Bitcoin has been in the news a lot lately due recent increases in sales value. Regardless of where you sit on the fence about it being a bubble or not, it’s worth thinking about how sustainable the core technology is.
Why do I ask that? Scaling.
Cryptocurrencies in general have a soaring electrical power consumption required to maintain the network. For example, the largest cryptocurrency (Bitcoin) consumes about 32,000,000 MWh to run the network per year. As a ballpark estimation, you can run about 100 homes off of a single megawatt. That places the Bitcoin network somewhere in the realm of a small first world nation in terms of power consumption. As the network grows, this is not expected to decrease. An additional complication for the environmental sustainability of this process is that most mining groups are located in areas where electricity is cheap (normally from coal). Some malicious Bitcoin users have coded malware that infects PCs and smartphones with mining software to effectively steal electricity and processing cycles in order to gain more of the digital currency.
Why does Bitcoin need so much electricity?
This power consumption is almost exclusively used to maintain the security of the network by repeating cryptographic hash calculations. Despite only supporting a maximum of 7 financial transactions per second, the Bitcoin network processes about 5,000,000,000,000,000,000 256-bit hashes per second. As a result, it’s estimated that a single Bitcoin transaction consumes 5,000x the electrical power of a credit card transaction.
Why is this the case?
Proof-of-work cryptocurrencies are secured by consensus. Simply put, whatever ledger 51% of the processing computers are operating off of is considered the correct one. As more computers join the network, the hash algorithm’s complexity is increased in order to maintain the same block completion rate for adding to the public ledger.
Why do more computers keep joining the network? To generate more revenue for the miner. Bitcoins are generated as a reward for performing cryptographic hashing to secure the network. They’re also given to miners as transaction fees for processing transactions. At the time this article was written, each Bitcoin transaction had an associated average fee of $20. As Bitcoin rewards continue to halve (which is a feature of the currency based on only allowing a certain number of Bitcoins to be generated), transaction fees are expected to continue to rise.
With all of these issues, the main question to ask is if this currency is sustainable in the long-term.