Satoshi Nakamoto’s invention of Bitcoin and a blockchain to manage it seemed like manna from heaven. Entire businesses are trying to exploit it. But the raw material, Bitcoin, is not a cost-free input. How expensive is the ongoing minting and distribution of Bitcoin? And what does that mean for how it should ultimately be used?
The costs are specific. Johnson Lau Chun-hong, a Hong Kong-based member of Bitcoin Core, the group of mostly volunteer developers who maintain Nakamoto’s software, illustrated just how high the cost is.
Speaking to a group of private investors, venture capitalists and crypto-geeks in Hong Kong, Lau said the cost of mining Bitcoin this year will add up to $788 million. Alongside the monetary cost is an environmental cost: the power consumed by computers to mine and distribute Bitcoin will require at least 408 megawatts of electricity, and probably a lot more.
That adds up to 2.43 kilowatts of global power consumption for every person on the planet. 408KW is enough to provide energy for nearly 168,000 people’s daily living needs worldwide, Lau says.
Adding up the bill
These are actually conservative figures. The process of mining for bitcoins involves computers executing increasingly complex mathematical problems, for a decreasing number of Bitcoins (the software is designed to limit the total number of Bitcoins to 21 million, and each cycle yields fewer of them). That means the energy required per new unit keeps climbing, by anywhere from 1% to 17% over the past few months, Lau says. “The next time I do this talk, the energy cost will be the equivalent of 500,000 to 600,000 people’s consumption needs,” he said, noting that incidents of the energy use declining is very rare.
His numbers exclude the costs for ether and other crypto-currencies.
The financial cost for this year may increase, too. That $788 million figure is based on production: every day, miners generate 12.5 bitcoins per block (a block is a miner’s reward, representing all of their transactions to generate bitcoins), and on average 144 such blocks are created every day. Multiplying these by Bitcoin’s US dollar price at the time, $1,200, leads to $2.16 million of units being generated every day.
That much new supply implies that $788 million’s worth of value must be generated for the price of Bitcoin to remain at about $1,200 at the end of the year, Lau says.
Of course, Bitcoin’s price fluctuates a lot. On March 3, Bitcoin’s total market capitalization hit a high of $20.9 billion, but by March 18, after Lau’s presentation, it had fallen to $15.7 billion, according to CoinDesk.
Is Bitcoin worth it?
But the point is that the implied financial cost is substantial. Lau says a traditional financial system relies on third parties, such as banks, which levy fees, forex spreads and hidden charges. So it’s not like Bitcoin is worse. But it’s not free, either, and its costs are spread across society. “There is some cost to maintaining a decentralized system,” Lau said.
The cost is further veiled by the voluntary nature of some participants, such as Lau. There are more than 5,000 open nodes (computers checking the validity of every single block and every single transaction in Bitcoin history). Many people use their computers to do this out of a passion for the system and a desire to keep it healthy – but that’s still electricity powering computers 24/7.
“That’s the hidden cost of maintaining this decentralized system,” Lau said.
So is Bitcoin worth it – the energy consumption, the pollution that it spews, and the opportunity cost of $788 million that could be spent somewhere else? And will Bitcoin go the distance and keep attracting the investment it needs to keep going?
Lau has to be careful about stating an opinion, as he does not represent Bitcoin Core, nor the miners nor the businesses and investors using Bitcoin. He’s just one developer. (His day job is a lecturer in healthcare.)
But Lau’s view is that many applications that fintech companies want with Bitcoin aren’t worth the true cost. “I can’t think of a reason why I’d want to use bitcoins to buy a coffee,” he said. “I can’t see why I’d prefer it to the Octopus card,” he added, referring to the debit card used in Hong Kong’s transportation system.
“Bitcoin’s price is volatile,” Lau said, “and that’s a bigger problem than any transaction fee I have to pay in a traditional means of exchange. Octopus is cheap and fast. My Visa card is fine – it gives me bonus points every time I make a purchase.”
If Bitcoin’s purpose is simply to replace traditional payment systems, it may not be competitive due to the high production and maintenance costs, as well as because of its volatility, Lau says.
For developers such as Lau with a bigger vision of Bitcoin’s potential. “Bitcoin is interesting because it’s different,” he said. It’s about creating a system that protects against cheating, prevents third parties such as banks from price gouging or charging hidden fees, defends against governments’ money-printing proclivities, and enables cross-border transactions that can’t be stolen or nationalized. Or, in tech-speak: “I’m talking about public permissionless decentralized blockchain.”
The bigger picture is what makes Bitcoin sustainable. “It must archive something that is not possible with traditional means of exchange,” he said. Although reduced volatility would make Bitcoin better as a payment system, which could occur if it becomes more liquid and popular, this is not Bitcoin’s primary advantage.
“It’s not about the software,” Lau said. “It’s about the philosophy.”