Bitcoin Mining: A Global Economic Perspective

Executive Summary

Bitcoin “mining” is the process of performing a computational effort to create the next valid block of transactions on the blockchain; a valid block being confirmed across the network sees the creator (miner) rewarded with newly issued BTC. However, taking a step back to understand blockchains, blocks, and transactions is helpful.

Blockchain is a distributed database that tracks the balances of Bitcoin users. Each "block" contains a transaction collection representing the transfer of bitcoins between users, with each transaction represented by an address. Network users broadcast these transactions to a shared network resource known as the mempool (memory pool). The network does not recognize transactions until they have been added from the mempool to the blockchain. To send bitcoins to an address, the sender must include transaction fees to incentivize miners to select their transactions from the mempool. Blocks have a maximum size; therefore, miners (typically) choose to include the transactions with the highest fees, generating maximum revenue for the miner. They then generate a block from these transactions and transmit it across the network so that the nodes may validate it.
 

A Miner's Work

• Group bitcoin transactions into blocks (since the block size is ~1 MB, each block can only fit so many transactions; should the mempool contain more transactions than can be fit into one block, the transaction overflow will be added to the next block)
• Perform computations to solve a cryptographic puzzle (performing the “proof of work”)
• Bitcoin miners pool ‘valid’ transactions into blocks; anyone can run a Bitcoin full-node and act as a ‘validator’ for proposed blocks; these people are typically miners since they have the incentive to invest in the network’s security
• Send the blocks out over the network to be cross-checked and verified, and they will validate other  proposed blocks 
• Propagate approved blocks across the network and move on to the next block of transactions

Context Matters

Inarguably, Bitcoin mining utilizes electricity to power its PoW mechanism. Whether it is a lot or a little depends on your frame of reference. But remember, PoW is essential to a decentralized consensus, network security, and the issuance of new BTC (i.e., Bitcoin’s predictable monetary policy). Bitcoin is not Bitcoin without PoW.

In absolute terms, Bitcoin mining used an estimated 82 TWh of electricity in 2021, a 9% increase from 2020, according to CoinShares’ 2022 report on the Bitcoin mining network. As of December 2021, the current annualized draw is 89 TWh. To put this in perspective, the Bitcoin network consumed 0.05% of the total global electricity consumed in 2019, essentially a rounding error when it comes to global energy consumption. For comparison, NYDIG reported in Q3 2021 that domestic tumble dryers and data centers used 108 TWh (0.07%) and 204 TWh (0.13%), respectively, in 2020. 

Bitcoin's Utility

The  Bitcoin network provides a globally-inclusive, censorship-resistant, incorruptible, self-sovereign monetary network for the entire world. Within that context, the amount of energy used (again, 0.05% of the global energy) is absolutely worth the cost. Especially considering, 

• Nearly everyone on the globe is currently living under double-digit inflation
• Two billion+ people live under authoritarian regimes where their rights are suppressed and are subjected to capital controls
• 3 billion+ are underbanked or have no access to bank accounts

Bitcoin gives BILLIONS of people an alternative currency/savings technology where there otherwise are no alternatives. To claim Bitcoin has no utility or value is to deny the lived experience of millions of less fortunate individuals cut off from the Western world’s living standards and freedoms.

Network Efficiency

Bitcoin's energy consumption is increasing (on a long-term trajectory), but it is also growing more efficient. Despite a decline in electricity consumption in 2022, the network hash rate, which represents the combined computational effort of all network miners, remains near an all-time high in Q4 2022. This combination of decreased electricity use and increased hash rate has resulted in a more efficient network. One factor contributing to the efficiency gains   miners have found it cost-effective to replace old, inefficient mining AISICs with new, more efficient ones. In other words, the economic value produced by a miner eight years ago is vastly different from that of today.