This week, the Cambridge Centre for Alternative Finance (CCAF), a research center at the University of Cambridge Judge Business School, published “A Deep Dive into Bitcoin’s Environmental Impact.” We have long held the belief that the CCAF has published the most thorough, thoughtful, and objective analysis of Bitcoin’s energy consumption and its impact on the environment. Given the importance of this topic for investors, regulators, legislators, and frankly the citizens of the planet, we are going to devote the entirety of this week’s research note to the findings.
Readers should appreciate the fact that estimating Bitcoin’s impact on the environment is not a simple exercise. There are multiple layers of data acquisition, estimation, and analysis to go from the first step, reading Bitcoin’s difficulty, to the final step, estimating greenhouse gas (GHG) emissions. The CCAF has three methodologies that underpin their electricity consumption, mining distribution, and GHG production estimates that are worth reviewing.
One of the most important takeaways from the CCAF analysis, which is one of the only continuously updated datasets on Bitcoin’s energy consumption and GHG emissions, is that annualized GHG emissions are down significantly from their peak. The CCAF estimates that Bitcoin mining is presently responsible for 47.7 MtCO2e annually, down 37.2% from the spring 2021 highs. As we will explore in the next section, most of that reduction is due to a decline in electricity consumption rather than other factors such as a shift to greener energy sources. As we explore later on, the Bitcoin network is powered by 37.8% sustainable energy.
The primary reason for the decline in GHG emissions is the reduction in monthly electricity demands of bitcoin mining over the past year. We have written about this at length in this newsletter; to recap: bitcoin mining has become a less profitable business over the recent months because of lower bitcoin prices, higher energy costs, rising network hash rate, and higher capital costs. These economic factors, coupled with service disruptions, have resulted in the crimping of electricity demand to power mining rigs. Embedded in the CCAF's energy mix assumptions are no changes from the last observed data point from January 2022, which will likely get revisited as new information is made available.
While electricity consumption has decreased, the network hash rate, the collective computational effort of all the network’s miners, remains at an all-time high. This combination of reduced electricity consumption and high hash rate means that the network has become more efficient. It is likely that miners have found it economical to replace old, inefficient mining rigs with new, more efficient mining rigs.
It’s important to understand that metrics such as network efficiency, which we define as the average monthly network hash rate divided by monthly electricity consumption (EH/s /TWh), are best used as short-term indicators. Because of secular improvements in the efficiency of semiconductor chip manufacturing and therefore mining rigs, the network should continually get more efficient on a hash per energy consumption basis, keeping all else equal. Said differently, a hash produced by a miner 10 years ago has a very different economic value than one produced today, even keeping other factors such as total difficulty and price the same. While the industry tends to focus on network hash rate to make inferences about the security of the Bitcoin network and protection against events like 51% attacks, electricity consumption and the installed mining rig base, a measure outside the scope of this analysis, are more important.
The CCAF estimates that 37.6% of Bitcoin mining’s energy mix comes from sustainable sources, solar, wind, hydro, nuclear, and other renewables, while the remainder, 62.4%, comes from fossil fuels. Nuclear alone accounts for 11.4% of the energy mix. As a caveat, the mix is last measured as of January 2022, so it is a bit backward looking. That being said, the biggest change in the composure of Bitcoin mining’s energy mix occurred in the summer of 2021 when China banned mining. The resulting migration of hash rate from China to the US changed the seasonal nature of Bitcoin’s energy mix, which used to shift heavily to hydro during the wet summer months in China. There should be less variability and seasonality associated with Bitcoin’s energy mix going forward.
The 47.7 MtCO2e of annual GHG emissions from Bitcoin mining presently estimated by the CCAF represents a small fraction of annual GHGs emitted worldwide (49,758 MtCO2e in 2019), just 0.10%. The White House Office of Science and Technology Policy report published a few weeks back put the figure at 0.2% - 0.3% of global GHGs for all proof of work mining, including Bitcoin. While the number is not zero, it is significantly less than the sensational media headlines would lead investors to believe.
In conclusion, we encourage investors to read the entire update from the CCAF here as well as access their tools and resources on the matter here. Environmental impact is an important discussion item for both investors and policymakers and will likely continue to take center stage. We urge investors to be informed on the matter and think the work done by the CCAF is among the most credible.
It was another tough week in financial markets as macroeconomic and interest rate fears continue to grip investors. Given that, we thought it was important to see that despite all the talk of higher equity market correlations, bitcoin was up slightly on the week, +0.5%, while equity markets continue to fall. The S&P 500 was down 3.1% and the Nasdaq Composite down 3.0%. Bonds again proved not to be a safe haven asset, with Investment Grade Corporate Bonds down 2.3%, High Yield Corporate Bonds down 1.8%, and Long-Term US Treasuries down 1.4%. It may be a surprise to investors, but year to date, the iShares 20+ Year Treasury Bond ETF (TLT) is down almost as much as the Nasdaq Composite (CCMP), -29.0% vs -30.9%. Gold fell again this week, down 1.0% as real rates rose and inflation expectations declined.
Developers Can Now Issue Assets Like Stablecoins on Bitcoin - Bitcoin Magazine
Regulation and Taxation:
October 7th – United States Non-Farm Payrolls
October 13th – Consumer Price Index
October 14th –The Atlanta Bitcoin Conference 2022
Nov 2nd – Next FOMC rate decision
Thanks for joining us again this week. Please reach out with any questions or comments.
The NYDIG Team
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