Bitcoin is Digital Energy (Part 2)

The implications of converting electricity into a scarce, digital asset are profound.

Dec 31, 2021

This piece builds upon ideas established in Part 1.

The pertinent point to keep in mind is that energy is the ability to effect change in the world. It can manifest in many forms ranging from physical objects, to money, to bitcoins, with each form exhibiting its own energy storage and transfer properties. Choosing how we manage our energy carries significance not only for our own financial future, but for society as a whole.

WATER FLOW AND ENERGY

A hydroelectric power station is built in a remote area. It has gravitational potential energy in the water it holds.

As water flows, that potential energy is converted into kinetic energy, turning turbines and generating electricity for a nearby town. Through power lines, the energy is deployed across a range of applications from heating, to lighting, to charging batteries.

An electric car that was charged from a hydropower source can be understood as moving with the energy of water flow. The water’s energy is harnessed and deployed as vehicle movement. Energy is the ability to effect change, and in this example, that change is moving a car.

Unfortunately, due to the fact that electricity is lost across long-distance power lines, it is impractical to transmit electricity to a distant big city. The hydro energy is therefore geographically stranded, available only to nearby townspeople who themselves only need energy at certain times of day.

Any excess energy goes to waste, un-captured, un-stored, and un-used.

BITCOIN MINING AS CAPTURING ENERGY

Bitcoin mining is the process whereby specialized hardware uses electricity to perform computational work, which facilitates Bitcoin transactions and secures the Bitcoin network. Miners are awarded bitcoins for their work.

In essence, electricity in, bitcoins out.

The relevance of Bitcoin mining is that it is a geographically and temporally-independent process that can convert electricity into a scarce asset. Wherever and whenever energy is produced, it can now be captured and converted into bitcoins using mining devices.

When a power utility company installs Bitcoin mining devices at a hydropower station, these devices convert the water’s kinetic energy into bitcoins. Bitcoins can be transmitted anywhere in the world at the speed of light, without losing their stored energy along the way. Not electrical energy, but stored potential energy, or the ability to effect change in the world.

As this power utility company seeks to serve customers in the distant big city, it transmits its flow of bitcoins to its big city operations, instantly. Through selling, lending or using as collateral, the bitcoins can be used to effect changes in the world.

When the construction of a building is financed from the sale of hydropower-sourced bitcoins, the building can be understood as being built with the power of water flow. Along the path from flowing water, to bitcoins, to construction payment, to completed building, the kinetic energy of water takes many forms, but ultimately it is the flow of water that is being harnessed to power the construction. The workers, the equipment and the land are all paid for with hydropower-sourced bitcoins, and the building is completed.

Just as the electric car moved with the energy of flowing water, so too is the building raised from water flow, only this time through a different energy pathway.

In this sense, Bitcoin stores and transfers the energy of water flow.

BITCOIN & ELECTRICITY GENERATION

One of the near-infinite possibilities for deploying these bitcoins’ energy is supporting the electricity needs of the distant big city. Big cities have high energy demand and are often not located near convenient energy resources, resulting in higher energy costs.

The hydro-sourced bitcoins can be sold to subsidize otherwise uneconomical electricity resources in the big city, ranging from power generation (solar, wind, geothermal, nuclear, etc…), to power storage (industrial-scale batteries), to energy efficiency projects (home insulation programs), or to purchase electricity from nearby grids.

The construction, operation and maintenance of downtown rooftop solar panels can be understood as being built with water flow. An electric car charged with those solar panels is then powered by locally-sourced energy generation, which itself is supported by distant hydroelectric energy. Bitcoin is not generating nor transmitting electricity itself, but it is nevertheless being deployed to meet the energy needs of the big city. Energy supply is meeting energy demand.

In this arrangement, the kinetic energy of hydropower is transmitted not via power lines, but via the Bitcoin network, instantly. It is irrelevant where the hydroelectric dam is located, just so long as it can store its energy as bitcoins.

Due to physical constraints, electricity must always be sourced locally, but the difference now is that the high cost of real estate, labour and capital in the big city that would otherwise obstruct locally-sourced electricity can be mitigated with the support of distant energy resources. Places with high energy supply can more readily support places with high energy demand via Bitcoin.

The game-changing revelation is that stranded, wasted or under-utilized energy resources can now be put to use, regardless of place or time.

Bitcoin acts as both power lines and as a battery.

DIGITAL ENERGY & RENEWABLE ENERGY

Bitcoin mining is a global, open, and competitive marketplace. Everyone everywhere has equal opportunity to compete in converting their energy resources into bitcoins.

Bitcoin’s automatic difficulty adjustment means that as more mining power (aka hash power) competes, the process of mining self-adjusts to become more challenging, resulting in fewer bitcoins awarded per unit of hash power. Whether ten exa-hashes of mining power are competing or ten million exa-hashes, the same number of bitcoins will be rewarded on average every ten minutes.

Over time, this function will result in only the most cost-efficient miners being economical. As more mining power competes, it becomes increasingly difficult to mine bitcoins, diminishing the profitability of all miners equally. Any miners whose costs exceed the value of their awarded bitcoins will not be profitable, and will therefore be incentivized to cease operations or relocate to lower-cost energy sources.

In this way, only the cheapest and lowest variable-cost energy sources will be economically viable for mining in the long term.

Renewable energy sources, such as hydropower, that are not running at full capacity have the ability to generate additional electricity at little to no variable cost. Contrastingly, fossil fuel power plants incur higher variable costs as they must acquire, import and burn fuel to produce a marginal megawatt-hour. Wasted energy such as flare gas, that would otherwise be un-captured and lost, are also prime sources for Bitcoin mining operations.

With the falling costs of building and operating renewable energy sources, coupled with their structural advantage of low variable costs, renewables and wasted energy sources will likely claim an ever-greater share of Bitcoin’s mining profile.

Bitcoin will naturally become greener over time.

BITCOIN & RENEWABLE COSTS

Renewable energy sources produce energy at a rate that is determined by natural supply rather than human demand. When the wind blows and the sun shines, peak energy is supplied, but unless that coincides with corresponding demand or a battery solution, it goes to waste. With Bitcoin mining, peak energy supply from renewable sources can be put to use.

At peak electricity demand hours, Bitcoin mining rigs can be shut off, returning more energy capacity back to the grid. As demand subsides, miners can turn back on, thereby providing grid stability as energy supply and demand are equalized. This arrangement is already in place in Texas, where contracts between Bitcoin miners and power utility companies stipulate how mining should be turned on or off to ensure grid stability.

Unlike factories, offices and households, Bitcoin is uniquely flexible in its energy demand, providing new opportunities for electricity resources to be more effectively managed.

By providing inexhaustible demand for low-cost energy anywhere at any time, the cost/benefit equation of building new renewable energy infrastructure is tipped in favour of more construction. Renewable energy projects that were previously impractical or uneconomical can be rendered profitable with Bitcoin mining as an ongoing, flexible source of demand. Hydro, solar, wind and geothermal energy sources everywhere can be rendered more profitable with Bitcoin mining.

In this way, Bitcoin provides a way for more renewable energy capacity to be added to grids, while also providing flexibility and efficiency opportunities on the grid’s demand.