sustainability is a priority, Bitcoin may be one investment to avoid.

1. https://coinmarketcap.com/currencies/bitcoin/historical-data/ 2. https://www.blockchain.com/charts/hash-rate 3. https://www.iea.org/data-and-statistics/charts/efficiency-of-bitcoin-mining-hardware 4. https://digiconomist.net/bitcoin-energy-consumption 5. https://usa.visa.com/dam/VCOM/download/corporate-responsibility/visa-2019-corporate-responsibility-report.pdf 6. https://usa.visa.com/dam/VCOM/download/corporate/media/visanet-technology/aboutvisafactsheet.pdf 7. https://www.statista.com/statistics/730806/daily-number-of-bitcoin-transactions/