Bitcoin and other cryptocurrencies are created, or “mined”, by the use of powerful computers that consume enormous amounts of electricity. As the world becomes more aware of limitations on our planet’s energy sources, this is not a time to be wasting electricity.
There has been much discussion about the amount of electricity that is used to transfer bitcoin. Since bitcoin is being promoted as the future of payments, let us make an attempt to cost out the amount of electricity that it takes to make a single purchase using bitcoin of a legitimate good or service. While an exact calculation is difficult since detailed data are not public, the following approximation is very likely to be accurate within 10 times too high or 10 times too low.
Let us assume that electrical energy constitutes approximately 95 per cent of the marginal cost (i.e. not including upfront costs) of mining bitcoin since the other marginal costs are mainly limited to replacing computers. Further, it is reasonable to assume that highly competitive bitcoin mining makes only half the profit margin of a typical local grocery store.
Grocery stores are very competitive but not as competitive as the bitcoin system which is 100 per cent online and has competition from all around the world. The typical grocery store has a marginal profit of about 2 per cent per product sold. Therefore, it is reasonable to assume a 1 per cent profit for miners per approximately 1,000 transactions (each “block”).
Also, assume an approximate price of bitcoin of $50,000 for ease of calculation. The bitcoin system operates such that the reward received by miners every 10 minutes for validating each block of transactions is 6.25 bitcoin. Therefore, the miners make 6.25 times $50,000 which is $313,000 per 1,000 transactions. That is $313 per transaction. Adjusting for non-electricity cost and profit, the electricity cost alone is approximately $250 per transaction.
Of the purchase transactions, 0.15 per cent are for illicit goods and services. In her testimony to Congress in January 2021, Treasury Secretary Janet Yellen stated that bitcoin is used more for illegal purchases than legal purchases. That means that less than 0.15 per cent of transactions are used for the purchase of legal goods and services. All transactions that are not illegal or legal purchases (the remaining 99.7 per cent) are simply market trades.
This estimate that only 0.15 per cent (1 in 667 bitcoin) transactions is for a purchase of a legal good or service makes sense since who personally knows anyone who actually bought something legitimate with bitcoin? We actually did meet one person a few years ago who made one such purchase – just so he could say he did so.
Almost everyone who holds bitcoin thinks it will appreciate. Why, then, would they want to part with it by buying something with it? On the other hand, we have met hundreds of people who have each made many bitcoin trades.
Therefore, the miners make 6.25 times $30,000 which is $188,000 per 1,000 transactions. That is $188 per transaction. Adjusting for non-electricity cost and profit, the electricity cost alone is approximately $140 per transaction.
The energy cost of each purchase of a legal good or service with bitcoin is 667 times the above-calculated $140 electricity cost – which equals approximately $93,000. As this approximation may be off by 10 times either high or low, the energy cost of each purchase is somewhere in the range of $9,000 – $900,000.
Think what you could do with the electricity that you could buy for that amount of money.
Bob Seeman is the author of the most comprehensive critique of bitcoin, The Coinmen; Bitcoin Exposed. He is a Co-founder of RIWI Corp., a data analytics company, speaker, electrical engineer, California attorney, and consultant. He will also be a speaker at our annual Africa Fintech Summit 2022.