Bitcoin’s Energy Use is a Feature Not a Bug

Bitcoin’s Energy Use is a Feature Not a Bug thumbnail

Mickey Koss is a West Point graduate with a degree in economics. After serving four years in the Infantry, he moved to the Finance Corps.

In a recent article titled “Bitcoin Is Not a Store-of-Value,” an author going by the name of 0xStacker provided a seemingly well-reasoned critique of Bitcoin, equating its energy usage to a flaw in the system — a leak that precludes bitcoin from being classified as a sound store of value. I am here to tell that the energy usage is not a flaw. It is actually the part of bitcoin that will propel it forward as a reserve currency, store of value, and global currency. Although proof-of-stake is the solution, the system’s flaws make it unsuitable for long-term storage of value or a decentralized monetary base.

Bitcoin miners are as competitive as they come with markets. You either have enough electricity to sustain profitability or you don’t. If you aren’t, you will eventually have to sell your bitcoins and go out of business. The author seems to believe that energy prices will continue rising over time, making it more expensive to mine bitcoin. This could lead to a network death spiral if the price action doesn’t keep up. The author may be correct if you assume that we will continue to rely on perishable and fundamentally scarce energy sources, and a system dependent upon perpetual money printing and inflationary policies. Isn’t Bitcoin’s purpose to create a parallel system that doesn’t foster hostility to human flourishing?

Fear Uncertainty And Doubt Repackaged With Math

First and foremost, bitcoin miners selling bitcoin isn’t an issue to me. Why would we want a group of perpetual HODLers keeping every coin they ever mine? For people to opt out of the current system, coin distribution is vital. Bitcoin is all about individual empowerment and decentralization. Can we criticize gold miners who sell gold? This criticism was so absurd to me, it barely registered as something I could address.

All the miners I know, both at the corporate level and myself, only sell bitcoin as an option last resort. They mine bitcoin because they want it, not because they need fiat revenue streams. Selling pressure is not an issue in my view. It is indicative of bitcoin’s marginal cost to produce, which is what gives it value compared with fiat currencies. What is the marginal cost of producing an additional dollar? It takes five clicks and a few strokes on Jerome Powell’s keyboard.

In 0xStacker’s solution, proof-of-stake, stakers have no variable expenses other than income taxes. The influence they have on the network through staking makes it more attractive for the big boys to keep their coins in order to exert more control over it. Theoretically, a large staker or a group of them (like the big exchanges) could take over a proof -of-stake network. Centralization is driven by the incentives. The more you have the better.

The author then attempts to calculate the current mining costs and to iterate them using current numbers to project a future market capitalization and energy expenditure. It took me a while before I could even understand this method. I realized that his equation was a mathematical representation for classic Bitcoin energy FUD (fear uncertainty and doubt). This claim has been refuted by so many people that it is barely worth mentioning. (Examples can be found here or here.)

A simple anecdote to combat some of his FUD points is the new Antminer S19 XP. Compared to its predecessor the S19 Pro, you get a 27% increase in hash rate with a 4% decrease in power consumption. While a miner’s hash rate can grow exponentially, their power consumption doesn’t.

He also attacked the Lightning Network for being centralized and relying upon companies like Strike. This is simply false. The Lightning Network, much like Bitcoin, is open-source, permissionless software. It has nothing to do whatsoever with Strike. The Lightning Network is a Layer-2 app. Strike should be considered Layer 3 and use the Lightning Network to support its business. Strike depends on the Lightning Network and not the other.

As bitcoin prices rise, fees will also rise. Lightning will be available for small purchases; larger purchases that require more security and finality, will remain on-chain. The hash rate will rise to whatever level miners are motivated to continue mining.

The author even contradicts himself when attempting to prove the benefits of proof-of-stake mining:

This means network usage is a bit more expensive for the end user, but their usage of the network benefits all holders of ETH by burning some of the supply. Network validators don’t have to sell ETH to cover costs because there is no huge energy cost to staking. They are actually incentivized not to sell the supply because it is deflationary.

Bitcoin is too expensive but ETH being expensive is okay because they burn tokens and don’t use energy…? It’s absurd. He also stated that validators are incentivized not to hold tokens due to their fixed costs. This is because the amount of bitcoin that you have does not affect network consensus. If validators are incentivized, how can they hold bitcoins? It’s a steady and slow march towards centralization.

He compares the return on investment into bitcoin mining to staking, but fails to mention that the accrual of bitcoin through mining:

  1. Happens at a decreasing rate with hash rate growth.
  2. Does not grow your influence over the network with the size of your bitcoin stack.

The miners need to provide value to remain viable. All that is required of miners is for them to be profitable are the stake holders.

The article contains so many false points that it is difficult to address them all. Bitcoin has a $3 billion cost for a 51% attack — good luck getting your hands on all that hardware and electricity. You must have your own secret chip finders and nuclear power plants that nobody else knows about. The author claimed that he was not publishing FUD. However, fact-check: False.

Mining Incentives

In Bitcoin Magazine’s “To the Moon Issue,” Hass McCook III wrote a theoretical story titled “Bitcoin Mining in the 22nd Century.” The article culminates in a beautiful illustration of how Bitcoin’s incentives iterate into a world of human flourishing:

On Earth, 25% of the world’s energy is dedicated to mining bitcoin, and due to the largely Bitcoin-driven intense competition in the energy markets, regular people effectively have access to very low-cost if not free energy … The world’s grid is emissions free. Of note is that humanity now uses a full 50 times more energy than we did a century ago — all clean.

Bitcoin is the incentive that can help drive down energy costs and bring human flourishing to the world. In a recent article by Level39, he presents a technique that uses temperature differentials in ocean water to generate electricity. The technology has existed for over 100 years in theory, however the incentives for actual development have not existed until the development of a decentralized, energy-based monetary system that could monetize electricity existed. This system is bitcoin.

Profitability Assumption

One of the most flawed assumptions in my eyes is that bitcoin mining needs to be profitable in the first place.

Assuming that miners will always be giant warehouses full of computers, consuming energy second-hand from the power companies, then yeah, bitcoin mining companies will always need to remain profitable. A fascinating discussion I heard on podcasts recently was that energy companies may acquire bitcoin mining companies, or that bitcoin mining firms will acquire energy producers. It’s a win-win situation that helps bitcoin miners be more profitable. The magic here lies in the electricity demand curve.

Bitcoin incentivizes energy innovations whereas proof-of-stake results in exacerbated inequality since the more money you have, the more money you get.

(Source): U.S. Energy Information Administration, U.S. Hourly Electric Grid Monitor.

The demand curve shows the variation in electricity demand based on time of day and at different times throughout the year. This conversation could get quite complicated. However, one of major reasons energy becomes more expensive over time, is that you have to pay not only for the energy that you use but also for any excess capacity electric companies have that they cannot use most of their time. Electric utility companies must maintain electricity capacity to meet the demand for electricity, as shown in July. This is plus some safety margin. However, that capacity is largely unutilized for the remainder of the year. This problem could be solved by combining bitcoin mining and energy production. Instead of energy consumers paying for unused capacity, utility companies would use nearly 100% of their capacity, ramping mining up and down based on energy demand throughout the day, charging customers only for the electricity that they actually use. The incentives for renewable development and variable cost are the same, but it removes the need for bitcoin miners being profitable. The opportunity cost of maintaining the extra capacity offline must be outweighed by the act of mining bitcoin. If there are near-zero variable costs associated with generating electricity, like in hydro and nuclear, why wouldn’t generators simply keep capacity at nearly 100% and soak up all the extra electricity into bitcoin? They wouldn’t have to sell and could simply use bitcoin in the beautiful, monetary battery capacity Michael Saylor loves to talk. This could result in a huge build-out of baseload clean energies like nuclear and make energy more affordable, reliable, and abundant for all. This energy-sponge concept is already helping to stabilize grids and reduce emissions in places like Texas, Utah, Kenya and Oman. While Bitcoin is changing the world, proof-of stake coin-holders are incentivized not to lose their coins as the price may rise.

Furthermore, ASIC chips can be used to replace the heating elements for applications, such as HVAC systems and water heaters. Why would you want to simply produce heat when you can mine bitcoin simultaneously? Sounds like a really stupid waste of electricity to me, and guess what, this is already happening in Canada on a pretty large scale, delivering heat to 100 residential and commercial buildings. Why would you want a water heater that mines bitcoin?

Came For The Number Go Up, Stayed For The Freedom Go Up

The author also seems to focus greatly on price, ignoring the freedom-oriented aspects of the decentralized and immutable ledger that is Bitcoin. The fundamental principle of proof-of-stake states that the more money you have the more control you have.

The author asks:

Why would an investor choose to store value in a token system that leaks value when they could choose one that doesn’t leak value, has higher demand potential due to being more eco-friendly, and has a deflationary supply that leads to value accrual in the token (number go up tokenomics)?”

Simply stated, it’s because I don’t believe in your system. It is not possible to decentralize based on the cost of running a node. I refuse to believe that anyone can dictate my energy use in the first instance. Nor do your ideas of what is eco-friendly have any objective or useful definitions. Do you want to live in an eco-fascist, post-freedom society? This is how you can get there. It’s not difficult to save energy. You can have your cake, and still save the environment.

At a current token price just below $2,000, the cost to spin up an Ethereum node right now is just shy of $64,000, or 32 ETH. This is a high price for self-sovereignty, and the ability to verify your transactions. This is a cost that most people will never be able pay. The staking reward ensures that the largest bagholders can always accumulate more of the network.

Bitcoin does not have this problem. You can keep your bitcoin for as long as it is possible. You will never be able to exert more influence than anyone else on the network, no matter how much bitcoin you have. We all have the same rights, from the pleb with a few hundred sats to Michael Saylor with his seven-figure mountain full of coins. The cost of setting up and running a bitcoin node is about $500 for a premium out-of-the-box solution. With Bitcoin, the hurdle to becoming a sovereign individual is easier than with Ethereum. The rules are enforced by the nodes, while the nodes keep the ledger. The lower barrier to entry ensures that Bitcoin is decentralized and allows for more people to manage their own nodes and maintain decentralization.

In my opinion, there are two ways forward.

Give in and accept rising energy prices. We must also reduce our dependence on unreliable and intermittent sources of electricity.

Or:

Leverage the Bitcoin network to bootstrap a new age of human flourishing and abundant energy for everyone.

I’ll choose option number 2. Bitcoin is a decentralized and powerful network that can be used to verify transactions. It is not proof-of-stake and will never be. Bitcoin’s energy consumption is a feature, and not a problem.

This is a guest post by Mickey Koss. Opinions expressed do not necessarily reflect the views of BTC Inc. or Bitcoin Magazine HTML1.

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