The halving caps Bitcoin’s electricity consumption – and even causes it to fall in the medium term

Let’s continue with our focus on halving. Today we look at halving as a mechanism to limit the ecological damage caused by Bitcoin mining.

One explanation why Satoshi programmed the halving into Bitcoin is ecological: As fewer and fewer Bitcoins are created per block, a large part of the Bitcoins are produced in the early years when the price is even lower – and thus the electricity consumption of mining .

You can illustrate this mechanism by considering the total number of Bitcoins in existence.

After the first halving in November 2012, 10.5 million Bitcoins – half of all coins that have ever existed – were in circulation. At this point, the value of Bitcoin had never been more than $30, usually significantly less. This suggests that the miners generally spent no more than $1,500 on a block, and probably even significantly less (today a block is worth almost 400,000 euros!).

Cambridge estimates Bitcoin’s electricity consumption at this time to be no more than 0.15 terawatt hours per year. That’s less than a small German town uses.

In the second Reward Era, which was scheduled to end in July 2016, an additional 5.25 million Bitcoins were created. When it ended, more than three quarters of all Bitcoins that ever existed had already been created. Electricity consumption remained low during this phase; Cambridge estimates it to be no more than five to seven terawatt hours per year.

There is no need to complete this in detail. You see the logic: The absolute majority of Bitcoins were created with an energy expenditure that is only a small, largely negligible fraction of what you have to use today to find a Bitcoin. The deflationary mechanics that halving introduces ensure that Bitcoin is able to store infinitely high values, but without burning electricity to the same extent.

If you compare the entire market capitalization of Bitcoin with all the electricity ever used, Bitcoin will be one of the most sustainable and energy-efficient financial products that has ever existed – and that is entirely due to the halving.

But we don’t want to stop at this statement, but rather go deeper into the details: Is there a direct connection between halving and power consumption, a mechanic that connects the two values?

The difficulty ignores the halving

Probably the most important factor for this is the so-called difficulty. Difficulty refers to the difficulty of the puzzles that miners have to solve with their hashes. If the difficulty increases, this means that miners are mobilizing more computing power – and therefore probably also consuming more electricity.

The following chart shows the development of difficulty since 2009 in a logarithmic view.

The first surprise that jumps out is that the halvings don’t play a role at all. The difficulty remained largely constant between summer 2011 and spring 2013; the halving in November 2012 left just as little trace in the curve as the one in July 2016 or May 2020.

This is a bit irritating and counterintuitive: Since the price was not directly affected by the halvings, the miners lost a total of half of their revenue. Anyone who runs an Asic miner with, say, 5 megawatts will only get half the profit for the same operating costs after the halving. So why don’t miners turn off their devices?

One can only speculate. The miners may have already been paid off, which is why the overall operating costs are negligible; The miners have probably already taken the halving into account in their investments, and perhaps they are prepared to temporarily operate at a loss in anticipation of rising prices. Either way: The halving impressively demonstrates how smoothly and fluidly a system can process even extreme disruptions if they were announced long enough in advance.

Halving transforms exponential growth into linear

Price is a more important factor for miners’ electricity consumption than halving. This can be seen from the fact that difficulty and price are visibly correlated.

The difficulty is something of a reaction to the Bitcoin price. If he rises, she rises too. However, the halving has the effect of inhibiting the reaction of the difficulty. In the phases after the halvings, we see short periods of time in which the price increases relatively quickly, but the difficulty only increases slowly. For example, it hardly reacts to the sharp increase from the end of 2016 or from mid-2020.

One could therefore assume that the halvings have a slightly delayed effect so that the hashrate – and with it the miners’ investments in energy and hardware – do not increase at the same pace as the price. Only when they form a new equilibrium do the two curves rise synchronously again. This tends to happen at the end of each reward era.

You could imagine halving as a kind of transformer between price and electricity consumption: it transforms the exponential increase in price into a linear increase in electricity consumption. Between 2020 and 2022, the price has roughly quadrupled, while electricity consumption has not even doubled.

Forecasts of future electricity consumption

Thanks to the halving, we can finally make some estimates about Bitcoin’s future electricity consumption.

If the price remains the same, electricity consumption will sooner or later be halved. If the price doubles to around 130,000 euros, electricity consumption remains stable; In order for electricity consumption to double, the price must quadruple to around 250,000 euros.

Under these circumstances, can Bitcoin ever use as much electricity as Germany — around 550 terawatt hours per year? For Bitcoin to get there, consumption would have to quadruple and the price would have to increase eightfold to 500,000 euros over the next few years. In order to maintain this consumption even after the halving in 2028, the price must rise to one million. And after 2032 to two million and so on.

And this would just be the pure power consumption. The primary energy consumption of Germany, which also includes oil and gasoline, is 3,200 terawatt hours. In order to achieve this – and above all to maintain it – the price would have to rise unimaginably high.

According to reasonable expectations, it is next to impossible that Bitcoin will use as much electricity as Germany in the 1930s, and completely impossible that Bitcoin will ever need as much primary energy as Germany. And while an economy like Germany requires largely constant electricity consumption while remaining the same size, Bitcoin has to grow continuously in order to maintain electricity consumption.

Halving as ecological regulation

Realistically, the halving acts as a kind of ceiling on how high Bitcoin’s electricity consumption can rise.

This ceiling is high, but not infinitely high, and it sinks lower with each new halving. Even ultra-bulls like Michael Saylor, for whom no prediction is too bold, would not claim that Bitcoin will consume as much electricity as Germany in 2036.

It is much more likely that the price increase will cool down with each successive reward era. At least that is what the patterns of development to date indicate. Although there are reasonable chances that an increase in the price will compensate for the loss of miners’ revenue due to the halving on April 19th. But this is no longer to be expected for the sixth reward era, which begins in 2028. From then on, Bitcoin’s electricity consumption will no longer increase, but decrease, and this decrease will accelerate with each halving.

Halving can therefore be seen as a kind of ecological regulation of mining. So far it remains invisible because of the aggressive price rise. But it will manifest itself more and more clearly over the next eight years – and the problem that Bitcoin’s CO2 emissions represent will be reduced more quickly than government regulation can.