Contrary to a flawed Cambridge University study, Bitcoin mining uses 52.6% sustainable energy, making it an attractive ESG investment.
This article provides an overview of my latest research, revealing how it came about that a 2022 Cambridge Center For Alternative Finance (CCAF) study on the environmental impact of bitcoin underestimates the amount of sustainable Bitcoin mining going on. I also explain why we can be very sure that the actual sustainable energy consumption is at least 52.6% of the total Bitcoin mining energy consumption.
why it matters
Whatever your stance on ESG investing, the reality is that it is on the rise, on its way to reaching $10.5 trillion in the United States alone. What is also true is that Bitcoin adoption can only happen if these $10.5 trillion ESG funds feel comfortable that Bitcoin is a net positive for the environment.
Currently, ESG investors are generally unconvinced that this is the case. Speaking with them, I feel like one of the reasons ESG investors are uncomfortable with Bitcoin is that the CCAF study, “A Deep Dive into the Environmental Impact of Bitcoinreported that Bitcoin only uses 37.6% sustainable energy.
While ESG investors are generally quick to dismiss the work of Bitcoin critic Alex de Vries – debunked in a previous Bitcoin Magazine article – I found that they are also more likely to trust the Bitcoin study. CCAF rather than a study by the Bitcoin Mining Council (BMC) which revealed Bitcoin uses 58.9% sustainable energy. You can see why: the Cambridge brand says ‘independent and reputable research’, while BMC’s says ‘industry body’.
Ironically, being an industry body, the very thing that gives BMC access to real-time Bitcoin mining data, also made it easier to disqualify its findings for at least some ESG investors. Environmental groups such as earthly justice and journals such as “The environmentalistwere just as quick to assume that the CCAF numbers must be correct.
To date, Bitcoiners have had a muted response. The result: the conversation about ESG funds behind Bitcoin cannot progress. Bitcoin user adoption is stagnating.
Meanwhile, environmental groups are gaining more fuel to lobby governments to regulate Bitcoin mining in a punitive way.
What would it take for ESG funds to back Bitcoin?
ESG funds require three things before investing in Bitcoin projects. These are the same three things the White House would need in order not to punitively regulate Bitcoin mining: independent empirical data that unambiguously demonstrates:
- How the CCAF study was underestimated and to what extent
- That the Bitcoin macro trend is quantifiably moving towards sustainable energy
- That Bitcoin is quantifiable a net positive for the environment and society
The research presented here is the answer to the first requirement of ESG investors. This alone won’t open the floodgates to institutional ESG investing, but it does knock down the first major hurdles.
Throughout 2022, I was puzzled by the consistent difference of more than 20% between BMC’s and CCAF’s estimates of Bitcoin’s sustainable energy consumption. I’ve seen both the bitcoin community and environmental groups cite the number that matches their stories.
Being in the unusual position of straddling the two communities, my simple question was, “Who is right?
I decided to research the issue.
What I realized was that the CCAF model excluded several factors. No great detective work on my part: He says so on his website under the “Model limits” section.
I therefore quantified the impact of these exclusions. It turned out that the three exclusions mentioned on his website cause his model to underestimate Bitcoin’s sustainable energy percentage by 13.6%. This explains two-thirds of the total variance between the CCAF and the BMC model.
When all the exclusions of the CCAF model are taken into account, the Bitcoin sustainable energy percentage is 15.5% higher.
Here is a complete breakdown of all exclusions from the CCAF model. There are nine exclusions in total: seven (in green) that increase the sustainable energy consumption figure; two (in red) which decrease it. A full assessment of each factor and the methodology used to quantify the exclusions can be found on my research site.
So, in summary, the CCAF model does not take into account:
- Off-grid mining (impact: more 10.8%)
- Flare gas extraction (impact: more 1.0%)
- Updated geo-hash rate (exodus of miners from Kazakhstan, impact: plus 1.8%)
All exclusions combined, the calculation of the sustainable energy mix is 52.6%. This figure represents a lower bound estimate, so it is not inconsistent with the BMC study showing 58.9% sustainable energy.
How sure can we be that Bitcoin’s power consumption is over 50%?
We can simulate this using the revised model. For Bitcoin’s true sustainable energy consumption to be less than 50%, at least one of the following scenarios should be true:
- Four Big Bitcoin Mining Farms Secretly Run On 100% Coal Power
- ERCOT (Texas’ electric grid operator) overstated its true renewable energy numbers by a factor of four
- Despite the widely publicized exodus of miners from Kazakhstanits claim on Bitcoin mining actually increased its share of the global hash rate from 13.2% to 20%
I would rate the likelihood of any of them being true as outlandish. As for the probability that the real sustainable percentage of the Bitcoin network is 37.6%, there is a greater probability that you will win the first prize in a one-ticket lottery where every man, woman and child in the United States has a note.
What this new research means for Bitcoin’s ESG narrative
1. It won’t stop the mainstream media from quoting the Cambridge study or environmental groups from using it. But it will make a difference to how ESG investors look at Bitcoin. For the first time, Bitcoin advocates have a legitimate, data-driven way to remove the roadblock that the CCAF study has created for some time in the minds of ESG investors.
Past the first hurdle, Bitcoin proponents can ask the next two big questions facing ESG investors and the White House: Is Bitcoin’s macro trend quantifiably shifting toward sustainable energy? And is Bitcoin a quantifiable net positive for the environment and society?
2. This also means that previous CCAF-FCVI results that appear to have used the same partial data set will need to be revisited. Specifically, we will need to revisit his findings that:
- Bitcoin emissions are currently 58.58 metric tons of carbon dioxide equivalent (MTCO2e) (probably exaggerated)
- Bitcoin uses less sustainable energy since China ban (likely to show a different trend once off-grid mining is taken into account)
- Emission intensity could increase (for the same reason as above)
- The main energy used by the Bitcoin network is coal (in light of the off-grid data, it is unclear if there is enough evidence for this conclusion)
Initial calculations suggest that all four results may be incorrect. This will require further analysis before it can be said with confidence. I will do this in separate works.
3. To my knowledge, all other major industries are significantly behind Bitcoin in their use of sustainable energy. Bitcoin can rightfully claim to lead all other industries in their adoption of sustainable energy sources. This is a very strong ESG case, as it shows an industry taking the leadership of the renewable transition, which has the potential to inspire other industries by example.
It should also be noted that Bitcoin achieved this feat in just 14 years.
In summary: one of the three barriers to institutional adoption of Bitcoin for ESG reasons no longer exists. Bitcoin advocates and ESG investors can now be sure that Bitcoin is primarily sustainable.
Throughout the process, I was in contact with Alexander Neumueller, the digital assets project manager at CCAF, and Michael Saylor, the founder of BMC. Everyone was both encouraging and supportive of the approach I was taking.
To my knowledge, CCAF was the first to create energy and emissions data for the Bitcoin network using valid methodology and high integrity data. I use both energy consumption index (CBECI) and its mining card in my own research and found the methodology and data for both of these tools to be strong. Only for the sustainable energy percentages did I find that there was an understatement.
When the CCAF started calculating the sustainable energy consumption of the Bitcoin network at the end of 2019, it was very precise. It was the subsequent proliferation of off-grid mining, largely based on renewable energy, flare gas extraction and the rapid movement of miners from Kazakhstan and Texas that saw its model begin to lose momentum. As any quantitative trader can tell you, “even a great algorithm will lose its intensity over time.”
This is a guest post by Daniel Batten. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.