This article was originally published by Caleb Fenton on Substack.
A common argument that you’ll hear against Bitcoin is that it wastes too much energy and this is bad for the environment. The people who say this tend to be well intentioned but woefully uninformed about energy.
This is probably because they have 24-hour access to electricity, and when something works you don’t bother learning how or why. There are many great articles on why the energy wasting argument against Bitcoin and proof of work in general is bunk. I’ll direct you to two of my favorites:
- The Frustrating, Maddening, All-Consuming Bitcoin Energy Debate
- The Last Word on Bitcoin’s Energy Consumption
In this article, I want to explain:
- how important energy is to civilization and improving the standard of living
- why energy is so tricky to produce
- how Bitcoin helps stabilize and improve access to energy as a byproduct of being the most incorruptible and freedom-promoting money known to man
Why is energy so important?
Civilization thrives when it has access to cheap energy. For most of our history, humans only had access to the energy in our bodies and were limited in what we could accomplish by the calories we could extract from the environment with hunting and foraging.
Kings and the wealthy had servants and slaves to work for them and make their lives less miserable. As we progressed, we developed technology and mechanical advantages like the plow, animal power, iron tools, wind mills, water mills, and so on.
Access to these energy sources and efficiencies raised the standard of living for everyone. It’s only been in the past couple centuries we’ve learned how to harness higher density energy sources like coal, oil, and nuclear. This has ushered in an era of unprecedented progress and prosperity.
If you live in a developed country, you probably take energy for granted. Most just assume it’s mundane and trivial to flip a switch and have access to vast amounts of power, but spend a moment to appreciate everything around you that’s only possible because of our mastery of energy:
- refrigerator and freezers — Totally changes how you buy and store food. Before these, all of your food had to be fresh or preserved. You couldn’t go out shopping and have everything keep for 2-3 weeks or a few months.
- air conditioning — Most of the planet is completely uninhabitable. Most of it is water and the land bits are either too hot or too cold for most people to live easily. Air conditioning bends nature to our will and opens up massive areas for our species to live.
- clothes washer / dryer — Huge time saver. I challenge you to wash your clothes manually just once. You’ll never take these for granted again.
- electric lights, vehicles, digital technology, microwaves, ovens, and so on.
This is to say nothing of all the industry or healthcare that’s only available with power. Almost all the heavy stuff is built with automation and tons of robots. Hospitals keep people alive with machines that need constant power.
Now consider this: 1.1 billion people live on less power than a modern, energy-efficient refrigerator (source, assuming 350kWh). That number climbs to over 3.3 billion if you have a less efficient fridge. Imagine living in a world where you only had access to the energy of a fridge. This is the stark reality of billions of people.
Why is energy production difficult?
At the risk of revealing how strange of a child I was, I used to watch Superman movies and get mad that he was wasting all that time pretending to be a reporter or punching bad guys in the face instead of solving the real problems like energy production.
Instead of dating Lois Lane, if he really cared about humanity, he could pull billions of people out of grinding poverty and usher in a new age of plenty. Why didn’t he just strap himself to a treadmill and power the world? It’s not as exciting to watch, sure, but it would greatly reduce geopolitical instability, poverty, misery, and crime.
Later, I learned I was wrong about Superman. You can’t just strap him into a dynamo and produce endless power for everyone because it’s hard to transmit electricity over long distances. For energy sources like oil and natural gas, it’s hard to pipe it around and there are regulatory costs. Once you generate power, it’s super expensive to store for any length of time.
Maybe this will be less of a problem as battery technology improves, but right now batteries are not a scalable solution. So power production has to be fairly local to where it’s needed and it has to very closely match how much power is needed. If too much is produced, it may damage equipment. If too little is produced, it may also damage equipment and you’ll get blackouts.
Since power companies can only control how much power they produce and they have to produce roughly as much as people demand, they have developed complex models for predicting power demand for any given minute. They take all sorts of factors into consideration like if it’s a holiday, if it’s Super Bowl weekend, weather conditions, and so on. There are also sophisticated markets for buying and selling power to help hedge against under and over production. When demand peaks quickly, there are so-called peaker plants that don’t produce power normally but can be called upon in short notice.
The Grid as a Person
Imagine the energy grid is a person running on a treadmill to generate electricity. This person would have no fat on their body since power companies can’t store energy. In order to fuel their muscles, they would have to eat the roughly the same number of calories they planned to run that day. If they order too little food, they starve and collapse on the treadmill. If they order too much, it’s wasted and goes bad.
The food is the energy grid’s ability to turn energy into power using power plants. Since power plants take a long time to build, this would mean the our runner would need to order groceries months or years in advance.
Another wrinkle is that not all power sources are equal. Some take a long time to turn on or off and some generate power intermittently and unpredictably. Peaker plants are designed to come online quickly, but a nuclear reactor takes days to turn on and off. Solar and wind energy are unreliable since the sun isn’t always shining and the wind isn’t always blowing. In our analogy, there are different types of food that release energy differently:
- quick burst of energy — peaker plants
- slow but stable energy — nuclear, gas, coal
- has a chance of not giving any energy — wind and solar
You might wonder why anyone would buy food that has a chance of not giving them any calories. It’s because there’s a lot of government interference in the market in the form of subsidies. The government is playing favorites and making it much cheaper to build unreliable energy. Some people may be happy about this because they believe fossil fuels are limited and lead to pollution and climate change.
There are convincing arguments that this isn’t true and I think these people are ignoring the negative impact of “green” energy (reference 1, 2). I’m not an expert on this so I’ll stick to what’s indisputable: unreliable energy makes it harder to match supply with demand which leads to grid instabilities. This is what caused grid failures during an uncommonly cold winter in my home country of Texas in 2021.
- Power companies can only control supply but not demand
- Power plants are not always easy to turn on or off
- Supply is harder to predict with unreliable energy sources like solar and wind
- Whenever supply does not match demand, the grid fails and people suffer
How Bitcoin Fixes This™
Bitcoin mining gives energy companies a way to control demand. For the first time, energy companies can influence both sides of supply and demand. This is because Bitcoin mining is perfectly interruptible — there’s no progress lost if you stop mining and the main cost to mining is power.
So Bitcoin mining companies create value for power companies by giving them demand that they can turn up and down as needed, and power companies can share this value with the mining companies in the form of lower electricity rates. It’s a win-win.
In our analogy above, Bitcoin miners are like a layer of fat. Any extra power production can be used to mine Bitcoin and whenever people need to turn on their air conditioning the power companies can ask the miners to dial it back. This creates a nice buffer when predicting demand.
Proof-of-work mining also incentivizes creating more power plants because it can be a stable, predictable base load which can justify the large expense of building an expensive power plant. More power plants means more supply which means more people have access to cheaper power. This isn’t a huge benefit to most people in the united states, but many areas of the world don’t have access to 24-hour electricity and don’t have stable grids.
Another benefit is that there’s a lot of stranded energy in the world and Bitcoin mining is fairly mobile. For example, any time you crack open an oil well there’s natural gas like carbonation in a can of soda. Since this gas is hard to move around, it’s often flared and sometimes even vented.
Energy companies stand to gain the most by utilizing this energy that would otherwise be wasted, and they’re already getting into mining:
- Exxon Mining Bitcoin: What You Need To Know
- Russia’s third-largest oil company to power Bitcoin mining farms
Imagine you’re Exxon and you have to flare all this energy because it’s too expensive to sell and you get a call from some freaks who say they have a shipping container you can just plop down next to your oil well and instead of flaring all that nat-gas they’ll turn it into money. You might get curious how it works. You might decide to start mining yourself instead of outsourcing it. Why go through a middleman? In any case, you’d jump at the opportunity to make money with almost zero risk.
Bitcoin mining also liberates another type of stranded energy: all the power that’s produced but not used by unreliable sources. For example, the wind may blow at night even though demand is low. Without Bitcoin mining, that power is just lost, but now that energy can go towards securing the Bitcoin network and enabling the best money in the world.
And for all of you worried about the environment, remember how I said the main cost in mining is power? Well, once you buy the solar panel or wind turbine, the power is pretty cheap! Depending on who you ask to measure, Bitcoin mining uses and incentivizes the production of a lot of unreliable energy, perhaps as much as 74%.
Wrapping it Up
- Is a way of turning energy into money
- Makes the grid more stable because power companies can control demand
- Incentivizes more power plants which improves the lives of the poor
- Incentivizes the construction of “renewable” power sources like wind and solar
- Frees trapped energy that would otherwise be wasted
- Makes use of unreliable power that would otherwise be wasted
- Potentially gets giant corporations to hold Bitcoin on their balance sheets thereby massively increasing adoption of the most pristine asset on the planet
All of these benefits are just a byproduct of Bitcoin’s true purpose: creating a global, scarce, permissionless, uncensorable, incorruptible, programmable money. A lot of today’s problems can be blamed on broken, corrupt money and how it’s impossible to store wealth without the government robbing you.
Bitcoin fixes this, and that’s already a lot, but it also increases access to cheaper power. This will pull people out of misery and poverty and help our civilization thrive. So don’t believe all the FUD against Bitcoin mining. It’s fixing the energy grid.