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Should we think of Bitcoin as a store of energy? » Brave New Coin

According to the prominent Czech-Canadian energy scientist Vaclav Smil as a species we have gone through three ‘energy revolutions’: the first was the discovery of thermal or fire by harnessing the sun’s energy to burn wood and plants. The second was the transition to farming which allowed us to store the sun’s energy in food and use machinery to take out a lot of the human labor so we could focus on other tasks other than sustenance; and thirdly came the industrial revolution with the discovery of fossil fuels — oil, coal, gas — which we have been trying to depart from in recent decades to renewable sources of energy.

The fourth energy revolution that we are on the threshold of is the renewable age, which, according to the late Prof Stephen Hawking, we must expedite within the next 100 years or be forced to migrate to another planet. Private companies are even starting to capitalizing on such an evacuation, the most prominent being Elon Musk’s SpaceX.

Ironic that Musk is simultaneously selling Tesla cars to prolong life on the planet while at the same time preparing for its extinction…

The third industrial revolution and internet of things

To halt the environmental degradation currently underway, Jeremy Rifkin, an economist and environmental advisor to the German government, believes that we need to be completely off carbon in forty years.

Rifkin points out that industrial revolutions have always coincided with the emergence and convergence of three new types of technology, and in the third industrial revolution it will be convergence of three types of internet tech: communication, renewable energy internet and logistical transportation internet — all riding on top of the Internet of Things (IoT).

In the IoT economy, technology will communicate together — self-driving cars, smart road, rail, and sensors in agriculture monitoring the environment and inventory — all collecting data and all saving energy in the process of their duties. Unlike the previous industrial revolutions, the platform for the third is a distributed economy that is shared, not centralized. 

Aggregate efficiency in the economy

Put simply, the premise of an industrial or energy revolution is to produce goods more efficiently and save more energy in the process of making them, or, in other words, increasing aggregate efficiency in the economy. Aggregate efficiency is the ratio of the potential work to the physical (spent) work that you embedded into the production of the good or service – or a way to measure you well you are at making goods with the least amount of energy.

Rifkin believes “the marginal cost of some goods and services in a digital [economy] will even approach zero, allowing millions of prosumers connected to the Internet of Things to produce and exchange things with one another for nearly free in the growing sharing economy.”

When you consider that we once spent years at sea hunting whales to extract their oil to provide the world’s energy to light our lamps we have come a long way, but we have stagnated. 

Currently the world’s most efficient economy, Japan, has been at a ceiling of 20 percent aggregate efficiency for several decades — this means that 80 percent of energy doesn’t make it into their products. The US has been sitting at 14 percent since the 1990s.

Could Bitcoin be an energy revolution?

Should we change the way we think about Bitcoin, not just as a store of value but as a way to export energy resources, bypassing centralized government monopolies to do so?

For instance, in the west of China where there’s a lack of ultra-high-voltage (UHV) power lines Bitcoin mining may be one of the only suitable consumers of the excess hydro energy. Without UHV lines, much energy is lost to resistance during electrical transmission. Bitcoin mining can, in theory, transfer the equivalent value of the energy to the main cities in the east of China, avoiding loss due to resistance in the lines. If you think of a transaction over the blockchain network as the movement of stored energy it is frictionless and akin to sending an email.  

In comparison, about 40 percent of the consumed energy in mineral is used for overcoming friction, equiviling a loss of $260,000m. Friction and wear results annually in 970 million tonnes of Co2 emissions worldwide in mineral mining alone – which accounts for 2.7 percent of world Co2 emissions, according to a 2017 tribology report on the mining industry.

Total energy consumption of global mining activities, including both mineral and rock mining, is estimated to be 6.2 percent of total global energy consumption. Note that only accounts for the extraction stage of the process – nevermind the energy consumed by logistics, refinement and storage of the products – and only a fraction of the overall process runs on renewable energy.

Put this way, Bitcoin mining may be a vast improvement on the aggregate efficiency of traditional resources like oil, coal, gas and its real-world competitor, gold, which makes up only three parts per billion of the earth’s crust and makes bitcoin mining look easy by comparison.

Bitcoin is not as prone to the same economies of scale as these other energy dense commodities, nor is it as restricted geographically. With Bitcoin mining, the manpower needed is minimal and the machinery (computer farms) and the energy to run them are the only significant overheads – and they should come down with more powerful ASIC chips.

So could Bitcoin be an energy revolution that provides a global energy arbitrage opportunity?

oil price 1

Economist and Bitcoin evangelist Tuur Demeester compares the transition from fiat to cryptocurrency to the 19th century transition from whale oil powering all the light in the world to the infinitely cheaper and more easily extracted kerosene oil and eventually to petroleum. The price of petroleum was also hugely volatile in its pioneering decades, much like what we’ve seen in Bitcoin, but this eventually flattened out.

Demeester calls Bitcoin “the new petroleum”. He premises this comparison on:

  1. The fiat banking industry, like the whaling industry at the time, has been growing quickly for over five decades and — like it — is heavily regulated.

  2. Like the whalers, bankers today are also on a hunt for a rare find: yield. Making a return on investment in an environment of ever increasing inflation and central bank interventions is a risky endeavor.

  3. Technologies with much greater efficiencies are making waves and are growing at impressive speed. [To illustrate the pace of improvement, look at the The Lightning Network].

Debunking energy myths

Renewable energy has barely made a dent on our reliance of fossil fuels

Despite the feelgood vibes around the renewable energy industry the reality is far more sober. In 2018 we will derive 90 percent of global energy from fossil sources like coal and oil. This is more than we did in 2000 by percentage and renewable energy sources make up only 1 percent of the overall mix.

energy inertia chart large2

The Germans are not so efficient

Germany, upheld as the poster child of the renewable revolution, is not faring too well weaning itself off fossil fuels. In 2000, fossil fuels provided 84 percent of the country’s energy. Then the government embarked on a renewable energy campaign, Energiewende, building 90 gigawatts of renewable power capacity to match its existing electricity generation. But because Germany sees the sun only 10 percent of the time, the country is still reliant on fossil fuels: In 2017, they still supplied 80 perent of its energy.

Renewables only accounted for 12.6 percent of the country’s primary energy consumption in 2016. It still imports over 63 percent of its energy; about 98 percent of its crude oil, 88 percent of its natural gas, 87 percent of (hard) coal, and 100 percent of uranium.

China’s move away from coal

China’s renewable revolution is also a bit of a misnomer. Although the government is spending more in the sector than any other country to tackle the pollution choking its population, Chinese coal companies intend to export that pollution by building 700 new coal plants across the world in the next decade, accounting for nearly half of all new coal power output. The world will increase coal consumption by 43 percent if all the planned new plants go online.

Bitcoin mining energy consumption

Bitcoin mining is another villain of the climate debate and the oft repeated refrain is that it consumes the same energy as entire nations. However the majority of miners are located in areas of the world where there is surplus of hydro energy, such as in Quebec, Canada, and in the west of China where there is an overcapacity in hydro from declining aluminium production. Increasingly mining farms are also being run on solar sources and Nasdaq-listed firm SPI Solar has just announced it will host 5,000 bitcoin miners.

energy consumption1

The most widely-quoted figure for bitcoin’s total energy consumption is predicated on a model from the website Digiconomist, created by a young data analyst with no background in energy economics that has been criticized for its inaccuracy by scientists with expertise in the area. At the moment bitcoin’s energy consumption sits around 60 TWh on this chart.

Jonathan Koomey, a Stanford University lecturer who pioneered studies of electricity usage from IT equipment and helped debunk the overblown forecasts of internet energy consumption in the Dotcom era, told CNBC that the Digiconomist model is “a completely unreliable way to do the analysis, and no credible energy analyst would ever do that.”  

It is fundamentally flawed because it calculates bitcoin’s power consumption by estimating miners’ revenues and expenses and “any time you do that, you introduce multiple layers of error and uncertainty,” Koomey said. And even if the Digiconomist figures are correct, power consumption from bitcoin mining would only amount to a fraction of 1 percent of global demand.

Christian Catalini, an assistant professor at the MIT Sloan School of Management said the Digiconomist Bitcoin energy model, among others, “are based on very weak assumptions.”

“I don’t think anybody can make a credible claim… without actually having data from the miners.”

Conclusion

Put into perspective of the historical and current energy efficiency levels of our industries it would be pedantic to evaluate bitcoin on the merits of its carbon footprint. And just as many Dotcom era forecasts for the nascent internet’s energy consumption were overblown we should take current estimates of this unknown quantity with a grain of salt. 

And like all goods produced, the energy spent is embedded into the price – so why would bitcoin be any different? In a decentralized economy powered with IoT we should be able to finally move aggregate efficiency levels beyond that of the Dotcom era. 

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