The Strategist

The reverse side of Bitcoin

12/21/2017 - 14:38

The new crypto currency Bitkoin has risen more than tenfold in 2017. In December its rate has overcome a record mark of 18 000 dollars. At the same time, virtual money is increasingly being criticized. Many call them "dirty", because you need huge amounts of electricity to mine bitcoins. According to experts of Digiconomist analytical online resource, about 32 terawatt hours are spent annually for the production of this crypto currency.

For comparison, this is the approximate amount of electricity consumed by one small state. Back in 2014, mathematicians of the Irish National University in Maynooth compared the amount of electricity spent on the production of bitcoins with the annual demand of their country. However, some experts consider such figures highly exaggerated. 

It is quite difficult to calculate the amount of electricity spent on mining bitcoins, because the main feature of the crypto-currency system is its complete decentralization and independence from any regulator. For this reason, experts often call virtual money a symbol of economic freedom. Payments are made without intermediaries and often require no commission.

In fact, each virtual monetary unit (digital coin) is a digital file, a sequence of unique encrypted blocks of information. Each computer included in the distributed network stores a copy of this file. Each new file contains the previous blocks plus a new cipher. To create such a file (block), the computing power of a computer is used, and the performance of this work is nothing more than emission of bitcoins. Today, a computer’s owner receives 25 bitcoins for creation of one block. The whole system is called blockchain.

The production of crypto-currency is also called mining, and the person who does it is a miner. The main tool in this case is a computer, and, more precisely, its video card, which performs the main job. Since the complexity of calculating blocks increases with time, higher demands are also placed on computers. 

The amount of electricity consumed by any miner depends on two factors: complexity of algorithms and efficiency of computers. According to an approximate calculation of Digiconomist’s analyst Alex de Vries, one Bitcoin operation currently consumes about 100 kilowatt-hours. About 300,000 such operations are carried out daily. Thus, the annual electricity consumption for these purposes will correspond to approximately half the amount of electricity consumed in 2016 by a country such as Nigeria.

Critics of crypto currency are also concerned that most of the electricity miners' needs are covered by a current that is generated from fossil fuels. Most of the mining farms are located in China, the energy of which is still largely dependent on coal, says a study conducted by the Center for Alternative Finance at Cambridge University with the support of Visa.

A similar opinion is shared by Digicomist analysts, who cite an example of a mining farm in Mongolia: electricity is also extracted from coal. According to experts, for each Bitcoins operation, there is approximately the same amount of carbon dioxide emissions as per one-hour flight of a passenger on a Boeing 747 aircraft.

At the same time, there is a reason for optimism. According to some experts, the very existence of an economic incentive for using "clean" electricity will accelerate development of renewable energy. "There is a significant concentration of (mining farms) in the Chinese province of Sichuan. The Bitcoin miners concluded an agreement with local HPPs, which allows them to receive electricity at favorable rates," said Cambridge University professor Garrick Hileman.

However, the sources from which electricity is generated and actual volumes of consumption are in fact may not be so important. For many experts, the current energy balance in this industry is already a sufficient cause for concern.

Although Bitcoin is only eight years old, the production of this crypto currency already now accounts for 0.05 to 0.15 percent of the world's electricity consumption. Therefore, as a service used by just about three million people, bitcoins are much less effective than the traditional banking system.