Green energy for Bitcoin

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Green energy for Bitcoin

  • Posted by: Farhad

The day before Earth Day this year, Jack Dorsey, Twitter’s CEO, tweeted that “#bitcoin incentivizes renewable energy.” It was a counterintuitive, provocative assertion as cryptocurrency critics and environmental advocates have decried bitcoin — and were especially noisy about it that week — for using too much electricity. So it seemed exactly backward what Dorsey was saying, that bitcoin was actually positive for the environment. To support his assertion, Dorsey had shared a new white paper from Square, his other company, which argued that “Bitcoin mining presents an opportunity to accelerate the global energy transition to renewables,” and “could encourage investment in solar systems.”

Beyond the 17,500 people who liked Dorsey’s tweet, there was one particularly interesting reply: Elon Musk, the ecocentibillionaire CEO of Tesla, answered simply, “True.” At that point, Musk had been egging on cryptofans for months, culminating in a February announcement that Tesla had bought $1.5 billion worth of bitcoin and would accept the cryptocurrency as payment for its electric cars. That made it all the more surprising when, just over three months later, Musk apparently changed his mind, announcing on May 12 that Tesla had stopped allowing purchases with bitcoin, sending prices of the cryptocurrency plummeting (it was recently down 50 percent from its peak last month). He appended a statement explaining that he and Tesla were “concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal.” Cryptocurrency, he added, “is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”

It’s unclear exactly when or why he changed his mind in the three weeks since Dorsey’s tweet, but his flip-flop puts him on both sides of perhaps the most contentious debate in the digital-asset space right now. The core technological breakthrough behind bitcoin, NFTs, and cryptocurrencies — the ability to create digital scarcity — is a major one and is on the ascendent in a range of industries. It’s only going to be more present in our lives in the years ahead. So the debate embodied by Musk’s two tweets is very important: Is bitcoin, the largest and most valuable cryptoproject in the world, a boon or a menace to the health of the planet?

The more widely accepted view at the moment is that bitcoin is an environmental scourge. There is no question that the network requires a lot of energy to function: Its core appeal is security, and the network is secured by millions of super-powerful computers constantly competing to solve difficult math problems. Those computers require huge amounts of electricity. According to the IEA, bitcoin mining consumed 50 to 70 terawatt hours in 2019 — roughly as much as a small wealthy nation like Switzerland, which consumes some 63 terawatt hours annually. But it gets worse: The Cambridge Bitcoin Electricity Consumption Index, a metric tracked at the University of Cambridge’s Judge Business School, indicates that the total could surge to more than 130 terawatt hours this year if miners continue at their current rate. By comparison, companies like Microsoft and Google used 10 and 12 terawatt hours of electricity last year; worldwide, data centers (excluding cryptominers) consumed 250 terawatt hours, according to data compiled by Eric Masanet, who leads Northwestern University’s Energy and Resource Systems Analysis Laboratory. Electricity consumption is, most of the time and in most of the world, strongly correlated with carbon emissions, as we still tend to get our energy from burning hydrocarbons. That is certainly true at a national level in China, which burns more coal than any other country. It is also where most bitcoin mining takes place.

Bitcoin advocates who take Dorsey’s side of the argument would both acknowledge that all those numbers are at least directionally accurate and also make the case that they are misleading. Bitcoin, they say, creates value with the energy it uses — and the situation today is nowhere as bad as critics would have you believe. Looking into the future, they see bitcoin being on the verge of becoming a strong force that will make the electrical grid greener, in part by providing a dependable financial incentive that will help make renewable power sources like solar and wind more economical. This is the case that Dorsey’s white paper lays out in detail.

Bitcoin mining rigs. Photo: Sheldon Bennett

First, the bitcoin defenders will note, consuming energy is not the same as releasing carbon emissions into the atmosphere, and bitcoin mining likely does surprisingly little of the latter. Switzerland, for example, produces nearly two or even three times as much CO2 as bitcoin does, according to IEA estimates. The reason is that the bitcoin network — all those computers solving math problems all day — are already disproportionately powered by zero-carbon sources, especially hydroelectric, which most of China’s bitcoin miners use (as it tends to be the cheapest dependable power source — less expensive than coal). Data is spare on the sources of electricity powering bitcoin miners, but CoinShares, a digital-asset investing company that says it spent hundreds of thousands of dollars researching the issue, estimates 74 percent of the energy used in bitcoin mining comes from renewable sources.

And that share is likely to grow. Renewable sources like solar and wind power are also cheap and their prices are continuing to fall — an attractive feature for an industry like cryptomining whose biggest expense is electricity. In early April, a consortium of nonprofits and blockchain companies launched the Crypto Climate Accord, with the aim of using 100 percent renewable energy to power the entire industry by 2025 and reach net-zero emissions by 2040. Square, which has invested hundreds of millions of dollars buying bitcoin and whose CashApp facilitates trading of it, in December started the Bitcoin Clean Energy Initiative to “promote the use of clean energy in Bitcoin mining.”

“We as a private industry are going to do what we can to ameliorate the problem,” says Meltem Demirors, chief strategy officer of CoinShares, one of the founding members of the Crypto Climate Accord as well as a de facto spokesperson for the effort. A former oil-and-gas trader who now invests in start-ups working to make cryptomining more green, she feels a bit miffed that critics have zeroed in on bitcoin as the planet’s problem child when far bigger polluters exist. “When they get on a plane, they’re not buying carbon offsets,” she says. “I find it preposterous that when they’re looking at bitcoin, they feel like the glaciers are melting.”

Defenders also point out that the bitcoin network is now worth (depending on the day) in the ballpark of $1 trillion, and that it is no different from any other industry: It uses energy to create economic value (in fact, more efficiently by many measures than a lot of other industries). “While bitcoin mining does consume energy, the question becomes, is it a worthwhile use of energy to secure the bitcoin network and process transactions? And the answer to that depends on the person answering,” says Jeff Cathie, a spokesperson for Fidelity, one of the largest investment brokerages that also runs an in-house cryptomining operation. “We believe bitcoin holders that derive value from storing value or transacting in bitcoin would suggest that it is.”

But the strongest form of the the green case for bitcoin is that it can help the electrical grid become greener by giving the companies that generate power — especially from renewable sources — an easy way to monetize energy that would otherwise go to waste. Consider, for instance, a wind installation, which is generating peak capacity at night, when electrical demand is low. Or a solar farm on sunny days, when output exceeds consumer demand. Or a hydroelectric project during spring floods, when the dam is able to create far more electricity than usual. In all those real-world cases, that electricity now tends to go to waste, hampering profitability. But if the power companies could sell it cheap to green bitcoin miners, it’s a win-win: Everybody makes more money, and there’s no net carbon added to the atmosphere.

That logic even spills over to the oil-and-gas industry. Last year, at the beginning of the pandemic, when demand for fuel dried up, energy markets crashed so low that certain oil prices even went, briefly, negative. Natural gas was worth so little that it would cost more to transport or store it than it would to sell it. The response by many energy producers: burn it, in a process known as flaring. Bright plumes from such flares are often visible on the horizon in oil-producing regions from Texas to North Dakota. Last spring was an extreme example, but flaring is a standard practice in the industry when there’s no easy or economical way to sell the gas that accompanies oil drilling.

Enter bitcoin miners, who saw the plumes as an opportunity to power their computational rigs with dirt cheap — if not free — energy, and reduce the amount of carbon going into the atmosphere at the same time. “Bitcoin is like a sponge that can soak that up,” says Nic Carter, a founding partner of Castle Island Ventures, a VC fund that focuses on digital assets. Last month, a company specializing in taking advantage of wasted natural gas that would otherwise be flared and using it for cryptomining and other data centers, Denver-based Crusoe Energy Systems, raised $128 million to expand its operation to more than 100 sites over the next year. The stranded energy is an abundant power source whose emissions bitcoin could make a serious dent in: “I ran the numbers — the flared gas alone could power bitcoin,” claims Carter.

There are opponents to this practice who argue that it merely encourages and supports fossil-fuel producers. But, given that the oil and gas industry is going to be around for a while yet, mitigating the damage in other ways is arguably still worth doing.

You can think of bitcoin as the ultimate energy subsidy — a go-anywhere, plug-and-play, there-when-you-need-it mechanism for turning power directly into money when otherwise it would just be stuck or poured down the drain. When the grid is idle — as it is much of the day between the morning rush and nighttime dinner-and-TV rituals — bitcoin miners are there to keep energy use humming at optimal levels, saving utilities the expenditures required to rev up and down repeatedly. Bitcoin, in other words, makes it possible for energy producers to run on cruise control as opposed to stop-and-go traffic. When the grid is stretched thin in brownout and blackout conditions, bitcoin miners can simply be switched off to conserve power and deploy it elsewhere, as happened in Texas during its power crisis this past winter.

Green power in, bitcoin out. Photo: Sheldon Bennett

There is even an argument that utilities should consider a side hustle in bitcoin mining — cutting out the middleman. Whereas the typical utility sells power to homes at about 10 cents a kilowatt, if it used the power to mine bitcoin instead, it could make at least 30 cents on the same kilowatt (based on bitcoin trading above $50,000), says Sheldon Bennett, CEO of DMG Blockchain Solutions, a large bitcoin-mining company based in Vancouver. That math led one large publicly traded U.S. utility to buy DMG’s bitcoin-mining containers — mobile units containing mining equipment. Not only can the mining add-on help the utility keep its power generation stable, thereby reducing production costs and, over the long term, staving off rate increases for customers, it’s also helping to bring in extra cash, making the utility’s expansion into solar power more profitable.

In some cases, bitcoin is already incentivizing the transition to renewable energy, just as Jack Dorsey argued. While DMG Blockchain’s own operations in British Columbia already rely entirely on cheap hydropower from dams, Bennett, constantly seeking to lower his energy costs, is also putting in a solar installation; he expects to begin reaping returns on that investment in a few years. “We’re pushing into renewable because it’s just logical and natural for us to go that way,” he says. “It’s natural and logical for me to put a solar plant up because that would give me the lowest-cost power.” Considering sunlight itself is free, if you can harness it to literally mint money, that creates a nice additional incentive.

As interest in bitcoin from Wall Street and big banks rises, there’s also mounting pressure for the crypto they transact in to be “green” crypto, in accordance with the companies’ own environmental policies. In a month or two, DMG Blockchain is preparing to launch what it believes is the first bitcoin-mining pool to run completely on clean energy, called the Terra Pool. “We already have interest from financial institutions in those coins,” says Bennett. In the future, you could imagine that bitcoin mined with coal or fossil fuels will be seen as the crypto equivalent of blood diamonds — with perhaps a premium market for those created in environmentally friendly ways. That there are cleaner and dirtier varieties of bitcoin mining might even help explain Elon Musk’s complicated views on the subject.

Author: Farhad

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