J.P. Szafranski
BridgeTower Media Newswires
I guess we dodged a bullet. A Newsweek article published in December 2017 warned: “Bitcoin Mining on Track to Consume All of the World’s Energy by 2020.” Four years hence, let’s count our lucky stars that the entire global energy grid hasn’t been swallowed up by Bitcoin miners. The analysis and projections in the article were laughably simplistic. Frustratingly, we continue to see similar ignorant takes, sometimes perhaps willfully so, from academics, media and government officials on Bitcoin mining and its energy usage.
I am far from a true subject matter expert, but I’ve invested a fair amount of time in the past year to learn about Bitcoin. It is an astonishing innovation of engineering that has resulted in a durable, resilient, trustless monetary network. Bitcoin is quite simply the best designed form of money yet conceived by humanity. That statement is not a price prediction nor is it investment advice. Bitcoin, like any other project, could fail in spite of its truly revolutionary innovation. Do your own research. If money and economics interest you and you aren’t digging in to learn about Bitcoin, you’re shortchanging yourself.
So, what exactly is Bitcoin mining? Miners can be thought of as the paid security guards of the Bitcoin network. A miner uses computing power to attempt to solve a cryptographic puzzle to find a new block. A miner validates and includes a selection of new Bitcoin transactions in the new block, permanently settling the transactions in the distributed ledger.
Users pay the miner a transaction fee that varies based on network demand. Miners also receive freshly minted Bitcoin as a reward for putting in the work to find a new block. Each new block currently results in the issuance of 6.25 new bitcoin. This block reward drops in half approximately every four years, a disinflationary model quite different from modern-day central banking.
There is a certain magic in this “proof of work” model. We must put in work to earn money. Isn’t it rational to require work to create new units of money too? (cc: Jay Powell) There’s no shortcut for miners and their incentives are aligned with the overall Bitcoin network. Miners must invest resources into computers and electricity in order to put in the work needed to earn Bitcoin, ensuring network security along the way. Any monkey business will be caught by the thousands of individuals around the world running the Bitcoin software on validating nodes. If a miner breaks any rules, the block will be ignored by the network and no block reward is issued.
Bitcoin mining uses a lot of electricity, but critics wildly overstate the energy cost per transaction. In actuality, mining acts as a grid stabilizer and can foster infrastructure investment in power distribution and generation, including from renewable sources. Last week, as Texas faced the prospect of another freeze-induced grid problem, the largest mining farm in the state, along with others, powered down to help shore up the state’s energy supply.
Bitcoin is a ruthlessly free-market environment. Miners have no control over the price of the Bitcoin they produce. Low-cost operations are essential and are found from stranded energy sources, like hydroelectric dams with more generation capacity than demand. Stranded and excess energy sources abound throughout the globe. We are likely in the early innings of traditional energy companies getting into Bitcoin mining. Oil producers with stranded gas can stop flaring and instead use on-site generation to mine Bitcoin. A win for the environment, producer profitability and the Bitcoin network. “ESG” values and Bitcoin often fit together nicely, certainly an inconvenient truth for detractors.
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J.P. Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital .com).
