Contrary to the erroneous Cambridge University study, Bitcoin mining uses 52.6% sustainable energy, making it an attractive ESG investment.
This article provides a look at the latest research, revealing how the 2022 Cambridge Center For Alternative Finance’s (CCAF) study on the environmental impact of Bitcoin underestimates the sustainable amount of Bitcoin mining going. I also told you why we can be very sure that the use of sustainable energy is at least 52.6% of the total Bitcoin mining energy.
Why This Matters
Whatever your position on ESG investing, the reality is that it’s on the rise, on its way to $10.5 trillion in the US alone. What is true is that Bitcoin adoption cannot happen unless these $10.5 trillion ESG funds feel comfortable that Bitcoin is a net positive for the environment.
Currently, ESG investors are generally uncomfortable with this happening. In talking to them, my impression is that one of the reasons for ESG investors not being comfortable with Bitcoin is that the CCAF study, “A Deep Dive Into Bitcoin’s Environment Impact,” reported that Bitcoin uses only 37.6% of sustainable energy.
While ESG investors are generally quick to dismiss the work of Bitcoin critic Alex de Vries – refuted in a previous Bitcoin Magazine article – I have found them to also trust the CCAF study through the Bitcoin Mining Council (BMC) study I found. Bitcoin uses 58.9% sustainable energy. You can see why: The Cambridge brand says “reputable independent research,” while BMC says, “industry body.”
Ironically, as an industry body, which gave BMC access to real-time Bitcoin mining data, it also made its findings easier for at least some ESG investors to withdraw. Environmental groups such as Earth Justice and journals such as “The Ecolog” are also quick to assume that CCAF’s numbers must be correct.
So far, Bitcoiners have responded with silence. The result: The conversation about ESG funds acquiring Bitcoin cannot move forward. Bitcoin user adoption stall.
Meanwhile, environmental groups gained more fuel to lobby the government to regulate Bitcoin mining in a punitive manner.
Do ESG Funds Need To Back Bitcoin?
ESG funds need three things before they will invest in Bitcoin projects. Here are three things the White House needs to avoid condemning Bitcoin mining: independent empirical data that clearly shows:
- How to study CCAF is understated and how much
- If Bitcoin’s macro trend is quantitatively moving towards sustainable energy
- Bitcoin can be a net positive for the environment and society
The research presented here is the answer to the first requirement for ESG investors. It won’t open the door to institutional ESG investing, but it can overcome the first major hurdle.
Findings
Throughout 2022, I am confused about the consistent, 20%-plus difference between BMC and CCAF estimates of Bitcoin which uses sustainable energy. I see the Bitcoin community and environmental groups quoting figures that fit their narrative.
Being in the unusual position of straddling both communities, my simple question is, “Who is right?”
I decided to research the question.
What I realized is that the CCAF model does not include several factors. No good detective work on my part: This is what the website says in the “Model Limitations” section.
So, I calculated the impact of the exclusion. It turns out that these three exclusions on the website caused the model to reduce the percentage of Bitcoin’s sustainable energy by 13.6%. It explains two-thirds of all the variation between the CCAF and BMC models.
When all exceptions to the CCAF model are taken into account, Bitcoin’s sustainable energy percentage figure is a full 15.5% higher.
Here is a full breakdown of all CCAF model exemptions. There are nine exceptions in total: seven (green) that increase the number of sustainable energy use; two (in red) that reduce it. A full evaluation of each factor and the methodology used to calculate the exemption can be found on my research site.
So, in summary, the CCAF model does not factor in:
- Off-grid mining (impact: plus 10.8%)
- Flare gas mining (impact: plus 1.0%)
- Updated geographic hash rate (exodus of Kazakhstan miners, impact: plus 1.8%)
With all exceptions considered, the calculation of the sustainable energy mix is 52.6%. This figure represents a lower bound estimate, so it does not match the BMC study showing 58.9% sustainable energy.
How Much Do We Believe Bitcoin Energy Can Be Used More Than 50%?
We can simulate this using a revised model. For Bitcoin’s actual sustainable energy use to be less than 50%, at least one of the following scenarios must be true:
- Four large Bitcoin mining operations are secretly running 100% coal-based energy
- ERCOT (Electric grid operator of Texas) has reported renewable energy numbers that are actually up by a factor of four.
- Despite the widely reported exodus of miners from Kazakhstan, claims of Bitcoin mining actually increased the global hash rate from 13.2% to 20%
I would rate the chances of any of these being true as far as fetched. As for the probability that the correct sustainable percentage of the Bitcoin network is 37.6%, there is a higher probability that you win the first prize in a one-ticket entry lottery where every man, woman and child in the US has a ticket.
What This New Research Means For Bitcoin’s ESG Narrative
Three things:
1. It won’t stop the mainstream media quoting the Cambridge study or environmental groups from using it. But it will make a difference in how ESG investors view Bitcoin. For the first time, Bitcoin advocates have a legitimate, data-based way to remove roadblocks that CCAF’s study has been creating for some time in the minds of ESG investors.
Over the first hurdle, Bitcoin supporters can ask the next two big questions that ESG investors and the White House have: Can Bitcoin’s macro trend move toward sustainable energy? And Bitcoin quantifiably net positive for the environment and society?
2. It also means that previous CCAF findings that seem to have used partial data sets should be revisited. Specifically, we should review these findings:
- Bitcoin emissions are currently 58.58 metric tons of carbon dioxide equivalent (MTCO2e) (probably overstated)
- Bitcoin uses less sustainable energy since the Chinese ban (likely to show a different trend if off-grid mining is anticipated)
- Emission intensity may 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 not clear if there is sufficient evidence for this conclusion)
Preliminary calculations suggest that all four findings may be wrong. This requires further analysis before we can speak with confidence. I will do this in a separate work.
3. To the best of my knowledge, all other major industries are significantly behind Bitcoin in using sustainable energy. Bitcoin can legitimately claim to be the leader of all other industries in the adoption of sustainable energy sources. This is a very strong ESG case, as it shows an industry taking the lead in the renewable transition, which has the potential to inspire other industries by example.
Moreover, Bitcoin has achieved this feat in a very fast time of only 14 years.
Summary: One of the three barriers to institutional adoption of Bitcoin on ESG grounds effectively no longer exists. Both Bitcoin supporters and ESG investors can now rest assured that Bitcoin is mostly sustainable.
Final Words
During the process, I interacted with Alexander Neumueller, digital assets project leader at CCAF, and Michael Saylor, founder of BMC. Both of them encouraged and supported the approach I took.
To our knowledge, CCAF is the first to generate energy and emissions data for the Bitcoin network using a valid methodology and high integrity data. I use the energy consumption index (CBECI) and the mining map extensively in my own research and find the methodology and data from these two tools to be excellent. It is only the percentage of sustainable energy where I find that there is an underestimation.
When CCAF first started calculating the sustainable energy use of the Bitcoin network in late 2019, it was very accurate. It was the subsequent proliferation of renewable mining, off-grid mining, flare-gas mining and the rapid mining movement from Kazakhstan and Texas that saw their models begin to disappear. As any quant-trader can tell you, “even great algorithms will lose tune over time.”
This is a guest post by Daniel Batten. The opinions expressed are entirely my own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.