Bitcoin's energy consumption is underestimated: A market dynamics approach

As the resource intensity of running Bitcoin has increased over recent years, it has become a serious concern for its potential impact on health and climate. Within this context, there exists a growing need for accurate information. Various organizations need this for multiple purposes like properly assessing the urgency of the problem, implementing the right policy response in the right locations and for setting up mitigation programs. We propose a market dynamics approach to evaluate the current methods for obtaining information on Bitcoin's energy demand. This allows us to establish that, while historically the Bitcoin mining industry has been growing most of the time, this growth allows market participants to pursue strategies that don't necessarily involve the best devices, device settings, or locations. The bigger the profitability of mining, the more it allows market participants to make decisions that result in suboptimal power efficiency of the Bitcoin network. Specifically, while the profitability of mining peaked during 2019, we find that market participants primarily used older generations of devices with better availability and lower acquisition costs. Common estimation approaches don't only fail to capture this behavior, but also fail to properly capture the market circumstances, like seasonal and geographic variation in electricity prices, that help enable participants to do so in the first place. This combination leaves common approaches prone to providing optimistic estimates during growth cycles. We conservatively estimate the Bitcoin network to consume 87.1 TWh of electrical energy annually per September 30, 2019 (equaling a country like Belgium).