Crypto Research

Bitcoin mining simply explained (Part 4/4)

May 24, 2022

You've probably heard the term "bitcoin mining" before, right? But what that is exactly is not entirely clear to you. Or maybe you know something about it but don't understand how it works, where its value comes from and how it is currently evolving.

The energy consumption of Bitcoin

Critics of Bitcoin like to compare its carbon footprint to a Visa card transaction, ignoring the environmental impact of the infrastructure that receives fiat money and the huge collateral damage fiat brings. These secondary effects make fiat money orders of magnitude more energy depleting than bitcoin. The cost of aspects of our financial system, mining the metals for our coins, fiat money and shipping, that go into bank branches and ATMs uses a lot of electricity and also has a fairly large carbon footprint. If you compare Bitcoin's carbon footprint to the carbon footprint of our current financial system, things don't look all that bad.

Bitcoin's energy consumption and environmental impact are very regularly commented on, but ultimately rarely understood. The majority of the arguments come from comparing Bitcoin's electricity consumption to specific countries. However, critics cannot even distinguish "energy consumption" from "power consumption". This would be like comparing apples to oranges.

Of the 160,000 TWh of energy generated worldwide each year, 50,000 TWh is wasted through inefficiency and only 25,000 TWh is generated by power grids. According to CBECI, Bitcoin currently consumes about 119.22 TWh, which is only 0.25% of the energy that is wasted each year, or 0.47% of the world's energy from grid power, or about 0.07% of human energy production.

Here is a comparison for 2020 for the gold mining industry (excluding additional refining of gold for industrial purposes) and for the entire finance and insurance industry:

The key takeaway should be that Bitcoin is mispriced in the global energy system and is lower than the gold mining, finance and insurance industries from a carbon footprint perspective and will continue to improve over time. Miners are economic actors who want to maximize their profits. They will continue to chase the cheapest electricity available, which is increasingly becoming renewable. Bitcoin could be powered by a majority combination of storage, waste and renewable energy by the end of the decade. Bitcoin is implicitly among the most eco-friendly technologies ever invented by mankind.

Which computers are suitable for mining bitcoins?

In the beginning, Bitcoins could be mined with conventional laptops and computers. The use of a CPU, i.e. a central processing unit, was completely sufficient for mining Bitcoin in 2009, since the mining difficulty was low. It was relatively easy to get a Bitcoin. As more and more people started to join Bitcoin mining, people started looking for more powerful mining solutions. Gradually, people switched to GPU mining, a special component that is added to computers to perform more complex calculations. Another development came later with FPGA mining, which was faster than GPUs. Finally, around 2013, a new generation of miners was introduced – the ASIC miners. ASIC stands for "Application Specific Integrated Circuit". ASIC miners are the current mining standard.

Most private and institutional miners use Antminers, which originated in China. They are optimized, powerful graphics cards, so to speak, but they can only do one job. They can only mine Bitcoins.