On Wednesday (12/05/21) Elon Musk declared on Twitter that Tesla would suspend vehicle purchases using Bitcoin due to concerns about the rapidly increasing use of fossil fuel for Bitcoin mining and transactions.
According to Elon’s tweet:
- Tesla do believe in a promising future for cryptocurrencies
- They are not selling their Bitcoin holdings
- Tesla intends to use it for transactions again when mining transitions to more sustainable energy
- They are currently looking into other cryptocurrencies that use less than 1% of Bitcoin’s energy
Environmental enthusiasts and green advocates have welcomed the decision due to Bitcoin’s huge energy consumption. Blockchain evangelists and bitcoiners have vehemently opposed Elon’s announcement as a direct attack on what they believe in. Personally, I have a foot in both camps. I am pro-blockchain, pro-bitcoin, and have a general understanding of how the technology works. I have also worked intensely with different areas of climate change law. Tesla’s apparent 180 turns on Bitcoin, may seem rash but is nonetheless reasonable from my perspective.
In this post, I will share the research I have done on Bitcoin’s energy consumption, and explain why I think Tesla’s decision to suspend payments in Bitcoin is relatively sound.
Energy Consumption of Cryptocurrencies
Discussions on climate policies tend to be based more on emotions and gut feelings than on science and facts. Not even scientists can understand how CO2 emissions will affect the temperatures, or how the climate is going to respond. The same goes for the environmental impact of cryptocurrencies. There are too many unmeasurable variables in play to make any meaningful predictions or assessments of their net emissions and effects on the environment.
A 2019 report from Coinshares estimates that the Bitcoin network obtains 74% of its electricity from renewable sources. According to the report, half of the global mining takes place in the Chinese region of Sichuan. During Sichuan’s rainy season its electricity prices are among the lowest in the world, because of hydropower. However, in the dry season, the mining operations migrate to Xinjiang and Inner Mongolia where the energy mix dominated by coal.
Another report from 2020 by Cambridge Centre for Alternative Finance shows different results. Based on data from surveys, the report found that 76% of the mining operators used renewable energies as a part of their energy mix, but the share of renewables in their total energy consumption remained at 39%.
Either way, the energy consumption of Bitcoin and other cryptocurrencies is indeed massive. Namely, the proof-of-work mechanism (PoW), where miners are competing to solve mathematical puzzles and earn block rewards, consumes a ridiculously large amount of energy. Mining on the Bitcoin network alone known to use more electricity than a mid-sized country (according to various sources Bitcoin’s energy consumption exceeds the entire consumption of countries such as the Netherlands, Argentina, Pakistan, or Portugal).
PoW blockchains are “energy-intensive by design”.  The point of making the mining process computationally costly and thereby energy-intensive is to prevent malicious nodes from validating false transactions, or worst-case scenario, hijack the network. Attackers would have to be in control of at least 51% of the network’s total computer power to successfully take over control of the network. In other words, the large energy consumption is what keeps the network secure from attackers.
Why Bitcoin Is Not Comparable With a Traditional Payment System
A research paper from 2018 titled “Could Bitcoin Push Global Warming Above 2°C?” made the dystopian proposal that emissions from Bitcoin alone, if it were to handle the number of transactions required by a worldwide payment system, would produce enough CO2 emissions to push global warming above 2 °C within two decades.
The research paper raised public attention to Bitcoin’s large energy consumption but was fundamentally flawed in several ways. The authors based their research on many wrong assumptions about how Bitcoin works as pointed out, among others, by Dittmar and Praktiknjo (2019)  and co-founder of Coinmetrics.io, Nic Carter.
One major misconception that journalists and climate activists have been promoting in the past, is that Bitcoin is comparable with a traditional payment system.
Bitcoin is programmatically designed to handle only a limited number of transactions. Over the past couple of years, the number of average daily transactions over a month has ranged between approx. 150.000-385.000 transactions per day. Compared with a traditional payment system like VISA, Bitcoin can process 3.3-7 transactions per second, while a Visa credit card can process 2.000-56.000 transactions per second. 
The Bitcoin network was not intended to compete with global payment systems that rely on an underlying financial structure. Rather it was designed to BE the underlying financial structure in itself. As pointed out by Nick Carter:
“Visa relies on ACH, Fedwire, SWIFT, the global correspondent banking system, the Federal Reserve. And, of course, the military and diplomatic strength of the U.S. government (..). It’s worth noting that the grossly oversized U.S. military, whose presence worldwide is necessary to backstop the international dollar system, is the largest single consumer of oil worldwide.”
Bitcoin transactions, by contrast, rely just on bitcoin. Bitcoin proposes a new monetary unit (also named bitcoin) and mediates its circulation through the Bitcoin protocol administered by nodes and miners. Bitcoin’s energy footprint is highly transparent, due to the accessible and highly integrated nature of the system. This provides fertile ammunition for critics who can easily estimate the externalities of Bitcoin while insisting no equivalent ones exist for the dollar system.
The strength of Bitcoin lies in its ability to provide final, irreversible settlement in a short time span and with low fees even when the transactions are humongous. Billion-dollar transactions have been settled on the Bitcoin network within 10 minutes to an hour with transactional fees of less the price than a cup of tea. That is something traditional payment systems cannot offer.
Bitcoin’s transactional limitation is sometimes referred to as “the problem of scalability”. One way to overcome the problem is by adding a second layer on top of the base network to facilitate minor transactions off-chain that don’t need to be recorded on the main blockchain. That is what the lightning network sets out to achieve. The lightning network is operational, however still very technical to use as a newcomer. According to DataDrivenInvestor, the Lightning Network has 15,384x the throughput of Visa despite consuming over 242 times less energy.
Is Bitcoin a Threat to the Environment?
I personally do not believe that PoW mining constitutes a fundamental threat to the environment. That is based on my “gut instinct” because I believe that the advantages of Bitcoin outweigh its very large energy consumption. Almost any other major industry could be attacked for their major energy consumption as well.
It is also clear that a large percentage of the electricity used for Bitcoin mining comes from renewable energy sources. That being said, I do believe that Tesla’s concern about fossil fuels used for Bitcoin mining has some credibility. According to the 2020 report by Cambridge Centre for Alternative Finance, 38% of the energy mix in global Bitcoin minding came from coal – the worst energy source from an environmental perspective. As a company working for a sustainable future. It makes sense that Tesla chooses not to rely on assets with a documentable negative environmental impact, all things considered.
The fact that Tesla still holds around 38.300 bitcoins (currently more than $1.85 billion) underlines that they do believe in the technology despite their green agenda. When second-layer solutions such as the Lightning Network are more developed and mainstreamed the Bitcoin network will be much more suitable for regular payments.
Another solution for Tesla would be to use a cryptocurrency that applies a proof-of-stake consensus mechanism, such as Cardano, or at a future point, Ethereum. Proof-of-stake mining is known to consume 99% less energy than PoW mining. I will tackle that subject in my next post.
 Christopher Bendiksen & Samuel Gibbons (Updated June 2019), CoinShares Research, The Bitcoin Mining Networks, Trends, Average Creation Costs, Electricity Consumption & Sources.
 Blandin et.al (September 2020) 3rd Global Cryptoasset Benchmarking Study, Cambridge Centre for Alternative Finance.
 J. Sedlmeier et. al (2020), The Energy Consumption of Blockchain Technology: Beyond Myth, Springer.
 Mora et. al (2018), Bitcoin emissions alone could push global warming above 2°C, Nat Clim Change 8(11):931–933.
 Dittmar L, Praktiknjo A (2019) Could bitcoin emissions push global warming above 2°C? Nat Clim Change 9(9):656–657.
 K. Cromann et. al (2016), On Scaling Decentralized Blockchains (A position paper).
 Blandin et.al (September 2020) 3rd Global Cryptoasset Benchmarking Study, Cambridge Centre for Alternative Finance, pg. 27.