Contrary to the misguided Cambridge University study, bitcoin mining leverages 52.6% of sustainable energy, making it an attractive ESG investment.
This article takes a look at my latest research, explaining how it happened that the 2022 Cambridge Center for Alternative Finance (CCAF) study on the environmental impact of bitcoin underestimates the amount of sustainable bitcoin mining underway. I also explain why we can be confident that real sustainable energy use is at least 52.6% of the total energy use of bitcoin mining.
why does it matter
Whatever your position on ESG investing, the fact is that it is growing, on its way to reach $10.5 trillion in the US alone. It is also true that bitcoin adoption may not happen until this $10.5 trillion ESG fund feels comfortable that bitcoin is a net positive for the environment.
Right now, ESG investors are largely not feeling comfortable that this is the case. In talking with him, my impression is that one of the reasons ESG investors have trouble with bitcoin is that the CCAF study, “A Deep Dive into the Environmental Impact of Bitcoin,” reported that bitcoin uses only 37.6% sustainable energy. Is.
While ESG investors are usually quick to dismiss the work of bitcoin-critic Alex de Vries – previously dismissed in a Bitcoin Magazine article – I have found that they are more interested in the Bitcoin Mining Council’s (BMC) study on CCAF’s study. Bitcoin used by 58.9% on sustainable energy was found to be more likely to be trusted. You can understand why: The Cambridge brand says “reputable, independent research,” while the BMC says “industry body.”
Ironically, being an industry body, the very thing that gave the BMC access to real-time bitcoin mining data made it easier for its findings to disqualify at least some ESG investors. Environmental groups like Earth Justice and magazines like “The Ecologist” are equally quick to assume that the CCAF numbers must be correct.
To date, there has been a muted response from bitcoiners. Result: The conversation about ESG funds behind bitcoin cannot move forward. Bitcoin user adoption stalls.
Meanwhile, environmental groups gain more fuel to lobby governments to regulate bitcoin mining in a punitive manner.
What Will It Take for ESG Funds to Support Bitcoin?
ESG funds need 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 clearly demonstrate:
How the CCAF study was undermined and the bitcoin macro trend is quantitatively moving towards sustainable energy that bitcoin is a quantitative net positive for the environment and society
The research presented here answers the first requirement for ESG investors. This by itself won’t open the floodgates for institutional ESG investing, but it knocks down the first major hurdles.
test result
Throughout 2022, I was concerned about the persistent 20%-plus difference between the BMC and CCAF estimates of bitcoin’s sustainable energy use. I notice that both the bitcoin community and environmental groups quote figures that fit their narratives.
Being in the unusual position of separating the two communities, my simple question was, “Who is right?”
I decided to research the question.
What I realized was that the CCAF model was taking out too many factors. No great detective work on my part: it says so on its website under the “Limitations of the Model” section.
Therefore, I quantified the effect of these exclusions. It turns out that the three exclusions mentioned on its website cause its model to underestimate bitcoin’s sustainable energy percentage by 13.6%. This explains two-thirds of the entire difference between the CCAF and BMC models.
When all exclusions from the CCAF model are taken into account, bitcoin’s sustainable energy percentage figure is a higher 15.5% in absolute terms.
Here’s a full breakdown of all the CCAF model exclusions. There are a total of nine exclusions: seven (in green) that increase the sustainable energy-use figure; The two (in red) that subtract it. A full evaluation of each factor and the methodology used to quantify exclusions can be found at my research site.
So, in summary, don’t factor into the CCAF model:
off-grid mining (impact: plus 10.8%) flare-gas mining (impact: plus 1.0%) updated geographic hash rate (Kazakhstan miner exodus, impact: plus 1.8%)
Taking into account all exclusions, the sustainable energy mix is calculated at 52.6%. This figure represents a lower-range estimate, so it is not inconsistent with the BMC study showing 58.9% sustainable energy.
How sure can we be that bitcoin’s energy usage is over 50%?
We can simulate this using a modified model. For bitcoin to have actual sustainable energy use below 50%, at least one of the following scenarios would have to be true:
Four Big Bitcoin Mining Operations Secretly Run 100% Coal-Based EnergyERCOT (operator of Texas’s electricity grid) overestimates its actual renewable energy numbers by a factor of four, despite a widely reported exodus of miners from Kazakhstan Reported, its claims mining on bitcoin actually increased its share of the global hash rate from 13.2% to 20%
I would rate the likelihood of either of these being true. For the probability that the actual permanent percentage of the bitcoin network is 37.6%, you are more likely to win first prize in a single-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 will not prevent mainstream media from using the Cambridge study or environmental groups. But it will make a difference to how ESG investors view bitcoin. For the first time, bitcoin advocates have a legitimate, data-based way to remove the barrier created by the CCAF study in the minds of ESG investors for some time.
After the first hurdle, bitcoin supporters can ask the next two big questions that ESG investors and the White House have in mind: Is bitcoin’s macro-trend moving toward quantitatively sustainable energy? And is bitcoin quantitatively a net positive for the environment and society?
2. It also means that findings from previous CCAFs that appear to have used the same partial data set will need to be revisited. In particular, we would need to reconsider its findings that:
Bitcoin emissions currently stand at 58.58 metric tons of carbon dioxide equivalent (MTCO2e) (potentially inflated). Bitcoin uses less sustainable energy since the China ban (likely to show a different trend once off-grid mining is included) may increase the intensity of emissions (for the same reasons as above) by the Bitcoin network. The predominant energy used is coal (in light of off-grid data, it is unclear whether there is sufficient evidence for this conclusion)
Preliminary calculations suggest that all four conclusions may be wrong. It will require further analysis before we can say this with confidence. I would do this in separate functions.
3. To the best of my knowledge, all other major industries lag far behind bitcoin in sustainable energy use. Bitcoin can legitimately claim to lead all other industries in the adoption of sustainable energy sources. This is a very strong ESG case, as it shows an industry leading the way in the renewable transition, with the potential to inspire other industries by example.
It is also notable that bitcoin has accomplished this feat in a remarkably quick time of just 14 years.
In short: One of the three barriers to institutional adoption of bitcoin on the basis of ESG effectively no longer exists. Both bitcoin supporters and ESG investors can now feel confident that bitcoin is primarily sustainable.
last word
Throughout the process, I was in contact with both Alexander Neumueller, Digital Asset Project Lead at CCAF, and Michael Saylor, founder of BMC. Each was both encouraging and supportive of the approach I was taking.
To the best of my knowledge, CCAF was the first to generate energy and emissions data for the bitcoin network using a valid methodology and high-integrity data. I use both its Energy Consumption Index (CBECI) and its Mining Map extensively in my own research and have found both these tools’ methodology and data to be sound. It’s only the sustainable energy percentage where I found that there was an underestimation.
When the CCAF first began calculating the sustainable energy use of the bitcoin network in late 2019, it was highly accurate. It is the proliferation of largely renewable-based, off-grid mining, flare-gas mining and the rapid miners’ movement from Kazakhstan and Texas that saw its model begin to lose tune. As any quant-trader can tell you, “even a great algorithm will lose tune over time.”
This is a guest post by Daniel Batten. The opinions expressed are solely his own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
