Bitcoin's electricity consumption drivers
Is electricity consumption going to keep increasing infinitely? Will its growth accelerate or trend towards an equilibrium? End the energy FUD.
Is possible that you have heard that bitcoin consumes as much electricity as a small country, and that if it continues to grow (by some measure of number of transactions) it will consume all the world’s electricity at some point in the future.
This conclusion fails in understanding what are the determinants of electricity consumption by the bitcoin network, and more specifically, by bitcoin miners. The most common misconception is that electricity consumption increases with the number of transactions, and hence the conclusion that if everyone in the world will use bitcoin for their financial transactions it will consume all the electricity in the world. Nothing more far from reality.
So what could explain electricity consumption by bitcoin miners? Is electricity consumption going to keep increasing infinitely? Will its growth accelerate or trend towards an equilibrium?
To answer these questions we will use the bitcoin network hashrate (the total number of hashes performed by bitcoin miners every second) as a proxy variable of electricity consumption and see its correlation with other variables as the bitcoin price, mining equipment technology and bitcoin issuance.
HASHRATE EVOLUTION
The first thing we need to be aware of is that although network hashrate has trend upwards for most of bitcoin’s history, its rate of growth has clearly diminished over the years, standing currently at 50% y/y from a maximum of 6,374,667% in 2011 (See charts below).
HASHRATE DRIVERS
This slowdown in hashrate growth could be related to the behavior of the following variables:
Bitcoin price.
One of the variables hashrate is more correlated to is the % change in bitcoin’s price (0.67 correlation), as shown in the chart below.
Changes in the bitcoin price is obviously important for miners as it impacts their profitability. Similar to hashrate, bitcoin price growth rate has also slowed down.
Is also worth noting that hashrate seems to follow price as seen by the fact that price growth bottoms and tops first in every cycle and then hashrate does.
Mining technology.
Hashrate has also a high correlation with the advance in bitcoin mining equipment technology, defined as the number of hashes per second a single equipment can make (CPU, GPU, ASIC).
Initially bitcoin mining was made with regular computers (CPU), this changed in late 2010, when GPU mining began. The introduction of GPUs caused a sharp increase in network hashrate as miners took advantage of the increase in quipment hash power by orders of magnitude. It is in this epoch when network hashrate and equipment hashrate increased the most in % terms (see 1 in the chart below). Subsequent advances in mining technology where done with the introduction of ASICs (basically an specialized computer made for the only purpose of producing hashes). This can also be seen in the chart below from 2014 to 2018 (2) and 2019 to currently (3).
Similar to network hashrate, mining equipment hashrate growth rate has also slowed down as each generation of technology brings a slower incremental change. Mining equipment hashrate and network hashrate growth show a 0.98 correlation.
Additionally, it should be pointed out that every uprade in technology has made mining equipment more efficient (less electricity consumed per hash).
Bitcoin issuance.
Bitcoins are issued in each block as a reward for the miner that finds the valid proof-of-work. Initially, 50 bitcoins were issued each block. By the protocol rules this part of the reward (block subsidy) decreases by half every 210,000 blocks, an event known as the halving. As such, bitcoin issuance will trend downward and reach 0 at some point in the year 2140 approximately. Block subsidy is 6.25 bitcoin per block currently.
As the block subsidy represents the majority of a miner’s revenue (about 95% today, transactions fees being the rest), as it decreases there could be less incentive for miners to increase hashrate. Indeed, the chart below shows the relationship between issuance and hashrate growth, both decreasing. Bitcoin issuance and network hashrate growth show a 0.40 correlation.
Conclusions.
Bitcoin’s network hashrate growth, a proxy of the miners electricity consumption, has been slowing down and most likely will trend to an equilibrium growth rate. The implication is that electricity consumption by the network could plateau at some point in the future and that “concerns” about it consuming all the world’s electricity obviously don’t make sense.
Network hashrate growth shows a high correlation with mining technology advancement, bitcoin price growth and bitcoin issuance, and all these variables should also slowdown to an equilibrium growth rate (issuance is obviously going to zero).