Bitcoin is a cryptocurrency created in January 2009. The people who created this technology used the name Satoshi Nakamoto, however their identity remains a mystery.
Bitcoin is created through a decentralized online process that operates without central bank control or supervision but relies on peer-to-peer open source software and encryption. That is, this form of crypto can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
Transactions are verified by network nodes through encryption and recorded in a public environment called blockchain. All bitcoin transactions are recorded and authenticated by a series of high-powered computers that work in a decentralized manner, meaning there is no central computer controlling the transactions.
Bitcoins can be exchanged for other currencies, products and services (where this is acceptable) but their actual value is extremely volatile.
Despite the fact that there is serious controversy over its use and overall legitimacy, bitcoin is very popular in most parts of the world. The advantage of Bitcoin is that it offers lower crypto transaction fees than traditional online payment methods, and unlike government-issued currencies, it is controlled by a decentralized authority.
This creates a currency backed by code rather than physical assets such as gold or silver, or trust in central authorities such as the US dollar.
The secret information that is exchanged can only be read by the sender and the recipient and therefore we are talking about an electronic payment system based on encrypted receipts, allowing two willing parties to transact directly with each other without the need for a trusted third party.
Bitcoin has also inspired and caused the creation of hundreds of other cryptocurrencies such as Ethereum or Dodgecoin which are referred to as altcoins.
How Is Bitcoin Born?
In the physical world, the central banks of each country, in a simplified approach, “issue/cut” money. Instead, bitcoin is created through a system called “mining”.
How Is Bitcoin Mining Done?
The mining of Bitcoin and all other cryptocurrencies is done in decentralized locations where a large amount of computers are in continuous operation (24 hours a day, 7 days a week) to produce the largest possible amount of cryptocurrency.
Bitcoin mining is performed by high-powered computers that solve complex computational mathematical problems.
The result of bitcoin mining is twofold:
- When computers solve these complex math problems on the bitcoin network, they generate new bitcoin.
- By solving computational math problems, the bitcoin payment network becomes reliable and secure as its transaction details are verified.
When someone sends bitcoins anywhere, it is called a transaction. All transactions are compiled into blocks that are public, while nodes keep records of these blocks so they can be verified in the future.
The whole process requires the use of computers with powerful processors and graphics cards, so it’s an energy-intensive business. To get a sense of the amount of computing power required, these computers are considered to be doing 160 million calculations per second.
Massive computing power – and therefore electricity use – is built into the way the blockchain technology that supports encryption is designed. These data processing centers around the world struggle to collect and submit this transaction record in a manner acceptable to the system.
The bitcoin software ensures that it always takes 10 minutes to solve the calculation (puzzle), so if the number of computer networks increases, the puzzle becomes more difficult and needs more computing power and therefore energy.
This means that, as Bitcoin becomes more valuable, the computational effort devoted to creating and maintaining it – and therefore the electricity consumption – inevitably increases.
But how does Bitcoin create value and what is it?
Simply put, when a Bitcoin transaction is made, computers around the world complete an operation that creates a 64-digit number. This number is displayed in a public environment so that everyone can confirm the transaction for that particular Bitcoin.
The computer that solves the calculation receives a reward corresponding to a small number of bitcoins which decreases over time.
We should also take into account that these complex computer systems generate a lot of heat and therefore require corresponding cooling in order to continue to operate efficiently. All mining facilities have many built-in fans but also a supporting external cooling system. Thus, we can easily perceive that even more electricity is required.
This means that the production of the cryptocurrency binds resources, such as land, time and of course, energy.
The Energy Consumed by Bitcoin Mining
According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin currently consumes approximately 121 Terawatt Hours per year, which is 0.55% of global electricity production or roughly equivalent to the annual energy consumption of countries such as Argentina or Sweden. This is certainly not a small number.
The graph below gives us an overall picture of the top 30 countries in energy consumption worldwide, and as we can see, Bitcoin is in one of those positions.
Also, Digiconomist’s Bitcoin Power Consumption Index estimated that one Bitcoin transaction takes 1,544 kWh to complete, which is equivalent to about 53 days of power for the average US household.
If we want to put it into value, the average cost per kWh in the US is 13 cents. This means that one Bitcoin transaction would generate more than $200 in energy consumption.
We should also emphasize that the exact energy mix, i.e. the composition of different energy sources used by Bitcoin mining computers, is not officially known.
Some estimates made of the percentage of Bitcoin mining that uses renewable energy vary widely and we certainly cannot speak with certainty. In December 2019, a report showed that 73% of Bitcoin’s energy consumption was carbon neutral, mainly due to the abundance of hydropower in major mining hubs such as Scandinavia and Southwest China.
Mining is a specialized and competitive market where fees are divided according to how much calculation is done. Not all users do Bitcoin mining and it is not an easy way to make money. Instead they prefer cloud minting. See more on kryptohodlers YouTube channel.