More than half of Bitcoin mining is powered by sustainable power
This article provides a look at my latest research, revealing how a 2022 Cambridge Center For Alternative Finance’s (CCAF) study on Bitcoin’s environmental impact underestimates the amount of sustainable Bitcoin mining going on. I also address why we can be very confident that the actual sustainable energy use is at least 52.6% of Bitcoin
WHY THIS MATTERS
Whatever your position on ESG investing is, the reality is that it is sky high, on the way to reaching it 10.5 trillion dollars in the US alone. What is also true is that Bitcoin adoption cannot happen unless these $10.5 trillion of ESG funds feel comfortable that Bitcoin is a net positive for the environment.
Right now, ESG investors are largely uncomfortable with this being the case. In talking to them, my impression is that one reason for ESG investors’ discomfort with Bitcoin is that the CCAF study, “A deep dive into Bitcoin’s environmental impact,” reported that Bitcoin uses only 37.6% sustainable energy.
While ESG investors are generally quick to dismiss the work of Bitcoin critic Alex de Vries – debunked in a previous Bitcoin Magazine article – I have found that they are also more likely to trust the CCAF study over a Bitcoin Mining Council (BMC) study that found Bitcoin uses 58.9% sustainable energy. You can understand why: the Cambridge brand says ‘recognised, independent research’, while the BMC says ‘industry body’.
Ironically, being an industry body, the one that gives the BMC access to real-time Bitcoin mining data, also made its findings easier for at least some ESG investors to disqualify. Environmental groups such as Earth’s justice and periodicals such as “The ecologist“have been just as quick to assume that the CCAF numbers must be the correct ones.
To date, Bitcoiners have had a muted response. The result: The conversation that ESG funds are behind Bitcoin cannot go forward. Bitcoin user adoption stalls.
Meanwhile, environmental groups are gaining more fuel to lobby governments to punitively regulate Bitcoin mining.
WHAT WILL IT TAKE FOR ESG FUNDS TO SUPPORT BITCOIN?
ESG funds require three things before investing in Bitcoin projects. These are the same three things that the White House would need to not criminally regulate Bitcoin mining: independent, empirical data that shows unequivocally:
- How the CCAF study was underestimated and by how much
- That the Bitcoin macro trend is quantifiably moving towards sustainable energy
- That Bitcoin is quantified as a net positive for the environment and society
The research presented here is the answer to the first requirement of ESG investors. It will not by itself open the floodgates for institutional ESG investments, but it overcomes the first major barriers.
DISCOVERY
Throughout 2022, I was baffled by the consistent 20%-plus difference between the BMC and CCAF estimates of Bitcoin’s sustainable energy use. I saw both the Bitcoin community and environmental groups cite the figure to fit their narratives.
Being in the unusual position of straddling both communities, my simple question was, “Who is right?”
I decided to investigate the question.
What I realized was that the CCAF model excluded several factors. No great detective work on my part: it says so on its website under the section “Limitations for the model”.
So I quantified the impact of these exclusions. It turned out that the three exclusions mentioned on the website cause the model to underestimate Bitcoin’s sustainable energy percentage by 13.6%. This explains two-thirds of the entire variance between the CCAF and the BMC model.
When all exclusions from the CCAF model are included, the sustainable energy percentage for Bitcoin is a whopping 15.5% higher.
Here is a complete overview of all CCAF model exclusions. There are nine exceptions in total: seven (green) which increase the figure for sustainable energy use; two (in red) that reduce it. A full evaluation of each factor and the methodology used to quantify exclusions can be found on my research page.
So, in summary, the CCAF model does not take into account:
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Off-grid mining (impact: plus 10.8%)
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Extraction of flare gas (impact: plus 1.0%)
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Updated geographic hash rate (exmigration of miners from Kazakhstan, effect: plus 1.8%)
With all exclusions included, the sustainable energy mix calculation is 52.6%. This figure represents a lower estimate, so it is not inconsistent with the BMC study showing 58.9% sustainable energy.
HOW SURE CAN WE BE THAT BITCOIN’S ENERGY USAGE IS ABOVE 50%?
We can simulate this using the revised model. For Bitcoin’s true sustainable energy use to be below 50%, at least one of the following scenarios must be true:
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Four major Bitcoin mining operations secretly run on 100% coal-based energy
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ERCOT (the operator of Texas’ electricity grid) has overreported its true renewable energy numbers by a factor of four
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Despite the widely reported exodus of miners from Kazakhstan, their claim to Bitcoin mining actually increased their share of the global hash rate from 13.2% to 20%
I would rate the chance of any of these being true as far-fetched. As for the probability that the true sustainable percentage of the Bitcoin network is 37.6%, you are more likely to win first prize in a single ticket lottery where every man, woman, and child in the United States has a ticket.
WHAT THIS NEW RESEARCH MEANS FOR BITCOIN’S ESG NARRATIVE
Three things:
1. It won’t stop the mainstream media from citing the Cambridge study or environmental groups from using it. But it will make a difference to how ESG investors view Bitcoin. For the first time, Bitcoin advocates have a legitimate, data-driven way to remove the roadblock that the CCAF study has created in the minds of ESG investors for some time.
Past the first hurdle, Bitcoin supporters can ask the next two big questions that ESG investors and the White House have: Is Bitcoin’s macro trend moving quantifiably toward sustainable energy? And is Bitcoin quantified a net positive for the environment and society?
2. It also means that previous CCAF findings that appear to have used the same partial data set must be re-addressed. Specifically, we must look at the findings as:
Initial calculations suggest that all four findings may be wrong. This will need further analysis before we can say this with confidence. I will do it in separate parts of the work.
3. As far as I know, all other major industries are significantly behind Bitcoin in their use of sustainable energy. Bitcoin can legitimately claim to be the leader in all other industries when it comes to adopting sustainable energy sources. This is a very strong ESG case, because it shows an industry taking leadership in the renewable transition, which has the potential to inspire other industries by example.
It is also worth noting that Bitcoin has achieved this feat in the remarkably quick time of just 14 years.
In summary: One of the three obstacles to institutional adoption of Bitcoin on an ESG basis no longer exists. Both Bitcoin advocates and ESG investors can now feel confident that Bitcoin is mainly sustainable.
FINAL WORDS
Throughout the process, I was in contact with both Alexander Neumueller, the digital assets project manager at CCAF, and Michael Saylor, the founder of BMC. Each was both encouraging and supportive of the approach I was taking.
To my knowledge, CCAF was the first to create energy and emissions data for the Bitcoin network using a valid methodology and high integrity data. I use both energy consumption index (CBECI) and its mine map much in my own research and have found both the methodology and data of these two tools to be good. It is only the sustainable energy percentages that I found that an underestimation occurred.
When CCAF first started calculating the sustainable energy use of the Bitcoin network in late 2019, it was very accurate. It is the subsequent proliferation of largely renewable-based, off-grid mining, flare gas mining and rapid miner movement from Kazakhstan and into Texas that saw the model begin to lose ground. As any quant trader can tell you, “even a good algorithm will lose tune over time.”
By Daniel Batten via Zerohedge.com
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