Investors are beginning to analyze investments in digital assets the same way they do any other portfolio investment. This means that digital assets are subject to ESG considerations by institutional investors. Christopher Bendiksen, Head of Bitcoin Research at CoinShares, sheds light on relevant “E” aspects.
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The “E” of ESG, the energy consumption of Bitcoin and its indirect impact on the environment has always been a topic of discussion. From humble beginnings in Satoshi’s first forum posts to its most recent heyday as the subject of a hearing before the US House of Representatives or the recent European proof-of-work discussion.
Coinshares has developed a comprehensive data model
However, much of the debate on this topic to date has been based on more qualitative and anecdotal evidence. A few rare attempts to quantify emissions have remained mostly superficial. “In this context, we developed a comprehensive data model to capture both electricity consumption and carbon emissions in the most important countries and regions. Our goal was to advance the development and discussion in this field in a grounded way, but also to provide investors with more clarity and transparency, ”underlines Christopher Bendiksen, Head of Bitcoin Research at CoinShares. In the following, he explains the procedure of his house.
The Basics: Bitcoin and Proof of Work
Bitcoin is a settlement system like FedWire, it is not a payment aggregator like Visa. Bitcoin is often compared to Visa, MasterCard or PayPal. Therein lies the error of the mathematical misunderstanding. Bitcoin’s energy cost is divided by its transactions and then compared to something it is not. Bitcoin adds new transactions to its ledger approximately every ten minutes. These blocks, added to the transaction record, are called a block and form an ever-expanding chain that contains Bitcoin’s entire transaction history. When adding blocks, electricity comes into play. Bitcoin uses electricity for a simple purpose: to check whether time has elapsed between two blocks, based on an objective system-independent calculation method himself. This ensures that the chronological order of blocks in the blockchain is correct without the need for a central time record. The technique used to achieve this is called proof of work.
Similarities Between Electric Cars and Bitcoin
Basically, bitcoin, like electric cars, is as climate-friendly as the electricity that powers it. This means that in a 100% renewable energy environment, Bitcoin runs on 100% renewable energy. The efficiency of the mining hardware was therefore the starting point for the analysis of CoinShares. A misjudgment of hardware efficiency results in a directly proportional amount of error in the estimate of power consumption. Using a bottom-up approach, they simulated the sum total of all hardware units currently contributing to overall performance. This approach contrasts with most previous studies, which often take a top-down approach. Individual mining units and their efficiency rate are used as representative for the entire network.
Another important difference is that CoinShares ended up subtracting emissions saved by bitcoin miners. These saved emissions come from the use of thermal energy in what is known as oilfield flaring. Bitcoin miners use the methane gases that otherwise escape into the atmosphere due to incomplete combustion and convert them into electrical energy for mining. This saves CO2 equivalent emissions. Various data sets were used for the analysis. In addition to internal research data, publicly available datasets from CoinMetrics and Canaan and Taiwan Semiconductor Manufacturing Company (TSMC) were used.
Bitcoin Network Power Sources
Source: CoinShares Research
The regional distribution is important when considering the emission profile. In addition, several data sources were combined for the analysis. For farm locations and sizes, public sources can be viewed and shared with miner data made available to CoinShares upon request. Other sources included data from the Cambridge Center for Alternative Finance and the Foundry USA Pool. The locations recorded by CoinShares ultimately represent 3.3 gigawatts (GW) of total consumption or 32% of the Bitcoin network’s estimated needs (10.3 GW) for the month of December 2021. Individual mining regions have individual values relative to their assigned carbon. intensity.
Monthly emissions (MT CO2) by mining region; annualized
Determine the footprint of bitcoin holdings
Today, CoinShares data can be used to compare bitcoin issuance to other energy-intensive technologies and industries. In addition, one can determine the amount of carbon credits that must be offset to offset the footprint of Bitcoin holdings at the custodian per unit time. Depending on the quality of the data, the model can also estimate time series of emissions by region, emissions by fuel, electricity consumption by region, and electricity consumption by energy source.
Conclusion: low energy consumption, compared to the world
The model showed that Bitcoin’s current energy needs are negligible compared to global energy needs. Bitcoin consumes around 0.08% of the world’s annual energy. Compared to the 162,194 terawatt-hours (TWh) consumed globally in 2020, total Bitcoin consumption in 2021 is minimal at 89 TWh. With a net emissions rate of 39 million metric tons of CO2e in 2021, Bitcoin’s total emissions represent only about 0.08% of the total global emissions of 49,360 million metric tons of CO2e in 2016. In the Taken together, this seems like a very small price to pay for CoinShares to have an open, trusted, and censorship-free monetary system for all of humanity. (kB)