Is Bitcoin using lots of energy actually a good thing?

Bitcoin is notoriously energy-intensive. Here’s why that’s not necessarily a bad thing.

| More on:
bitcoin logo

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Bitcoin (CRYPTO: BTC) takes a lot of criticism for its extensive energy use. According to Cambridge Bitcoin Electricity Consumption Index, Bitcoin uses about .29% of the globe's energy . That is a whopping amount of energy, but this figure doesn't tell the whole story.

This statistic tells us nothing about how Bitcoin uses the energy, the type of energy it is using, or any external effects this energy use has. Although it may seem counterintuitive, it could be argued it's a good thing that Bitcoin uses as much energy as it does.

What is the energy actually used for?

In order to discuss Bitcoin's usefulness, we need to cover what the energy is actually used for. Bitcoin has three strict rules that the energy is used for:

  1. Keep the maximum supply of bitcoin at 21 million coins.
  2. Produce a 1MB block roughly every 10 minutes to store transactions on the blockchain.
  3. Don't change the first two rules.

Ultimately, Bitcoin uses a significant amount of energy to secure and protect its network from an attack. An attack could theoretically stem from an entity that wishes to alter the core parameters of its protocol. This entity may try to alter three main things: the supply, the block size, or the block schedule.

This entity might want to change the block schedule -- and thus the supply of Bitcoin -- in order to profit from newly created Bitcoin. Or, someone may want to increase the block size, which would increase the number of transactions per second Bitcoin can handle (this has been flagged as a potential threat to Bitcoin's decentralization, as doubling the block size would increase hardware requirements for node runners, which in turn would decrease the number of people that could run their own Bitcoin node).

As it turns out, the ruleset that was configured at Bitcoin's launch were calibrated to maximize decentralization, If someone wanted to change the rules in any way, they would need to acquire more electricity than what the network is already using, and a massive fleet of computers.

A task like that would prove difficult even for the largest of nations .

What the energy is not used for

The energy bitcoin uses is not directly used to process transactions. The network will use the energy to produce a block (or a packaged set of transactions), regardless of whether or not there are transactions within the block. Processing transactions is a byproduct of block production, not the purpose.

The type of energy Bitcoin uses

The Bitcoin Mining Council estimates that around 58.5% of the network is powered by renewable energy . Bitcoin miners routinely search for the cheapest forms of energy because they can make more money.

Bitcoin incentivizes miners to find cheaper forms of energy production because to mine Bitcoin, all that is required are computers that run on electricity. The cheaper the energy, the less the miner spends mining blocks. When a miner mines a block, they're rewarded with BTC, which they can then sell to recoup the cost of energy. This often leads miners to deploy their operations next to renewable energy sources such as hydroelectric, wind, and solar. These renewable energy farms can sell electricity cheaper than non-renewable sources which means Bitcoin mining companies can make more money.

A buffer for the grid

Bitcoin's heavy energy usage, therefore, creates more demand for these renewable forms of energy. Bitcoin can actually be a 24/7 buyer-of-last-resort for these energy farms, when retail and industrial buyers might be offline, asleep, or when the energy would have otherwise just been dumped (known as curtailment) . This allows bitcoin to act as a buffer for the grid, and smooth out energy production -- and profits. This leads to more profitability for both bitcoin mining farms and green energy providers. The profits can then be used to reinvest in new green energy projects, accelerating the rate at which the globe transitions to a greener energy grid.

An acknowledgement of waste

Bitcoin is not perfect by any means. It is run by computers which have their own carbon footprint to produce. The solar, hydro, and electric energy sources also have an environmental cost to produce. Lastly, around 41.5% of Bitcoin's energy use still comes from non-renewable sources, such as coal and fossil fuels. But every useful industry produces waste of some sort; no one is exempt. But, Bitcoin is about transitioning to a more sustainable and reliable financial system. And it could be argued that this is accelerating the rate at which more sustainable sources of energy production is used for such processes.

Bitcoin puts the energy to good use

Bitcoin uses energy to protect the integrity of the network, ultimately securing about $1 trillion worth of bitcoin. But there are also positive externalities that come from bitcoin using as much energy as it does. It buys energy from suppliers that may not otherwise have a buyer. It prefers cheaper, and therefore greener energy sources, aiding in the necessary rapid transition to a greener grid. So, many are comfortable with bitcoin using as much energy as it does.

They would also argue it's a good thing to have bitcoin use this energy to secure their investments, and everyone else using the network to store, save, and transact value. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Keegan Francis owns Bitcoin. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and recommends Bitcoin. The Motley Fool Australia owns and recommends Bitcoin. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

Man and woman looking over documents at computer
International Stock News

Warren Buffett says this type of investor benefits most when stock prices fall

Thinking like a buyer can make market downturns easier to manage.

Read more »

asx share price rebound represented by wooden blocks spelling rebound with coins on top
International Stock News

Just how safe is the stock market right now?

Stocks are rebounding, but should you really invest right now?

Read more »

market sell off
International Stock News

Stock market sell-off: How I’m continuing to make passive income

I love my dividend stocks, and since I'm still not retired, market downturns let me buy more of what I…

Read more »

Iron ore bear market Fortescue dissapointed man and shadow bear with a tumbling down stock market
International Stock News

Your investments vs. a bear market: How to come out on top

Bear markets can provide a great opportunity for you to emerge in a better space after they end.

Read more »

A trendy woman wearing sunglasses is making it rain, spraying cash on that bargain.
International Stock News

3 US stocks that could be worth $1 trillion by 2032

Buying these stocks today could be a rewarding move in 10 years.

Read more »

A man clenches his fists with glee having seen the Lake Resources share price go up on the computer screen in front of him.
International Stock News

3 reasons I’m buying this crypto hand over fist

Polygon continues to showcase why it might just be the blockchain of the future.

Read more »

bull market encapsulated by bull running up a rising stock market price
International Stock News

Despite some big losers, these growth stocks are keeping the Nasdaq bull market going

Investors continue to slowly move away from worries about the economy, inflation, and interest rates, sending growth stocks higher. It's…

Read more »

Three different coloured arrows going up, symbolising a rising share price and record highs.
International Stock News

Why Ethereum, Bitcoin, and Dogecoin jumped this morning

The Merge is near and crypto investors are excited.

Read more »