How much energy will Bitcoin consume in the future?

The debate about Bitcoin has almost always focused on Bitcoin’s current energy consumption, but few people have considered how it will develop in the future. In this paper, we estimate Bitcoin’s future energy consumption based on several price scenarios.

What determines Bitcoin's future energy consumption?

Before diving into estimates, we should understand the factors that determine Bitcoin’s future energy consumption. The most important variables are Bitcoin price, transaction fees, the percentage of revenue miners spend on electricity, and the average electricity price for miners.

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 for the mining industry

Bitcoin Price

Bitcoin price is the most critical determinant of Bitcoin’s future energy consumption.

The price of Bitcoin multiplied by the block reward determines the industry-wide revenue of Bitcoin miners, including their costs and profit margins. Rising Bitcoin prices drive revenue growth for miners across the industry, increasing miners’ profit margins in the short term. Bitcoin mining is a highly competitive industry with low barriers to entry, and these lucrative profit margins will naturally attract more miners to participate, leading to increased energy consumption.

Transaction Fees

Currently, most miners barely consider transaction fees, as they represent only a small portion of a miner’s total revenue. So you may be surprised why we believe Bitcoin’s transaction fee levels are critical to its future energy consumption.

Bitcoin miners produce 52,560 blocks per year, and the first miner to grab a block will receive a block reward. The block reward consists of two parts: block subsidy and transaction fees.

The block subsidy is newly minted Bitcoins, while transaction fees are Bitcoins paid to miners as tips by the senders of transactions included in a block.

According to CoinMetrics, the historical average transaction fee per block is 0.4 bitcoin, which is just a fraction of the current block reward.

Transaction fees may not seem like a significant component of the block reward, but as the block subsidy is cut in half approximately every four years, its importance will grow over time.

We assume that transaction fees will remain at 0.4 BTC per block until 2040. Since transaction fees are constant but the block subsidy halves every four years, transaction fees will gradually become a larger share of the block reward. By my estimate, the transaction fee share will grow to 67% by 2040, with a block subsidy of 0.195 BTC and transaction fees of 0.4 BTC.

While Bitcoin price is the most critical determinant of Bitcoin’s future energy consumption, transaction fees are a close second and will grow in importance in the future.

Percentage of revenue miners spend on electricity

Bitcoin miners spend a certain percentage of their income on energy, and the higher this percentage is, the higher the energy consumption of the industry. To estimate where this percentage will be in 2040, we must once again look at the competitive nature of the industry.

In any industry, expenses can be divided into two main parts: CAPEX (capital expenditure) and OPEX (operating expenses). For Bitcoin miners, CAPEX consists of equipment and electrical infrastructure, while OPEX mainly consists of energy. Currently, based on an energy consumption of 88 TWh and an average energy price of $50 per MWh, Bitcoin miners spend about 50% of their revenue on energy.

I believe that as the industry matures, Bitcoin miners will see a modest increase in their share of revenue from energy compared to current levels. As the industry matures, it will likely become the most competitive industry ever. It is a global industry that is difficult to regulate and has low barriers to entry. Competitive forces are likely to wipe out profit margins over the long term, except for miners with access to unusually cheap electricity.

Furthermore, since ASIC improvements are slowing down, the CAPEX component will gradually decrease. To account for these trends, I assume that the percentage of miners’ revenues spent on electricity grows by 2% per year, which means it will reach 71% by 2040.

Average energy prices for Bitcoin mining

As I explained, Bitcoin miners will collectively earn a specific annual revenue, depending on the Bitcoin price and block rewards. They will spend a certain percentage of this revenue on energy, depending on how competitive the industry is. To understand how much energy costs translate into, we have to estimate the average energy price for the industry.

We estimate the average electricity price for the Bitcoin mining industry to be $50 per MWh, and I believe it will remain at this level for the foreseeable future. We are already seeing high inflation around the world, and this is likely to continue. Still, the ultra-competitive nature of Bitcoin mining will incentivize miners to find cheaper energy.

Bitcoin mining is a location-independent industry, meaning you can set up a mining operation almost anywhere regulations allow. By 2040, I believe most Bitcoin miners will be using stranded energy that is much cheaper than grid electricity. Some miners may still be connected to the grid, but they will reduce their energy costs by providing demand response services or selling the heat output of their equipment.

Miners reduce energy costs by providing positive externalities to the energy industry, which will offset the effects of inflation. Therefore, I believe the average energy price for the mining industry will remain at $50 per MWh.

Bitcoin could become a significant energy consumer, but it depends on price

If you’ve read any of the news headlines about Bitcoin mining, you might assume that the industry is currently a massive consumer of energy on a global scale.

However, Bitcoin mining consumes only 88 TWh per year, which is 0.05% of the global energy consumption of 173,340 TWh. This means that the current energy consumption of Bitcoin mining is only a small number on a global scale.

Bitcoin mining may have limited energy consumption today, but historically it has grown rapidly as the price of Bitcoin has risen. If the price of Bitcoin continues to soar in the coming decades, Bitcoin mining could grow into a major global energy consumer.

The price of Bitcoin is the most critical factor in determining Bitcoin’s future energy consumption. Therefore, I simulated three scenarios:

1. Bullish scenario with linear growth of Bitcoin price to $2 million in 2040.

2. Neutral scenario with Bitcoin price growing linearly to $500,000 in 2040.

3. Bearish scenario of Bitcoin price growing linearly to $100,000 in 2040.

As shown in the figure below, Bitcoin's future energy consumption varies greatly depending on the future Bitcoin price.

If the Bitcoin price reaches $2 million by 2040, Bitcoin could consume 894 TWh per year — a 10-fold increase from today’s levels. This energy consumption is expected to be equivalent to 0.36% of global energy consumption in 2040, a considerable increase from today’s share of 0.05%.

Let’s look at a more neutral scenario, where the Bitcoin price reaches $500,000 by 2040. In this scenario, Bitcoin would consume 223 TWh per year, slightly more than double the current level. This small increase in energy consumption is surprising, as a Bitcoin price of $500,000 would imply a 20x increase in the Bitcoin price. Here we see the impact of the halving, which will be explained later in this article.

In our bearish scenario, the Bitcoin price reaches $100,000 in 2040. While this would mean more than 4 times today’s price, Bitcoin’s annual energy consumption would halve to 45 TWh, or 0.02% of global energy consumption. Just like in the neutral case, this is the magic of the halving.

Scenario Analysis: Bitcoin Price and Transaction Fees

The three scenarios above differ only in price. As mentioned before, the level of transaction fees also has a huge impact on Bitcoin’s future energy consumption. Therefore, I included a scenario analysis to see how Bitcoin’s energy consumption will differ in 2040 based on Bitcoin price and transaction fees.

In the table above, we see that transaction fees have a dramatic impact on Bitcoin’s energy consumption, calculated at a Bitcoin price of $2 million in 2040. Every 0.1 Bitcoin increase in transaction fees per block increases Bitcoin’s energy consumption by 150 TWh, nearly doubling the current energy consumption of 88 TWh.

Another interesting conclusion from the table is that, with the historical average transaction fee of 0.4 bitcoins per block, the bitcoin price would have to be over $200,000 in 2040 for its energy consumption to remain at current levels. Here again, we see the impact of the halving.

The above chart is the same as the previous one, but instead of showing energy consumption in TWh, it is shown as a percentage of global energy consumption. Here, we assume that global energy consumption will grow by 2% per year until 2040.

If the Bitcoin price reaches $2 million by 2040 and transaction fees remain at historical averages, Bitcoin's share of global energy consumption will be 0.36%. This is a huge increase from today's level of just 0.05%, but still far below the "doomsday" estimates of some Bitcoin critics. At this energy consumption, Bitcoin mining would be considered a significant energy-intensive industry, but still far lower than industries such as cement production, which consumes 2% of the world's energy.

Halving limits Bitcoin’s energy consumption growth

The figure below shows our estimates of the development of Bitcoin’s energy consumption between 2022 and 2040. We can see that energy consumption decreases significantly every four years for all price scenarios. The reason for this is that the block subsidy is halved every 210,000 blocks, or every four years.

As the block subsidy is halved every four years, Bitcoin mining will gradually reduce energy consumption. Over time, the impact of the block subsidy halving on Bitcoin mining energy consumption will gradually weaken.

Assuming 0 BTC per block, Bitcoin's energy consumption will only increase if the price of Bitcoin increases faster than the block subsidy decreases. The block subsidy halves every four years, and the price of Bitcoin must double every four years to offset this effect. In this case, the price of Bitcoin would have to be around $650,000 in 2040 for its energy consumption to be higher than it is today.

But transaction fees will certainly exist, with Bitcoin's historical average transaction fee per block being 0.4 bitcoins. Assuming transaction fees remain at this level, the price of Bitcoin does not need to double every four years to offset the impact of the block subsidy halving. In this case, a Bitcoin price above $200,000 will increase Bitcoin's energy consumption in 2040.

in conclusion

Bitcoin’s future energy consumption is highly uncertain and depends on several factors. However, one thing is certain: only when Bitcoin’s price reaches millions of dollars will it become a major global energy consumer.

While Bitcoin price growth stimulates more mining activity and higher energy consumption, halvings have the opposite effect. Bitcoin prices must continue to rise at an alarming rate for Bitcoin's energy consumption to increase in the long term due to halvings. The mitigating effect of halvings can be offset by future increases in transaction fees. Such growth will only occur if Bitcoin becomes a major global payment system and is in high demand.

This fact leads us to an important conclusion from this article. That is: Bitcoin's future energy consumption will only grow if people use Bitcoin as a store of value and a payment system. Remember, Bitcoin will consume a lot of energy in 2040 if the price grows to millions of dollars and transaction fees are quite high. Bitcoin price depends on the market demand for Bitcoin as a store of value, while transaction fees are driven by the demand for the use of Bitcoin as a payment system.

So we can say that energy consumption will only reach extremely high levels if Bitcoin succeeds as a "currency". Even in the bullish price scenario of $2 million in 2040, Bitcoin will only consume 0.36% of global energy consumption. It is well worth spending 0.36% of our energy to ensure a store of value and facilitate transactions for billions of people around the world - and this does not take into account that the energy needs of Bitcoin miners will stimulate more energy production.

For those who would like to see Bitcoin's energy consumption go down, we have good news: because if Bitcoin fails as a monetary system, your wish will come true. (doge)