Why are bitcoin mining machines so expensive

The insatiable power guzzler: Bitcoin

As you read this article, you are consuming electricity. Every Google search, every email sent and every photo stored in the cloud requires energy. It is well known: with increasing digitalization, power consumption also increases.

The digital currency Bitcoin, however, needs a lot of energy. This has just been confirmed by a study by the University of Cambridge. According to this, the huge server farms behind the cryptocurrency will consume more electricity in a year than the Netherlands, a country with more than 17 million inhabitants. And with the value of Bitcoin increasing to more than $ 50,000, so is the need for electrical energy.

Bitcoin proponents do not find this a problem, because Bitcoin is creating a completely new financial system that does without controlling institutions such as central banks. In addition, mining for gold and printing money would incur costs for production, transport and safe storage. In addition, the traditional financial system with its digital platforms and offices also consumes a lot of energy.

How much energy does Bitcoin need?

Bitcoin's hunger for energy has grown significantly in recent years. At the beginning of 2017, the digital currency was consuming 6.6 terawatt hours of electricity per year. In October 2020 it was already 67 terawatt hours. Now, a few months later, electricity consumption has almost doubled to 121 terawatt hours, according to the Cambridge researchers. That's enough to run your entire university for nearly 700 years.

Based on these calculations, only 30 countries use more electricity than Bitcoin. This means that more electricity has to be produced for Bitcoin than the United Arab Emirates, the Netherlands, the Philippines, Belgium, Austria or Israel need in a year.

The Dutch economist Alex de Vries calculates a little more conservatively and believes that Bitcoin uses 77 terawatt hours of energy per year. He too has been following the situation for years and is publishing his research Digiconomist's Bitcoin Energy Consumption Index.

Today, all data centers worldwide that are needed for large areas of technology, the cloud, the Internet and the current financial system require around 200 terawatt hours of electricity per year, according to de Vries. "At the moment, the Bitcoin network uses about half that amount," he told DW.

In 2018, a Bitcoin transaction had the same energy footprint as 80,000 transactions with a credit card. Now, a single Bitcoin transaction consumes the same electricity as 453,000 such transactions, according to figures on Digiconomist, a website that claims to be devoted to uncovering the unintended consequences of digital trends.

Tesla boss Elon Musk is one of the fans. He recently invested $ 1.5 billion in Bitcoin and announced that his cars can be paid for with Bitcoin in the future.

Why does Bitcoin need energy at all?

The large consumption is because Bitcoin is a virtual cryptocurrency. It is transferred from a peer-to-peer computer network. This network is formed by all participants who run certain software, the Bitcoin client. There is no central server for administration. All transactions are documented via blockchain. Everyone on the network gets a copy and all copies are linked. This should make it impossible to manipulate the system.

Anyone can become part of the network. The only requirement is a powerful, purpose-built computer - the more powerful, the better. These computers solve increasingly difficult math problems to keep everything going and mine new bitcoin. To avoid overheating, the busy machines need to be kept cool.

The operators of these computers, so-called miners, have the chance to be rewarded with Bitcoin for their efforts. The more computing power you have, the higher your chances of mining Bitcoin. Thus, as the price of Bitcoin goes up, it becomes more attractive to invest in more technology. And when there are more computers in the network, the arithmetic tasks become more difficult and thus more technology is needed to solve them successfully. An upward spiral.

"The higher the price, the more the miners earn and the greater the incentive to add more machines to the network," says de Vries. Incentives for miners also result from how heavily Bitcoin is used. "Since the network can only process five transactions per second, it quickly becomes more expensive to use Bitcoin if a lot of people try," said de Vries. "Since the transaction fees also go to the miners, this drives the miners' income additionally and ultimately also the energy consumption."

Where are the Bitcoin miners located?

Currently, over 65 percent of Bitcoin miners are in China, followed by the USA and Russia with around seven percent each, according to the Cambridge researchers. "In China you can get cheap surplus hydropower in summer and cheap coal-fired electricity in winter," de Vries told DW. "But since they have to move seasonally within China to get the most out of it, we've seen countries like Iran and Kazakhstan become more popular lately."

Critics see this as a major problem. Many countries have unstable power grids and some cannot handle the increased demand from Bitcoin. In January, for example, the Iranian government blamed Bitcoin mining for power outages in the country. In addition, there is the huge CO2 footprint of the entire electricity production.

An illegal Bitcoin farm was discovered in Iran

Although the environment is much less polluted by Bitcoin than by cars and industry, many miners have settled where there is cheap electricity from hydropower instead of coal.

In addition to Bitcoin, there are other cryptocurrencies and they also need energy. According to de Vries, they used around half as much electricity as Bitcoin in the past year. Some use a mining technique similar to Bitcoin. Others use alternatives where the process of building blocks depends on wealth rather than computing power. "In theory, this modification could also be implemented in Bitcoin," said de Vries. This would eliminate the incentive to use specialized mining hardware, thus saving energy and reducing electrical waste.

Adaptation from the English by Insa Wrede