Bitcoin's Increasing Energy Inefficiency

Bitcoin's value has risen meteorically in 2017, recently reaching record highs of nearly $7500. This has delighted speculators who cite it as evidence of Bitcoin's legitimacy, which has occasionally been questioned.

But with this rise in value has come a proportional, astronomical rise in Bitcoin's energy consumption. There is no direct way to measure the electricity Bitcoin consumes, but it can be estimated based upon data available on Bitcoin's network. The website Digiconomist built a Bitcoin Energy Consumption Index to do just that - and it shows some alarming results.

As of November 8, 2017, Bitcoin uses an estimated 26.05 terawatt hours of energy per year. That's more than Nigeria - a country with a population of 186 million people - uses, and thousands of times more energy than the Visa datacenter uses to process its transactions. Based upon estimates, the energy consumed in a single Bitcoin transaction could power 8.44 U.S. households for a full day.

Bitcoin has long required more energy than other methods of digital payment. Even in 2015, a single Bitcoin transaction was utilizing enough electricity to power 1.57 U.S. homes for one day.

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Bitcoin operates via a process that is energy-intensive by design: proof-of-work mining. Bitcoin miners add new sets of transactions, or blocks, to Bitcoin's blockchain, each competing to win rewards of a fixed amount of coins, plus transaction fees. Bitcoin protocol makes it hard to add blocks to the chain, requiring the miner to complete a verification, or proof of work, for all of the data in the block. This difficulty ensures that miners will only successfully produce a block every 10 minutes or so. The proof-of-work algorithm itself requires a lot of processing power, and by extension electricity.

Producing a successful block hinges largely upon luck, which means that miners are constant attempting to add more blocks to increase their chances of winning. When Bitcoin first arrived in 2009, mining could be performed from any desktop computer. But as Bitcoin's value has risen, it has resulted in the creation of both extraordinarily efficient miners and even entire mining facilities, some of which consume vast quantities of power.

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The Bitcoin proof-of-work system has a ratcheting effect, too: as the Bitcoin network raises the difficulty to account for growth in mining capacity, miners in turn raise their mining capacity to account for the growth in difficulty. And as the price of Bitcoin rises, it only becomes more economical to mine - further incentivizing rapid growth in mining capacity. Miners simply add whatever computing power they can afford to continue earning mining rewards, compounding the energy expenditure problem.

This voracious consumption has lead to concerns about Bitcoin's environmental footprint, as well as its viability as an investment in the long term. Such intensive energy use might eventually draw regulatory scrutiny, the lack of which has hitherto been a large part of Bitcoin's appeal. The cryptocurrency market is expanding rapidly, and Bitcoin competitors like Ethereum are taking steps to reduce the energy consumption of their algorithms.

But Bitcoin is not necessarily doomed. There are ways by which Bitcoin might become more sustainable, including transitioning from a proof-of-work model to an alternative consensus model that would shift the system away from rewarding miners with the most computing power.