Today we consider the profit motive.
When it comes to coercion and “getting people to do the right thing” we argue that profit is a far more powerful incentive than government edict, and the outcomes are better.
We follow the Adam Smith argument, that self interest motivates what we do, yet that by acting in our own self-interest we promote the greater good. An individual may intend “only his own gain” but he is “led by an invisible hand to promote an end which was no part of his intention.”
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To demonstrate this point we contrast Western governments’ Green Industrial Revolution with that most heinous of activities, bitcoin mining.
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We have observed on these pages many times that Western governments’ grand plans for a Green Industrial Revolution are going to require extraordinary amounts of fossil fuel to be burnt in order to realise, especially to mine all the required metal.
What is the more environmentally friendly solution? To carry on driving the old banger, or to buy a new electric vehicle, with all the fossil fuel requirements there are in the manufacture of that vehicle, and in the creation of electricity to power it? I rather suspect the former.
We now park that thought, and turn to bitcoin mining, pilloried as wasteful and environmentally unfriendly.
Bitcoin’s vast energy use is a feature, not a bug
Bitcoin’s “proof-of-work” system of verifying transactions on the blockchain means that extraordinary amounts of energy are required to power the network. Some estimates are that bitcoin’s annual energy demands are equivalent to those of the Netherlands with its 20 million people.
In previous missives I’ve explained why this energy consumption is inherent to bitcoin, and how it is a feature, not a flaw.
By the way, just because something consumes a lot of energy does not mean it is wasteful. Energy consumption is part of progress. After the Agricultural Revolution we started to use animals to labour for us, then, following the Industrial Revolution, machines. In today’s digital age, we consume more energy per capita than ever. As we progress we have found better means to provide that energy.
Bitcoin mining, as we all know, consumes lots of electricity. A bitcoin miner can, in theory, locate itself pretty much anywhere. It could locate itself in Mayfair or it could set up shop in the darkest reaches of the Amazon. Its chief concern is that energy is cheap.
The cheapest energy in the world is energy that goes unused or is wasted, often stranded renewables in remote parts of the globe. If bitcoin miners can access that energy, they become more profitable. Location does not matter; that energy can be anywhere, and bitcoin mining is constantly seeking it out.
Let me give you some recent examples.
The first relates to gas flaring. This is the practice in the oil and gas industry of burning off the huge quantities of natural gas that rise to the surface as oil is extracted from wells. That gas is often uneconomic to pipe to market and so, to dispose of it, it is flared.
Some $20bn worth of gas is flared every year – as much CO2 and other greenhouse gases are released into the atmosphere as a result as from the use of 200 million cars: 150 billion cubic metres of gas. It’s an extraordinarily wasteful and polluting practice. The World Bank has attempted to impose initiatives to eradicate it, but it continues.
If only the oil and gas industry could find a way to turn that gas to profit, then much of the waste and environmental harm could be averted. Enter bitcoin.
Bitcoin mining uses energy that would otherwise go to waste
One company, Great American Mining, has found a means to deliver portable bitcoin mining machines, in great crates, to oil and gas fields. That energy from that gas is now used to power bitcoin mining operations.
In July, another start up, Compass Mining, signed a 20-year deal with nuclear fission company Oklo, which builds microreactors. The deal enables Compass to use all the excess energy from Oklo’s microreactors. The partnership is a “beacon” for the intersection of cryptocurrency and clean-energy development, says Oklo CEO Jacob DeWitte. Bitcoin mining generally is making use of unwanted land close to nuclear power stations, especially in France.
Also in July, payments company Square, founded by Jack Dorsey of Twitter, announced that it is funding a solar-powered bitcoin mining facility with Blockstream
El Salvador hit the headlines in June when it became the first nation to authorise bitcoin as legal tender. Within hours of the announcement El Salvador’s president, Nayib Bukele, was outlining plans for bitcoin mining rigs “with very cheap, 100% clean, 100% renewable, zero emissions energy from our volcanos.”
Around 8% of all bitcoins have been mined in Iceland, where hydroelectric and geothermal account for almost all of the power generation.
The extraordinary energy that bitcoin requires to power its network is powering an energy revolution that is happening in real time around us now. The motive is profit.
And we hark back to Adam Smith. “Every individual”, he said, “neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
That very dynamic is at work with bitcoin’s vast energy demands.
The Bitcoin Mining Council, which was set up in May in reaction to criticism about bitcoin’s energy consumption, especially from Elon Musk, found in its first report that over 50% of bitcoin’s energy comes from sustainables. Research by investment house CoinShares estimated that the number is much higher: 74% of bitcoin mining is powered by renewables, it said.
Bitcoin gets singled out for criticism. No other industry receives as much scrutiny, but in fact it is making better use of wasted or renewable energy sources than almost any other large-scale industry in the world.
