Arcane Research: How much energy will Bitcoin consume in the future?

Source: Arcane Blog

Compiled by: Bai Ze Research Institute

The debate surrounding Bitcoin is almost entirely focused on its current energy consumption, with little consideration given to how it will evolve in the future. In this article, we estimate Bitcoin's future energy consumption based on several price scenarios.

What Determines Bitcoin's Future Energy Consumption?

Before diving into the 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 miner revenue spent 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 miner revenue spent on energy / average energy price in the mining industry

Bitcoin Price

The price of Bitcoin is the most critical determinant of its future energy consumption.

The Bitcoin price multiplied by the block reward determines the total revenue for Bitcoin miners across the industry, including their costs and profit margins. An increase in Bitcoin price drives revenue growth for miners, temporarily boosting their profit margins. Bitcoin mining is a highly competitive industry with low barriers to entry, and these substantial profit margins naturally attract more miners, leading to increased energy consumption.

Transaction Fees

Currently, most miners hardly consider transaction fees, as they account for only a small portion of miners' total revenue. Therefore, you might be surprised why we believe the level of Bitcoin's transaction fees is crucial for its future energy consumption.

Bitcoin miners produce 52,560 blocks annually, with the first miner to find a block receiving the block reward. The block reward consists of two parts: block subsidy and transaction fees.

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

According to CoinMetrics data, the historical average transaction fee per block is 0.4 Bitcoin, which is just a small part of the current block reward.

Transaction fees may seem insignificant within the block reward, but their importance will gradually increase as the block subsidy halves approximately every four years.

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

While Bitcoin price is the most critical determinant of its future energy consumption, transaction fees follow closely behind, with their importance expected to grow in the future.

Percentage of Miner Revenue Spent on Electricity

Bitcoin miners spend a certain percentage of their revenue on energy, and the higher this percentage, the greater the industry's energy consumption. To estimate how this percentage will evolve by 2040, we must again examine the competitive nature of the industry.

In any industry, expenses can be divided into two main parts: CAPEX (capital expenditures) and OPEX (operating expenses). For Bitcoin miners, CAPEX consists of equipment and electrical infrastructure, while OPEX is primarily made up of energy costs. 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, the share of revenue that Bitcoin miners spend on energy will increase from current levels. As the industry matures, it is likely to become one of the most competitive industries ever. This is a difficult-to-regulate, low-barrier-to-entry global industry. Competitive forces may erode profit margins over time, except for miners who can access exceptionally cheap electricity.

Additionally, as improvements in ASIC technology slow down, the CAPEX portion will gradually decrease. To explain these trends, I assume that the percentage of miner revenue spent on electricity will grow by 2% annually, meaning it will reach 71% by 2040.

Average Energy Price in the Bitcoin Mining Industry

As I explained, Bitcoin miners will collectively earn a specific annual revenue depending on Bitcoin price and block rewards. They will allocate a certain percentage of this revenue to energy, depending on the competitive dynamics of the industry. To understand how energy costs translate into energy consumption, we need to estimate the average energy price in the industry.

We estimate the average electricity price in the Bitcoin mining industry to be $50 per MWh, and I believe it will remain at this level for the foreseeable future. We have seen high inflation globally, which is likely to persist. Nevertheless, the super-competitive nature of Bitcoin mining will still incentivize miners to seek cheaper energy sources.

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

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

Bitcoin May Become a Significant Energy Consumer, but It Depends on Price

If you've read any headlines about Bitcoin mining, you might think the industry is currently a massive energy consumer globally.

However, Bitcoin mining currently consumes only 88 TWh annually, which is 0.05% of the world's total energy consumption of 173,340 TWh. This means that Bitcoin mining's current energy consumption is just a small fraction of the global total.

While Bitcoin mining's current energy consumption may be limited, historically, it has grown rapidly with the increase in Bitcoin price. If Bitcoin prices continue to soar in the coming decades, Bitcoin mining could grow into a major global energy consumer.

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

1. A bullish scenario where Bitcoin price linearly grows to $2 million by 2040.

2. A neutral scenario where Bitcoin price linearly grows to $500,000 by 2040.

3. A bearish scenario where Bitcoin price linearly grows to $100,000 by 2040.

As shown in the following chart, Bitcoin's future energy consumption varies significantly based on future Bitcoin prices.

If Bitcoin price reaches $2 million by 2040, it could consume 894 TWh annually—ten times the current level. This energy consumption is expected to account for 0.36% of global energy consumption in 2040, a substantial increase from today's 0.05% share.

Let's look at the more neutral scenario, where Bitcoin price reaches $500,000 by 2040. In this case, Bitcoin would consume 223 TWh annually, slightly more than double the current level. This modest increase in energy consumption is surprising, given that a Bitcoin price of $500,000 implies a 20-fold increase. Here, we see the impact of halving, which will be explained later in this article.

In our bearish scenario, Bitcoin price will reach $100,000 by 2040. While this means more than quadrupling the current price, Bitcoin's annual energy consumption will halve to 45 TWh, accounting for 0.02% of global energy consumption. Just like in the neutral scenario, this illustrates the magic of halving.

Scenario Analysis: Bitcoin Price and Transaction Fees

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

In the table above, we see that with a Bitcoin price of $2 million in 2040, transaction fees have a massive impact on Bitcoin's energy consumption. For every 0.1 Bitcoin increase in transaction fees per block, Bitcoin's energy consumption increases by 150 TWh, nearly doubling the current consumption of 88 TWh.

Another interesting conclusion from the table is that, based on the historical average transaction fee of 0.4 Bitcoin per block, Bitcoin price must exceed $200,000 in 2040 for its energy consumption to remain at current levels. Here, we again see the impact of halving.

The above chart is the same as the previous one, but it displays energy consumption as a percentage of global energy consumption instead of in TWh. Here, we assume a 2% annual growth rate for global energy consumption by 2040.

If Bitcoin price reaches $2 million by 2040, and transaction fees remain at historical average levels, Bitcoin's share of global energy consumption will be 0.36%. Compared to today's mere 0.05% level, this is a significant increase, but still far below the "apocalypse" estimates made by some Bitcoin critics. At such energy consumption levels, Bitcoin mining would be considered a significant energy-intensive industry, but still far below sectors like cement production, which consumes 2% of global energy.

Halving Limits the Growth of Bitcoin's Energy Consumption

The following chart shows our estimates for Bitcoin's energy consumption development from 2022 to 2040. We can see that energy consumption across all price scenarios will significantly decrease every four years. The reason is that the block subsidy halves every 210,000 blocks or every four years.

Due to the halving of the block subsidy every four years, Bitcoin mining will gradually reduce energy consumption. Over time, the impact of block subsidy halving on Bitcoin mining energy consumption will gradually diminish.

Assuming a transaction fee of 0 Bitcoin per block, Bitcoin's energy consumption will only increase if the price of Bitcoin rises faster than the decline in block subsidy. Since the block subsidy halves every four years, Bitcoin price must double every four years to offset this effect. In this case, Bitcoin price must be around $650,000 by 2040 for its energy consumption to exceed current levels.

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

Conclusion

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

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

This fact leads us to an important conclusion from this article: Bitcoin's future energy consumption will only grow when people view it as a store of value and a payment system. Keep in mind that if the price rises to millions of dollars and transaction fees are relatively high, Bitcoin will consume a significant amount of energy by 2040. Bitcoin's price depends on market demand for Bitcoin as a store of value, while transaction fees are driven by the demand for the use of the Bitcoin payment system.

Therefore, we can say that Bitcoin's energy consumption will reach extremely high levels only when it succeeds as "currency." Even in the bullish price scenario of $2 million in 2040, Bitcoin will only consume 0.36% of global energy consumption. Spending 0.36% of our energy to ensure value storage and facilitate transactions for billions of people worldwide is very worthwhile—this does not even consider that the energy needs of Bitcoin miners will stimulate more energy production.

For those who wish to see Bitcoin's energy consumption decrease, we have good news: if Bitcoin fails as a monetary system, your wish will come true.