This past week Elon Musk announced that Tesla would no longer be accepting payments for vehicles in Bitcoin due to environmental concerns. In this announcement, he also stated that they are still holding onto their Bitcoin and won’t be selling any at the moment and that he’s still pro crypto and will be looking into other cryptocurrencies that use less energy per transaction. This news resulted in a crash in Bitcoin and therefore a larger market wide correction. There’s been a lot of FUD (fear, uncertainty,doubt) around Bitcoin’s energy consumption over the years and so I wanted to write a quick post breaking down what’s true and what’s not.
Elon's Real Reason
For starters, it’s important to understand that this news of Tesla no longer accepting payments in Bitcoin should not have crashed the market.
- Less than 10 Tesla vehicles have been paid for in Bitcoin this year so it’s not like this was a huge aspect of their business
- Tesla is still holding onto their Bitcoin investment which is a much bigger deal than Bitcoin payments
- The panic selling that goes on in crypto is pretty ridiculous. This wasn’t groundbreaking bad news as proven by point 1 and 2, people need to stop being scared by the little things, but I digress.
On top of this, Elon Musk in the past agreed with Jack Dorsey when he tweeted that Bitcoin incentives clean energy. This new change of ideals most likely stems from 1 of 2 things
- Elon has been experiencing a lot of pressure from shareholders about the environmental impact of Bitcoin and therefore eventually bent to their will.
- He is looking at other crypto projects and wants to start transitioning the attention away from Bitcoin to his next adoption, there is a lot of evidence of this on his Twitter as you can see from his strong position in Doge.
Due to this, you need to take his tweets with a grain of salt. Tesla has thousands of very smart people employed under its belt, including Elon Musk. To think that the company didn’t do its due diligence in Bitcoin before investing in it would be naïve. So to conclude this section, Tesla’s move away from Bitcoin payments may be justified to some degree but the overall market correction was not justified by any means but it rarely ever is. Now let’s get into the logistics of Bitcoin’s environmental impact.
Bitcoin's Environmental Impact
Both Jack Dorsey and ARK Invest’s Cathie Wood claim that Bitcoin incentives clean energy. For starters, the truth behind the matter is yes, Bitcoin consumes a ton of energy. The network’s energy consumption has grown 66 fold since 2015, reaching a staggering 143 terawatt-hours, outpacing many developed countries like Argentina and Switzerland. It’s also true that as the network grows, the energy consumption needed to secure the network will also grow. But it’s important to understand that nothing in life is simply black and white. Bitcoin’s energy consumption is relative.
The way mining Bitcoin works is that a miner uses computing power to race to solve a difficult algorithmic puzzle in order to receive a reward of Bitcoin and thereby validating the next block of transactions in the Bitcoin network. Large Bitcoin miners like the ones in China and Iceland have huge warehouses filled with mining rigs that consume large amounts of electricity. In order for this Bitcoin mining to be profitable, miners need to drive down their energy costs. They do this by locating in places where electricity is generally cheap but they can also do this by using cheap forms of electricity. Well what are the cheapest forms of electricity? Solar and wind energy. A recent study by Coinshare, found that as much as 74.1% of Bitcoin’s energy consumption comes from renewable sources. This should intuitively make sense, in order for Bitcoin mining to be most profitable, miners need to seek out cheap forms of electricity. The cheapest forms of electricity these days resides in renewable sources and therefore many miners will adopt renewable energy to fund their business.
A large problem that exists in the renewable energy market right now is that the infrastructure for renewable energy systems are very poorly located and therefore the energy these systems generate have been underutilized. Because of this, a lot of this renewable energy has been utilized by the Bitcoin network rather than traditional sources. More and more miners adopting renewable energy sources will help drive down the costs of renewable energy and therefore help with widespread adoption to other industries. A useful infographic that Square made is shown below.
Now all of this isn’t to say that clean energy is perfect. Individuals love to write off clean energy consumption as this purely angelistic practice when in reality clean energy still causes greenhouse gases due to the fact that our society’s grids haven’t been fully converted over to clean energy so the infrastructure setup of wind farms and solar farms still requires the burning of fossil fuels. Despite this, I would argue that clean energy is on a huge ramp to disrupt traditional energy and any industry that helps reduce its cost curve and therefore accelerator its adoption, is a plus in my eyes. Clean energy is a sector at Spectacle that I will be analyzing and heavily investing in in the years to come.
The Relativity of Energy Consumption
There’s no denying that Bitcoin consumes a ton of energy, but like I said before, this is all relative. Just take a look at the chart below.
As we can see, Bitcoin uses far less energy than the traditional banking systems used around the world. Important to note though that the traditional banking systems do serve far more users than Bitcoin and Bitcoin’s energy consumption will accelerate as the network grows but my point is that you don’t see anyone complaining or trying to make the traditional financial systems less power hungry or more clean.
There’s a few conclusions I want to draw from all of this.
- Stop panicking at the slightest hint of bad news, trust your investments and your conviction.
- Bitcoin incentivizes clean energy, not perfectly but it is contributing to the clean energy revolution more than people are giving it credit for.
- Everything is relative, Bitcoin’s energy consumption is a fraction of other leading pollutants, educate yourselves before drawing conclusions based on fear inducing headlines from people pushing an agenda. Ignore the FUD!
Overall, this recent news from Elon Musk does have me questioning Bitcoin a little. I’m not a Bitcoin maxi by any means but I do believe in Bitcoin as a store of value solely because of its decentralization and network effect. You can check out my Comprehensive Guide to Bitcoin here. Elon’s tweets did bring up an interesting point, if another crypto were to develop a network effect equal to the magnitude of Bitcoins but consumed less energy and was technologically superior in every way, then Bitcoin could be wiped out. This is completely hypothetical though as Bitcoin’s network effect is extremely strong and the past decade of FUD hasn’t been able to stop it and this recent FUD won’t either. But just some food for thought, always question everything, nothing is black and white.
Thanks for reading, let me know what you think as all constructive criticism is welcomed. Make sure to follow Spectacle on Twitter and give the blog a follow to stay up to date with new news, analysis and breakdowns. Check out the crypto homepage for analysis on projects like SXP, ADA, 1inch, and happy investing everyone!