Bitcoin is not a Battery — it is a Sink
By: Elad Verbin
Tags: Cryptocurrency, Green Energy, Bitcoin, Crypto

Bitcoin is not a Battery — it is a Sink

In a recent blogpost, Nick Grossman argues that Bitcoin acts as a battery — moving electricity across time and space, from where it can be cheaply produced to where it can provide the most utility. In this blogpost, I argue that Grossman’s economic analysis fails to consider the particularities of Bitcoin’s mining mechanism. Bitcoin is not a battery; it is a bottomless sink for marginal-cost electricity. It doesn’t store energy to be deployed later; instead, it sucks marginal cheap energy and produces no marginal asset in return. The reason is simple: if Bitcoin was a battery, then the more electricity you’d put into it, the more “charge” you’d get. But that’s not the case: in Bitcoin, more electricity does not buy “more Bitcoin”, it rather buys “more security”, a common good for the entire Bitcoin system. And security is not an asset, and cannot be later traded. As a result, Bitcoin likely does not have the social utility that Grossman ascribes to it, of promoting the production of cheap power. Elad Verbin Follow Mar 23 · 11 min read

A few days ago, Nick Grossman published the blogpost Bitcoin as Battery. I love this blogpost. It’s clear, it’s appealing, and it has an optimistic conclusion about the great social benefits of Bitcoin.¹ Sadly, I’m pretty sure it’s also wrong. In this blogpost I will explain why. To be clear: this is not an attack on Bitcoin, on its power consumption, or its social utility;² this blogpost is purely a critique of Grossman’s argument and an invitation for a more careful economic analysis of Bitcoin’s power usage and its implications.

Grossman writes:

Crypto mining converts electricity into value, in the form of crypto assets (BTC, ETH, etc). Those assets […] can then be moved, transferred and transformed […] instantly via an internet connection.

This seems to suggest that Bitcoin is a battery: storing energy at one place and time, and releasing it at another place and time. In this blogpost, I explain why Bitcoin is not a battery, but rather a sink. This is a simple corollary of the following two facts:

Fact 1: the price of Bitcoin is dictated by the cryptocurrency market, i.e. by the supply and demand for Bitcoin. Most importantly, the price of Bitcoin is barely affected by the availability of electricity, or by the price of electricity.

Fact 2: Bitcoin is produced at a fixed rate: 6.25 new Bitcoin are generated approximately every 10 minutes. The newly-created Bitcoins are distributed among all miners, proportionally to the amount of electricity that they burned. (This is not technically accurate: I’m making some big simplifications here and in the rest of the post.³)

From these two facts, we already see that Bitcoin cannot be a battery: no matter how much electricity is poured into Bitcoin, the output is always the same — 6.25 Bitcoin per 10 minutes. And while the value of 6.25 Bitcoin is not fixed but fluctuating, the fluctuations have nothing to do with the price of electricity. In a battery, the more electricity you put in, the more you’ll get out. In Bitcoin, the output is constant regardless of the amount of electricity you put in.

In fact, taking Fact 1 and Fact 2 together teaches us a lot about Bitcoin’s electricity usage economics: the Bitcoin mining system is something between an arbitrage and an auction. Miners who can generate electricity cheaper than some threshold can profitably mine Bitcoin. Miners whose electricity is more expensive than this threshold, cannot mine Bitcoin profitably. The value of this threshold fluctuates with time: it depends on the amount of current mining power deployed to the network, and is determined every two weeks in a process called “Bitcoin Difficulty Adjustment” that’s sort of like an auction (we won’t discuss that here). There is a lot more to say about these economic behaviors, but the bottom line is this:

Corollary: the Bitcoin network incentivizes miners to invest into it all electricity that’s substantially cheaper than the threshold. In return for all this electricity, it produces a fixed economic outcome — 6.25 Bitcoin every 10 minutes. And the value of this economic outcome has nothing to do with the amount of power fed into it — it only depends on crypto market forces that are unrelated to mining. The economic equilibrium of the Bitcoin economic model is as follows: the total cost of all electricity invested into the network over a 10-minute period strives to be equal to the present financial value of 6.25 Bitcoins.³ If electricity becomes cheaper, then more electricity gets poured into the system, producing the exact same output. That is why Bitcoin is not a battery but rather a sink: its economic output is pre-fixed, and does not depend on the amount of resources poured into it. When miners pour more electricity into Bitcoin, they don’t get more Bitcoin; instead, the entirety of the Bitcoin network becomes more secure.⁴ Security is not a commodity, and can’t be usefully traded-away later: we’ll get to this later in this post.

Now, what happens if the price of bitcoin increases? As the price of Bitcoin increases, more and more sources of energy become marginally-profitable to spend on mining Bitcoin, so more expensive electricity will be poured into the network. This is true regardless of the availability of any kind of clean or cheap energy: as Bitcoin’s price increase, more expensive and wasteful sources of power become attracted into the sink as well.

What happens when more sources of cheap energy become available? They will be poured into the bitcoin network, and then the auction (i.e. the Bitcoin Difficulty Adjustment) will lower the threshold for mining efficiency, which means that more-expensive sources of power will no longer be profitable for mining Bitcoin. But the Bitcoin system as a whole will end up consuming the sources of cheap power, so they will not be available for other uses. Bitcoin is indeed incentivizing the creation of cheap power sources, but then it promptly monopolizes those power sources: those sources are not going to be used for anything besides feeding the Bitcoin network itself. There is a subtle argument possible here: maybe there are secondary effects: the high price of Bitcoin might incentivize actors, over the long term, to develop technology for more abundant cheap energy, and such technology might allow us to create cheaper energy for non-Bitcoin uses! But this is a pretty tough argument to make credibly: such secondary effects usually turn out to be smaller than anticipated. And Bitcoin’s $50M-a-day bounty is likely not enough to incentivize true moonshot sustainable cheap-energy technology: it is more likely to incentivize unsustainable sources of cheap energy. And importantly, cheap energy is not the same as clean energy. Bitcoin incentivizes the development of cold fusion and more efficient solar panels in exactly the same way that it incentivizes more aggressive fracking in the global south.

Comparison to Aluminum Smelters: Smelters produce Aluminum, but the Bitcoin Network produces Network Security

Let’s go back to Grossman’s argument. Grossman compares Bitcoin to Icelandic Aluminum smelters. He explains that Aluminum smelters are a battery: smelters convert cheap electricity into a commodity, which can then be moved across space and time. (This claim about Aluminum smelters might be dubious as well, because it once again includes uninternalized externalities; but from a theoretical economics viewpoint, we can take “smelters == batteries” as a reasonable economic model of smelters.)

Grossman claims that Bitcoin acts in the same way: taking cheap electricity and converting it into a commodity — Bitcoin. But the analogy does not hold. The product of Aluminum smelters is indeed a commodity — Aluminum. The more electricity you put in, the more Aluminum you get out. But the product of Bitcoin mining is not Bitcoin, at least not in the same sense as the product of Aluminum smelters is Aluminum. Whether you put in more electricity or less electricity, exactly 6.25 Bitcoin will be generated every 10 minutes, no matter what. No, the product of Bitcoin miners is security. If you spend more electricity, you get better security.⁴ And sadly, security is not a commodity. It can’t be re-sold, and it doesn’t maintain its value over time. If you convert twice as much electricity into Bitcoin, you don’t get twice as much value (remember that the value of Bitcoin is determined by unrelated market forces!); instead, you just get the same amount of value, and simultaneously you provide the bitcoin network with twice as much security. Bitcoin Miners are service providers. The service they provide is security, and the amount they provide is “whatever security you can sell me at 6.25 Bitcoin per 10 minutes”.

Satoshi Nakamoto explicitly designed the Bitcoin network to NOT work like a smelter, but rather as an auction to provide the most security for the lowest price. So it shouldn’t surprise us that Bitcoin does not work like a smelter, and that what is produced is not a commodity. Satoshi designed the Bitcoin network with one key objective in mind: security. They designed Bitcoin to be as secure as possible, not to incentivize society to find new sources of cheap energy — that’s just a side effect, and one that creates perverse incentives.

Wrapping it up.

To summarize: Bitcoin is not a battery. Bitcoin is a sink for low-cost power. As such, its environmental impact is quite negative (in a vacuum), and will get more negative as the price of Bitcoin climbs. Still, Bitcoin has many useful social properties as digital money, and is still likely much cheaper than the banking system (depending on how you measure it). Bitcoin also provides the substrate for the development of useful protocols and primitives, which will build Web 3.0, a global network efficiently transacting in data and value, with immeasurable social utility. Bitcoin’s contribution to the world is (in NPV terms) more than worth its energy cost. But we shouldn’t ignore Bitcoin’s energy cost; this is a nuanced topic, which shouldn’t be swept under the rug by wishful thinking.

Acknowledgments. After posting this, I saw that Shayle Kann has used the “Bitcoin as Sink” metaphor before I did.