What determines Bitcoin's future energy consumption?Before diving into the estimates, we should understand what determines Bitcoin's future energy consumption. The most significant variables are the bitcoin price, the transaction fees, the percentage of revenue the miners spend on electricity, and the miners' average electricity price. In this section, I will first provide the general formula I used in my estimation and then explain each variable.Bitcoin's annual energy consumption = BTC price X (Block subsidy + Average transaction fee per block) X Number of blocks per year X Percentage of revenue miners spend on energy / Average energy price in the mining industryThe bitcoin priceThe bitcoin price is the most critical determinant for Bitcoin's future energy consumption. To understand why we must look at the competitive dynamics of the bitcoin mining industry.The bitcoin price multiplied by the block reward determines the industry-wide revenue for bitcoin miners, which covers their costs and a profit margin. An increase in the bitcoin price leads the industry-wide miner revenue to grow, which increases miners' profit margins in the short term. Bitcoin mining is a hyper-competitive industry with low barriers to entry, and these fat profit margins will naturally attract more miners to the feast, leading to an increase in energy consumption.Transaction feesCurrently, most miners almost disregard the transaction fees since they are only a tiny fraction of the total miner revenue. Therefore, it may surprise you that the level of Bitcoin's transaction fees is critical for its future energy consumption.Bitcoin miners produce 52,560 blocks per year, and the first miner to find a block receives a block reward denominated in bitcoin. The bitcoin block reward consists of two components: a block subsidy and transaction fees. The block subsidy is freshly minted bitcoin, while the transaction fees are any bitcoin paid as tips to the miners by the senders of the transactions included in the block.According to CoinMetrics, the historic average transaction fees per block have been 0.4 bitcoin, which is only a tiny fraction of the current block reward. Transaction fees may look like an unimportant block reward component, but their importance will gradually grow due to the halvings. The halvings occur every fourth year and halve the block subsidy. I explain the halvings' effect on Bitcoin's energy consumption in a section later in the article.I assume the transaction fees per block will stay at 0.4 bitcoin until 2040. Since the transaction fees are constant but the block subsidy halves every fourth year, the transaction fees will gradually become a larger share of the block reward. According to my estimates, the transaction fees share of the block reward will grow to 67% in 2040, with a block subsidy of 0.195 bitcoin and transaction fees per block of 0.4 bitcoin.
While the bitcoin price is the most critical determinant for Bitcoin's future energy consumption, the transaction fees follow closely behind, and their importance grows further into the future.The percentage of miner revenue spent on electricityBitcoin miners will spend a certain percentage of their income on energy, and the higher this percentage, the higher the industry's energy consumption will be. To estimate how this percentage will evolve towards 2040, we must again look at the competitive nature of the industry.In any industry, expenses can be broken down into two main components: CAPEX (capital expenditures) and OPEX (operating expenses). For a bitcoin miner, CAPEX consists of machines and electrical infrastructure, while OPEX consists primarily of energy. Currently, based on their energy consumption of 88 TWh and an average energy price of $50 per MWh, bitcoin miners spend around 50% of their income on energy.I believe the share of bitcoin miners' income spent on energy will grow from the current level as the industry matures. As the industry grows towards maturity, it will likely become the most competitive industry that has ever existed. It's a global industry that is hard to regulate and has low barriers to entry. Competitive forces will likely erase profit margins long-term, except for miners with access to exceptionally cheap electricity.In addition, the CAPEX component will gradually become lower since ASIC improvements are slowing. To account for these trends, I have assumed a 2% annual growth in the percentage of miner revenue spent on electricity, meaning it will be 71% in 2040.The average energy price in the bitcoin mining industryAs I explained, the bitcoin miners will collectively earn a specific annual revenue that depends on the bitcoin price and the block reward. They will spend a certain percentage of this revenue on energy, depending on how the competitive dynamics in the industry unfolds. To find out how much energy this energy cost translates to, we must estimate the average energy price in the industry.I estimate the average electricity price in the bitcoin mining industry to be $50 per MWh, and I believe it will stay at this level for the foreseeable future. We are already seeing high inflation globally, which is likely to persist. Still, the ultra-competitive nature of bitcoin mining incentivizes miners to seek out cheaper energy sources over time.Bitcoin mining is a location-agnostic industry, meaning you can set up a mining operation practically anywhere. In 2040, I believe most bitcoin miners will make use of stranded energy sources that are far cheaper than grid electricity. Some miners might still be grid-connected, but they will lower their energy costs by providing demand response services or selling their machines' heat output.The lower energy costs miners will achieve by providing positive externalities to the energy industry will offset inflation's impact. Therefore, I believe the average energy price in the mining industry will stay constant at $50 per MWh.
Bitcoin may become a significant energy consumer, but it depends on the priceIf you have read any news headlines about bitcoin mining, you may believe that the industry is currently a massive energy consumer on a global basis. Bitcoin mining only consumes 88 TWh annually or 0.05% of the global energy consumption of 173,340 TWh. These numbers mean that bitcoin mining's current energy consumption is a rounding error in the larger context.Bitcoin mining may have a limited energy consumption right now, but it has historically increased fast along with the bitcoin price. If the bitcoin price continues surging over the next couple of decades, bitcoin mining may grow to become a significant energy consumer globally.The bitcoin price is the most critical factor determining Bitcoin's future energy consumption. I have therefore modeled three scenarios:
- A bullish scenario where the bitcoin price grows linearly to $2 million in 2040
- A neutral scenario where the bitcoin price grows linearly to $500,000 in 2040.
- A bearish scenario where the bitcoin price grows linearly to $100,000 in 2040.
If the bitcoin price reaches $2 million by 2040, Bitcoin may consume 894 TWh per year – a 10x increase from today's level. This energy consumption is equal to 0.36% of the estimated global energy consumption in 2040, which implies a considerable increase from Bitcoin's 0.05% share today.Let's remove our bullish shoes and look at the more neutral scenario where the bitcoin price reaches $500,000 by 2040. In this case, Bitcoin will consume 223 TWh per year, slightly more than double the current level. This slight increase in energy consumption is surprising since a bitcoin price of $500,000 implies a 20x increase in the bitcoin price. Here, we see the effects of the halving, which I will explain later in this article.In our bearish scenario, the bitcoin price will reach $100k in 2040. Although this implies a 4x from today's price level, Bitcoin's yearly energy consumption will halve to only 45 TWh or 0.02% of the global energy consumption. Like in the neutral scenario, this is the magic of the halving.
Scenario analysis: Bitcoin price vs. transaction feesThe three scenarios from the previous section only differ in price. As explained, the level of transaction fees also has a massive impact on Bitcoin's future energy consumption. Therefore, I include a scenario analysis to see how much Bitcoin's energy consumption in 2040 will differ based on bitcoin prices and transaction fees.
In the table above, we see that at a Bitcoin price of $2 million in 2040, the transaction fees have an enormous impact on Bitcoin's energy consumption. For each extra 0.1 bitcoin in transaction fees per block, Bitcoin's energy consumption increases by 150 TWh, or almost twice the current energy consumption of 88 TWh.Another interesting conclusion from the table is that with the historical average transaction fees per block of 0.4 bitcoin, the bitcoin price must surpass $200k in 2040 for its energy consumption to stay at the current level. Here again, we again see the halving in action.
The chart above is the same as the previous one, but instead of showing the energy consumption in TWh, it shows it as a percentage of the global energy consumption. Here, I have assumed an annual growth in the global energy consumption of 2% until 2040.If the Bitcoin price reaches $2 million by 2040 and transaction fees stay at the historical average, Bitcoin's share of the global energy consumption will be 0.36%. This is a massive increase from today's level of only 0.05%, but it's still far below the doomsday estimates provided by certain Bitcoin critics. At such an energy consumption, bitcoin mining will be considered a significant energy-intensive industry, but still far below industries like cement production, which consumes 2% of the global energy.
Source: Hashrate Index, IEA
The halving limits Bitcoin's energy consumption growthThe chart showing my estimation for the development of Bitcoin's energy consumption between 2022 and 2040 shows that energy consumption is drastically reduced for all price scenarios every fourth year. The reason is that the block subsidy halves every 210,000 blocks or each fourth year.
Bitcoin mining will gradually consume less energy per value secured because the block subsidy halves every fourth year. Over time, the block subsidy halving's impact on the Bitcoin mining energy consumption will gradually weaken.
Source: The Bitcoin Protocol
Assuming 0 bitcoin per block in transaction fees, Bitcoin's energy consumption will only increase if the bitcoin price increases at a faster rate than the block subsidy declines. The block subsidy halves every fourth year, and the bitcoin price must double every fourth year to offset this effect. In this case, the bitcoin price must be around $650k in 2040 for its energy consumption to be higher than the current.Still, transaction fees will be higher than 0 bitcoin per block. Bitcoin's historical average transaction fee per block is 0.4 bitcoin. Assuming transaction fees stay at this level, the bitcoin price doesn't need to double every fourth year to offset the block subsidy halving effect. In this case, a bitcoin price higher than $200k will increase Bitcoin's energy consumption in 2040.