Last week, Circle Co-founder and CEO Jeremy Allaire hosted The Money Movement Episode 36: “Crypto and the Carbon Emissions Debate” on Clubhouse.
CoinShares Chief Strategy Officer Meltem Demirors and Castle Island Ventures General Partner Nic Carter joined Jeremy to discuss the energy consumption of the economic system we rely on today, why China became an epicenter for Bitcoin mining (and why those days are numbered), and how to move crypto and the rest of society towards a more resilient, sustainable, and decentralized future.
Economic Security and Energy Today
The energy used by Bitcoin miners to secure the network is well publicized, consuming as much power as some small countries. But the Bitcoin network is hardly unique in requiring substantial energy inputs to generate value for society.
“Bitcoin is a utility like any other, just dematerialized; it’s not physical, but that doesn’t mean it’s not real and it doesn’t have genuine utility to millions of people and firms globally,” Carter explained.
“There are plenty of industries that consume a huge amount of energy - like the airline industry - that buy carbon offsets and that’s considered normal, and that’s an acceptable trade off in society, you produce something useful and consume energy to do it.”
Bitcoin mining is often subjected to particularly harsh scrutiny when it comes to sectors of the economy with high energy inputs, but arguably only because world-class transparency makes the industry an easy target.
“Bitcoin is different from any other industry and becomes a target because Bitcoin is very transparent about its energy usage. I think it’s important for people in the industry to focus on the facts,” Demirors said.
“Yes, the Bitcoin network does consume energy, but we should steer away from a conversation about the morality of energy usage and focus instead on sources of energy, and how better policy can shift those sources. We can build a future where Bitcoin and energy and ESG mandates are highly compatible.”
Diving deeper, Allaire pointed out that the existing US-led economic system is built on a foundation of control over hydrocarbon energy resources like oil around the globe, enforced by energy-intensive military operations.
“At the end of World War II there was a geopolitical situation where the US was able to dictate a dollar based economic system, and ultimately the fundamental global economic liquidity was based on dollar-priced oil and the securing of the oil reserves in the Middle East,” he said.
“This is well understood, but underpinning the dollar is the oil industry, and the military infrastructure that has been there supporting it. So we should be thinking about the energy cost of that.”
“Some people think it’s a conspiracy when you talk about the petrodollar system, but it’s just a fact. The military order is an inextricable part of the dollar system, and of course the US military is the single largest institutional consumer of energy on the planet,” Carter added.
“It’s hard to say the dollar is literally backed by oil, but the global dollar infrastructure is certainly part of the reason the US accounts for 15% of global military spending. We maintain that dollar system through soft and hard power, and it takes a lot of resources to do that.”
Bitcoin Mining in China
Much has been written about Chinese Bitcoin mining operations that peaked between 2016 and 2018, raising concerns about coal-powered production and the risk of nation-state capture of substantial mining capacity. But Carter’s research indicates the situation is more nuanced than it first appears.
“It’s not a coincidence that a lot of Bitcoin is mined in China, and in four Chinese provinces specifically. There has been a massive overabundance of energy in each of those four provinces, and not other Chinese provinces. There’s been an overabundance of energy because China overbuilt their energy infrastructure, they built too much wind and solar, and in the southwest parts of China there’s tons of rivers, and they built enormous amounts of dams,” he explained.
“All four of these provinces are very distant from the big population centers which are mostly on the east coast of China. And we know electricity doesn’t travel very well, so Bitcoin mining emerged in 2016 and 2017 as a big industry at a time when the Chinese energy grid was the most unbalanced it had ever been.”
As China continues to modernize their electrical infrastructure, much of the incentive to position mining operations in energy-abundant regions of the country has evaporated, as power is more effectively routed to support the Chinese population.
“Now China is fixing their grid, building long distance transmission lines, trying to make the grid more balanced to match the supply to the demand, and making it easier to export energy from these provinces,” Carter said.
“At the same time, some local authorities have banned Bitcoin mining in more coal driven provinces. The epic of Chinese Bitcoin mining is ending, believe it or not, and Bitcoin hash power will be routed to other locations around the globe where there’s abundant energy waiting to be monetized.”
Efficiency and the Decentralized Energy Future
As urgency grows around increasing the share of energy produced from fossil fuel alternatives, crypto mining operations are poised to help accelerate adoption of renewable technologies that provide energy at the lowest possible cost.
“As Bitcoin achieves mass market scale and becomes a significant global reserve asset, naturally the process of mining will tend towards the most energy efficient form it can find,” Allaire said.
“I always felt that the long-term destiny of Bitcoin would actually lead to many of the most important breakthroughs in energy efficiency, and that there’s a long-term industrial convergence between the growth of this network and energy efficiency—the more energy efficient you are, the more successful you’ll be securing the Bitcoin network.”
Decentralization also won’t be restricted to the world of digital assets, as humanity’s demand for energy continues to grow and competing groups seek energy independence and security.
“I think Bitcoin lends itself well to smaller scale grids helping make up more resilient energy infrastructure, less dependent on large but fragile energy infrastructure like pipelines, large transmission systems, et cetera,” Demirors said.
“Ultimately I think from a geopolitical perspective, and a military industrial perspective and a national security perspective, we actually have a great incentive to move towards localized, less centralized, more resilient energy infrastructure that isn’t so vulnerable to potential threats, both natural threats and from state or non-state actors.”
A New Energy-Economic Paradigm
There’s little doubt Bitcoin and other cryptocurrencies are here to stay, but what are the best ways to approach preparing the global population and world leaders for the transition away from carbon-based economic systems?
“Step one right now is to defang some of the loudest critics, because there’s persistent misperception out there and there are a lot of people who are intent on fear mongering or somehow pushing this narrative that Bitcoin needs to be banned or something needs to be done around Bitcoin’s energy usage,” Demirors noted.
“And step two is being in those conversations and showing where and how infrastructure investments can be made to help create a path to Bitcoin mining and infrastructure being a core part of maintaining the security of the global financial system.”
And woe to those governments and institutions that don’t take the coming shift seriously; they risk being left out of opportunities within the emerging global digital economy.
“I think we’re at a moment now with national governments around the world confronting the reality of a new form of global digital commodity money. It’s here to stay, it’s scaling, it’s monetizing, and there will be many trillions of dollars of monetization as we go forward. There’s a higher level issue here of having world leaders consider what role therefore do individual governments have in interacting with that,” Allaire said.
“There’s the option to put your head in the sand and wish it goes away, there’s the option to basically try to ban the internet, but really we’re talking about a much broader level of understanding, comprehension, and acceptance where the discussion shifts quickly to ‘What are we going to do to be competitive here, and to be part of securing the infrastructure and align incentives for this significant new form of global economic activity?'”