Bitcoin is nothing but a combination of digital, one.value and encrypted signs, which are recorded in a distributed “diary” managed by a computer network. These operate according to a public operating software, known as the Bitcoin Protocol. The software and concept was invented by an anonymous person called “Satoshi Nakamoto”, who published it on a remote Internet site in late 2008. The computers that participate in the operation of the Bitcoin network are the ones who record the ownership and transfers, ie transactions, of the “bitcoins”.
To ensure the uniformity of the log, a copy of which is kept on each of the participating computers, the distributed log is updated in a certain way that prevents forgery. This way is the heart of the Bitcoin magic, and it is called “consensus” according to which one computer will randomly get the right to update the diary. The other computers will verify that the random win was legitimate and that the updated transactions were correct, and if so they will approve them and update the copies of the journal in their possession in the same way as the updating computer made by the updating computer. This process is repeated every 10 minutes.
The updating computer will be the one that manages to first solve a kind of complicated mathematical combination, which all the computers on the network try to crack at the same time. The same computer will be paid in bitcoins for its success. This is how new bitcoins are born, the amount of which has been limited in protocol to 21 million. Hence the name “miners” for computers that participate in the maintenance of the Bitcoin network. The Bitcoin protocol determines the difficulty in solving the numerical combination according to the number of participants in the competition, so that the solution will take a fixed period of time of about 10 minutes.
The Chinese government has acted aggressively
A few weeks ago, the Chinese government acted aggressively to narrow the steps of the “miners” in China. As a result, about half of China’s miners have stopped participating in network maintenance. In response, the Bitcoin protocol updated the difficulty of solving the combination, and it dropped by about 28%, the largest decrease since 2009.
The Bitcoin network is open to any object to participate in its maintenance and it is clear from this that the number of those who want to participate, those who receive the new bitcoins as compensation for the computers they operate, increases as the price of Bitcoin increases. As the number of participating computers increases, the computing power activated in the network increases, and with them the total power consumption required to operate them. The total computing power used to guess the combination and record the transactions is also known as the “ash.right”. Its rate is a clear indication of the number of participants and the electricity consumed by them.
But the Bitcoin network not only updates and corrects the complexity of the combination, it also updates the payment paid to the miner who managed to solve it. Such an update is made every four years, and is reflected in the reduction of compensation by half in all 210,000 diary updates, also known as blocks. On January 3, 2009, the first block of Bitcoin was mined and the payout per miner was 50 Bitcoin. In November 2012, the first “crossing” occurred and the said payment was reduced to 25 bitcoins, in July 2016, the second crossing occurred and the amount of compensation.payment was reduced to 12.5 bitcoins for each blockchain update guess. In May 2020, the third crossing took place and the payment dropped to 6.25 Bitcoin, where it will remain until the spring of 2024, when the next crossing will take place and the compensation will drop to 3.125 Bitcoin for each guess and update. And so until the last bitcoin was sold somewhere in 2140.
In order to participate in the maintenance of the network and mine new bitcoins, the miners must purchase suitable computers and they must rent areas to place them and invest in the manpower required for their operation. In addition they will have to bear the cost of the electricity involved in operating them. Since the miners do not want or can operate for a long time at a loss it can be said with complete confidence that the total cost of energy consumed by the miners since January 2009 is equal to the total compensation in dollars received for their work less equipment costs, manpower, and operating profit. Or in simple words, since hardware and little manpower are the only factors of production besides energy, if we subtract the cost of factors of production from the total income of the miners, we can get the cost ceiling of all the energy consumed by Bitcoin from the first bitcoin.
In 2011, Bitcoin crossed the dollar line
Between January 2009 and November 2012, 10.5 million bitcoins were mined, half of the total amount of bitcoins to be born. The number of miners and hashtags was extremely low, as was the price of bitcoin. After more than two years, in the second quarter of 2011, its price crossed the one dollar line, and only near the first half, in November 2012, will the price cross the $ 10 line. On average for the first 4 years, the price of Bitcoin was around $ 3. It follows that the total payments to the miners amounted to about $ 30 million.
Since the cost of hardware, manpower and operating profit in the mining process is about 60 percent of revenues, it would not be unreasonable to estimate that the electricity costs of mining half of all bitcoins in the world were about $ 12.5 million. For comparison, the total revenue of the Israel Electric Company (HHI) for 2020 was almost NIS 24 billion.
In the next four years between November 2012 and July 9, 2016, 5.5 million new bitcoins were created. During these years Bitcoin became more familiar and the number of miners began to rise. At the end of March 2013, its price crossed the $ 100 line throughout 2014. By 2016, the price ranged from $ 250 to $ 500, except for one small jump in early 2014. On average for the period, the miners received less than $ 350 for Bitcoin for 5.5 million bitcoins mined, hence That the total cost of electricity was no more than $ 770 million. This is the same as the annual cost of electricity consumption of about 510,000 average households in the United States, about one.third of the households connected to the electricity grid there.
In July 2016, the next crossing took place and from then until May 2020, another 2.625 million bitcoins were mined. Bitcoin has now become a well.known international brand and its price has skyrocketed. With its price also increased the number of applicants to participate in mining. With them also increased the difficulty in solving the combination, the number of computers on the network and their power consumption. During the said period, the price of bitcoin moved wildly. At the beginning of 2017, its price crossed the $ 1,000 line and by December, its price had reached almost $ 20,000, only to collapse to a low of $ 3,900 in early 2019.
10% of greenhouse gases – agriculture and food production
On average, the price of Bitcoin for the third half period was about $ 7,000. The total revenues of the miners for the period were therefore about $ 18 billion, less the cost of hardware, manpower and operating profit, the cost of energy for all 4 years was about $ 7.5 billion. For comparison, in 2018, the total electricity expenditure of all areas other than industry or households, ie office buildings of all kinds, and commercial areas, in the United States alone, was about $ 190 billion. About 30% was an unnecessary waste. In other words, the total energy waste in commercial and office space in the United States in one year was about eight times the total bitcoin mining over 4 years worldwide, as stated for the relatively expensive third half period.
Energy wastage does not only occur in commercial and public areas in the US. According to estimates by the Government Ministry of Environmental Protection, in 2019 about 10% of greenhouse gases – originated in agriculture and food production. This total waste is about a trillion dollars a year – more than 500 times the average annual energy consumption of Bitcoin in the third half period.
25% of the greenhouse gases come from electricity generation. According to the US Environmental Protection Agency, the efficiency of the global electricity system is about 31.53%. That is, for every 100 megawatt.hours (unit of measurement for electrical energy) of fuel consumed in production, only 31.53 megawatt.hours will be converted into electricity consumed by the consumer, the remaining 68% will be lost. This is because when energy is converted from its original form (say coal) to electricity carried over long distances, most of the energy is lost. The percentage of energy that is converted into electricity that the consumer will use is called the “level of efficiency”, and it is mainly affected by the type of fuel used and the technology of electricity production. For example, in 2019 gas.fired power plants achieved a 45% efficiency level, while coal.using plants converted only 32% of energy into electricity.
Coal is not only low in efficiency, it is also extremely polluting. Coal combustion is responsible for 72% of the total greenhouse gases in the world and 46% of carbon dioxide emissions. Despite this, according to the government agency for environmental protection, in 2018 coal accounted for 38% of the energy source for global electricity generation, and 27% of all energy used in the world. Here is therefore a place for a truly significant improvement, for all those who are loudly bothered by the environmental impact of Bitcoin. By the way the cheapest, most efficient energy source that does not emit any greenhouse gases are the nuclear power plants.
The cost of energy for gold production – 2 times
It is also interesting to compare the environmental “footprint” of bitcoin, digital gold, to that of physical gold, which does not receive negative public relations in this context. In 2020, about 3,500 tons of gold were mined and about 1,300 tons were returned in this way, according to the World Gold Council. According to studies regarding the environmental cost of recycling and mining this gold, it has been found that the annual energy cost of this industry is slightly more than double that of bitcoin production in the corresponding period.
The International Energy Agency, an organization established in 1974 by the OECD, estimated that the total global expenditure on energy of all types and sources in 2019 was about $ 7.2 trillion.
Compared to the widespread use of coal which is both inefficient and appallingly polluting, bitcoin production relies on much greener sources. According to a report by the University of Cambridge from 2020, about 39% of the energy consumed in cryptocurrency mining is green energy with hydroelectric energy (water) being the most popular that at least 60% of the world’s miners use to one degree or another.
Only in Asia and especially in China has the use of coal been common as a major energy source used by the bitcoin industry. With the changes in the Chinese government policy towards the bitcoin industry many miners started to leave. In September 2019 it was about 75% of the mining power in China, by April this year the number had dropped to 46% and it is likely that in recent months this number has continued to plunge. Miners for their part moved to the US, whose share of mining power grew to almost 17% as of April, and to Kazakhstan which became third on the list of mining locations, with 8.2% of global mining power. With the move from China to the US and Canada, bitcoin It is also used as a tool for “storage of lost electricity” when it is operated close to production sites and during downtime, a fact that is particularly significant in solar energy.
As of today almost 90% of all bitcoins coming into the world have been mined. Only another 2.24 million remain for mining. Since May 2020 and the third half, the price of Bitcoin has exceeded the average price for the previous four years. With them, the number of participants in the network increased by about 50%. At the same time, the price of mining and energy consumption rose.
It is difficult to estimate how much energy will be required to mine the 2.24 million bitcoins left to mine by 2140. It is also still difficult to estimate what, if any, the benefits and value that bitcoin will bring to the world over the coming decades. One thing can be said for sure, the total energy required to bring into the world the 18.78 million existing bitcoin today was esoteric. Something between $ 12 billion and $ 15 billion over a 12.year period. A quarter of the energy wasted in managing office space in the U.S. in 2019 alone. And so even if the price of energy for mining the balance of bitcoin jumps 10 times, its annual cost will hardly equal half the energy waste in this one small section.
The writer is a lawyer by education who deals with and is involved in technology. Manages an investment fund in cryptocurrencies, and lives in Silicon Valley. Author of the book A Brief History of
Money and the podcast KanAmerica.Com