bitcom

For someone who is not particularly interested in bitcoin I spend an awful lot of time talking about bitcoin. 

In part that's because I have serious Someone Is Wrong On The Internet Syndrome, and can't help myself getting into arguments with strangers. The widely acknowledged unpleasantness of the bitcoin community actually helps here, though; it's easier to walk away from a conversation with someone whose opening gambit is "lol have fun staying poor" than it is with someone who seems actually nice and intelligent.

In part it's because – I don't know, this is probably bigheaded of me, but – I think I'm in a quite small crossover of "understands bitcoin on quite a deep level" and "dislikes bitcoin and wishes the world would stop talking about it". Which means I feel a powerful responsibility to jump in every time someone Normal says something like "maybe we should put covid passports on the blockchain" and screech.

The current news cycle around Bitcoin is based on two things: at one end, the fact that Elon Musk pumped $1.5bn of Tesla's cash reserves into it; and at the other, the fact that a new estimate of Bitcoin's energy use has it running at 120TWh per year. For context, the combined energy use of Amazon, Google, Microsoft, Facebook & Apple is 45TWh a year. The total energy use of Norway is 122TWh a year.

There's a few responses that you get from Bitcoin fans to the data. One is, let's say, beyond the scope of this newsletter: it is to defend the energy use of bitcoin as prima facie acceptable, because of the transformative potential of the technology.

I have some respect for this position. Wasted energy is in the eye of the beholder, after all, and there are plenty of uses of electricity which are both unsettling at a global scale and also something I would defend. I would not, for instance, feel hugely comfortable being confronted with the total burden, in electricity and manufacturing, of the video gaming sector. But I would defend it, because I defend the ability to use resources for leisure.

If you truly believe in bitcoin, the astronomical energy cost of the technology isn't a waste; it is an unfortunate byproduct of the epoch-defining discovery of proof-of-work based cryptocurrencies.

But while I respect it, I don't think it is… true. For one thing, the energy cost of bitcoin isn't inherent to cryptocurrencies in general. For the uninitiated, Bitcoin is secured by burning electricity. I am simplifying to the extent that people will shout at me but: every ten minutes, the bitcoin network randomly holds a lottery to let someone declare which transactions are valid, and to gift them 6.25btc, or £200,000. You get entries into the lottery by doing pointless calculations: one pointless calculation is one ticket. 

The pointless calculations cost computing power, which costs electricity, which costs real money, and so in aggregate two things happen: one is that the people who win the lottery have an incentive to accurately declare which transactions are valid, because if they lie, they'll just get overruled by the next lottery winner, and because controlling enough computing power to guarantee you win, say, ten lotteries in a row would be astronomically expensive; and the other is that the amount of electricity burned by the network levels out at about that which you can buy for 900btc, or £29m a day – the total value of all the lottery tickets every day.

That long-run electricity cost is effectively built in to bitcoin. If more electricity is spent than the total value of the rewards, then eventually, the least efficient miners go bankrupt, because they've been spending money on electricity and computers and not winning any rewards. But if less electricity is spent than the total value of the rewards, then that means there's money being left on the table. Imagine a daily raffle with a £25 grand prize, where you learned that only two other £1 tickets were sold each day. It'd make sense, in that situation, to start buying up to £23 worth of tickets each day – since in the long run, that's how much you could expect to win.

(With bitcoin, in the really long run, there's going to be interesting interactions between this system, the free-floating exchange rate between bitcoin and the real money people use to pay electricity bills, the fact that the block rewards, that 6.25BTC, halve every four years, and the ability of miners, the lottery entrants, to charge a small fee to validate transactions.)

All of which is to say that Bitcoin doesn't just use energy, like anything else. It inherently uses a lot of energy. The already-large energy budget of the currency is only as small as it is because, regardless of its potential, it is barely used. If Bitcoin were to live up to its potential, if it were to – I don't know, replace Visa, or the US dollar, or hamburgers – then that 6.25BTC reward wouldn't be worth £200k, it would be worth £200m, or £2bn, and the energy budget would go up accordingly.

And so simply handwaving the problem away, saying "this isn't wasteful because bitcoin isn't a waste", doesn't cut it. There is no version of bitcoin that manages to achieve all three of fulfilling its potential, keeping its proof-of-work system, and not destroying the planet. 

But that last point brings us to a second defence of the system: that bitcoin is low-carbon.

It's true, in a way. Cambridge University, which published the study estimating a 120TWh energy use, also estimates that 39% of the electricity bitcoin uses is carbon neutral.

The reason for this is, again, economic. Bitcoin mining is, at scale, a system for turning electricity into money. The trick, as with any manufacturing problem, is to spend less on the inputs than you get from the outputs, and with bitcoin, that means finding the absolute cheapest electricity possible.

Sometimes, that a problem which is optimised poorly. The cheapest electricity of all, after all, is electricity paid for by someone else. That's what spawned the "crypto miner" malware class, which hijacks your computer to use your electricity to mine bitcoin for other people. Even simpler, you could just be the IT administrator of a network and have no morals. A friend of mine said he suddenly put two and two together the other day and realised that his former employer, where the computers were always slow as shit and the IT admin retired at 40, might not have been doing the best due diligence on its employees.

Other times, though, the optimisation is less directly problematic. A lot of renewable power sources have the slight problem of being easy to generate, but far away from people. Hydroelectric and geothermal are two that come to mind, for instance. And while you can export electricity, running cables over long distances is expensive, so you might choose to incentivise the users to come to you, by selling the electricity for less close to the source. Which is how you end up with bitcoin miners setting up in huge numbers in, for instance, Xinjiang, where huge hydroelectric generation is married to a relatively anaemic local economy and few export opportunities for that energy.

The term the bitcoin community uses for this is "stranded generation". It is, in a way, better even than powering with renewables bought off the grid: grid electricity can always be used for other things, but stranded generation may literally be wasted if it's not used to mine bitcoin. Win Win!

(There's actually a bizarre claim coming from some of the big brains in the bitcoin community based on this: they like to say it proves that bitcoin is a battery. Because you can turn electricity into bitcoin in one place, and then turn bitcoin into electricity in another. This is dumb, like claiming a £5 note is an MP3, and we will spend no more time talking about it)

Except, well, even then, is it really the best use? Put aside the fact that 61% of bitcoin is still old fashioned carbon-generating waste, and that much of the remaining 39% is not stranded, but simply conventionally accessible renewable generation: is spending real resources to build a huge bitcoin mining plant next to a hydroelectric dam really better than spending real resource to build… high voltage cables allowing the electricity to be exported? 

And that's assuming that the stranded generation is in fact stranded at all. Bitcoiners have already caused problems in some communities by identifying supposedly "stranded" electricity, only to be informed that actually the prices are low deliberately, offering cheap electricity to the people who funded the creation of the capacity in the first place.

Fundamentally, bitcoin behaves like a fluid. It will seep in to any crack, and fill any container, in its quest to turn electricity into money. 

In the same way you put a tyre in a bucket of water to look for the puncture, the single best use of bitcoin is to find weird distortions in the power grid: just introduce cryptocurrency to a nation, wait a few years, and then the places the miners have set up are probably systems where the free market isn't doing its job.

There's more to say here – I haven't talked about proof-of-work, or about the blockchains that could just be a spreadsheet, or about pump and dumps and dogecoin and my £900 burger – but I'll stop for today.

Have a good February,

Alex