Bitcoin: a Revolution in Regulation

I have spent the last two years intensely studying Bitcoin and the greater crypto-ecosystem. In that time, I have yet to find a single valid argument against Bitcoin. Sadly, most of these criticisms come with the intellectual vigor of headline browsing. With a little more dedicated research, the lack of critical thinking and understanding of the detractors becomes clear. The latest such criticism is an environmental concern. Behind the narrative is a fear that the continuation of bitcoin mining would soon boil the oceans from its colossal carbon-emissions. Once again, this is unquestionably false.

What is Bitcoin Mining?

Bitcoin mining is the globally-distributed mechanism in which transactions are added to the blockchain (a ledger) in a manner that is decentralized (no single point of failure), trustless (no need to trust a third party), and cryptographically-secure (the costs to attack the network far outweigh any potential benefit). Basically, these “miners” confirm transactions. An entity can send a transaction request to the network, but it is only confirmed once it’s been processed by the miners. In exchange for confirming transactions correctly, the miners are rewarded with a systematic issuance of bitcoin as well as any complimentary transaction fees. Below are some important facts regarding this mining process:

  • A fixed amount of bitcoin is mined periodically. The current rate is 6.25 bitcoin (BTC) per ~10 minutes or about 900 BTC/day.
  • The bulk of the operation cost is electricity (ballpark 85%). The other 15% can be attributed to hardware.
  • For the first time, energy can be productive with only an internet connection.

Market Competition

Let’s start with the first point: a fixed amount of bitcoin is mined periodically. Whether there are one or one million mining operations, they are all fighting over the same 6.25 bitcoin every 10 minutes. Those that successfully mine bitcoin enough to cover their costs, stay in business, and those that don’t, go out of business. What’s the difference between them? Look at the second bullet: the bulk of the operation cost is electricity. If miners are paying a little more or less for hardware, it isn’t a significant differentiator because hardware is a relatively small portion of their costs. On the other hand, whether they source cheap or expensive electricity will determine which miners run a profitable business and which miners are run out of business.

Let’s illustrate this phenomenon with hypothetical figures and assuming each actor contributes the same amount of computing power. Say a single miner is powering the bitcoin network using expensive electricity from a coal-powered plant. They are making the 900 BTC/day. A potential miner sees the profits and wants to get in on the action. They join and now each of the two miners are making 450 BTC/day. The profits continue to attract newcomers until 9 miners are each making 100 BTC/day — just enough to cover their costs. Then, an outsider decides to begin mining, but with cheaper, natural gas-powered electricity. Each miner is now making 90 BTC/day, but only the new miner is profitable, the rest are losing money each day. They can either stop mining or switch to cheaper, natural gas-powered electricity. More natural gas-powered miners join (because it’s profitable) and coal-powered miners leave (because it’s unprofitable) until everyone is running on natural gas. This free-market phenomenon of weeding out expensive electricity and attracting cheap electricity doesn’t stop at natural gas, but will continue until the marginal cost of electricity is free.

Bitcoin mining is a competitive free-market battleground of everchanging market participants. The idea that mining operations are being built/maintained using dirty coal-powered electricity is ludicrous. Why would someone build out infrastructure for an operation that’s future profitability is less than likely and why would someone use their infrastructure to operate at the worst margin in their industry? It’s just silly. Instead, we are seeing bitcoin mining being powered by renewables simply because the cost of the next ray of sun or gust of wind is closer to zero than the cost of the next block of coal. The only long-term bitcoin miners are those utilizing stranded (free) or otherwise wasted (also free) energy. For example, after bitcoin became legal tender, President Nayib Bukele of El Salvador made plans public to begin mining bitcoin powered by their volcano!

Based on a misunderstanding of Bitcoin, many people question why renewable energy isn’t being used for other purposes. Yet, remember the third bullet from earlier: for the first time, energy can be productive with only an internet connection.

The barrier to turning an energy source productive has never been lower. Previously, power generation was only profitable if it was built strategically next to a civilization full of buyers. Now, bitcoin mining is an energy buyer of last resort; the energy bitcoin is buying is that which no one else wants. The idea that bitcoin is dangerously contributing to the carbon footprint by utilizing energy that would otherwise go to waste does not make any sense!

In fact, at bitcoin’s current price of $40k, bitcoin mining is currently a +$13 billion annual incentive to invent and improve cheap energy. Undoubtedly, this pushes forth innovation and implementation of renewable energies where the marginal cost is $0. In Square & Ark-Invest’s whitepaper, they explain how bitcoin, as the energy buyer of last resort, solves renewable energies like solar and wind’s problem of intermittent energy. For example, a solar facility has to be built such that at 5pm, even though the sun is starting to set, the peak energy demand is fully met. However, that amount of solar panels will create an immense surplus of energy around 12pm when the sun shines the brightest and energy use is smallest. Now, these facilities can be built with integrated bitcoin miners that begin mining whenever supply usurps demand. In this example, bitcoin is being powered by otherwise wasted energy, pushing any expensive “coal” powered bitcoin miners out of business, making a solar farm immensely more profitable, driving more returns to shareholders, who will invest in building more solar farms and even developing better renewable technologies — where exactly is the environmental catastrophe here?

Regulating Bitcoin Mining

Regulation exists to combat perverse incentives. But Bitcoin is like nothing our regulating bodies has ever seen — it is an engineered monetary network. It was architected with simple rules, open to all, and such that it’s incentives are aligned with every stakeholder of the network. You don’t need to regulate bitcoin mining because bitcoin mining regulates itself.

Take a minute and think about it. Even if you sincerely thought bitcoin mining was powered by coal and emitting immense amount of carbon emissions into the atmosphere, the most effective course of action would have nothing to do with banning coal-powered mining. It isn’t worth the headache of drafting the bill, campaigning to constituents, negotiating to adversaries, adhering to lobbyists, compromising on some issues, and then if it finally passes, trying to enforce restrictions on an open network! Rather, the most effective course of action would simply be to start mining yourself with cheaper energy. Might I suggest Quebec…

With a $0 marginal cost of electricity, you will price out every coal-powered bitcoin miner. You will price out every natural-gas powered bitcoin miner. You will price out every single bitcoin miner that isn’t powered by otherwise stranded or wasted energy.

Regulating Legacy Finance

When the United States dropped the gold standard in 1971, our dollars stopped being backed by gold and became fiat, backed by decree of our government. With no checks and balances, the incentive to print money grew each year. This is a system with perverse incentives and where unintended consequences run rampant with each decision. Wtfhappenedin1971.com is a mind-blowing resource to view a compilation of graphs showing disturbing trends as our money supply lost its base. And this is an article detailing how wealth inequality is unnaturally exacerbated by these inflationary practices.

In the below video, Social Capital CEO Chamath Palihapitiya eloquently explains how these incentives are skewed towards short-term profiteering of executives, hedge funds, and nobody else.

This is the system that needs regulation — regulation to combat printing money to bailing out the billionaire class. Bitcoin is the people’s money. Leave it alone — it is doing just fine.

More Erroneous Bitcoin’s Environmental Criticisms

Credit to Nic Carter [1] [2]

Scaling Bitcoin Transactions Scales its Energy Use Similarly

The Bitcoin Network confirms about seven transactions per second, which is not a lot. Recognizing that a goal for bitcoin is to become global money, people have compared it’s current transaction speed to what would be necessary to meet the total global demand of financial transactions. Then, they scale the energy use similarly and conclude that the amount of energy necessary to run the network would scorch the earth. This is incorrect. First of all, there will likely never be an increase in the Bitcoin Network’s seven transactions per second because increasing the transactions per second hampers the network’s decentralization. Instead, think of the Bitcoin Network we’re referring to as a settlement layer and imagine the network scaling in layers. The Lightning Network is Bitcoin’s most popular 2nd layer whereby millions of transactions can be embedded in a single base-layer transaction. Thus, scaling the network to millions of transactions per second without any material increase in energy use.

Using Country’s Energy Mixes to Estimate Bitcoin’s Energy Mix

Until recently, there used to be a significant amount of Bitcoin mining in China and China burns a lot of coal. People will take the coal portion of China’s nationwide energy-mix and attribute that same portion to what must be fueling bitcoin mining in China. I hope the Market Competition section explained why that was not the case. China’s mining primarily came from it’s overbuilt hydro facilities.

Bitcoin is Useless so there is no Amount of Energy Use Justified

Many seem frustrated with the very existence of Bitcoin and claim there is no use for it. And if there’s no use for it, then no energy use is justified. With all due respect, I think that is a statement of great ignorance. This is a technology that empowers every individual. For the billions of the unbanked, they are granted financial access. For the billions living under hyper-inflation, they can store wealth in a fixed-supply asset. For the billions under dictatorships, their wealth can’t be confiscated. Never in history has there been a technology that allows one to flee from dangerous circumstances, holding all your wealth securely by memorizing 12 words in your mind or fund protestors of authoritarian regimes overseas. If you can’t see the value in bitcoin, you might need to check your financial privilege and find hope for decolonization.

Bitcoin is a Just Another Use of Energy and Replaces Nothing

For those that see bitcoin as an alternative store of value to gold, compare it’s environmental effects to that of gold mining and jewelry manufacturing. For those that see bitcoin as a way to give financial services to every person or an insurance hedge, compare it to the finance and insurance sector. For those who see bitcoin as a defensive contender for the next global reserve currency (opposed to the petrodollar), compare it to the military industrial complex.

Bitcoin is for the people. I will die on this hill.