New Report Busts Major Bitcoin Myths: Electricity and Illicit Activity

A new research report conducted by Sasha Fleyshman, a trader at digital asset management firm Arca, is dissecting two major narratives that dog Bitcoin and cryptocurrencies as environmental disasters that were designed to serve criminals.

The report, “Bitcoin: Energy Consumption as a Corollary to Environmental Impact and the Potential of the Evolution of Money,” analyzes how Bitcoin’s origin story from Silk Road, the first modern online darknet market where users bought drugs and guns and conducted other illicit activities, cemented public perception that Bitcoin is for criminals.

Writes Fleyshman,

“The main argument stems from the belief that Bitcoin isn’t governed by a regulatory body, and is therefore anonymous and impossible to trace.”

That narrative is eroding over time as a blockchain analysis companies such as Chainalysis work with law enforcement and regulatory agencies to use information that’s recorded onto Bitcoin’s public and open ledger to track down the senders and recipients of suspicious transactions.

“As for using BTC for nefarious activities, a report conducted in 2018 revealed that 46% of all Bitcoin transactions ($76 B) were used for illegal activities, which fell in line with the percentages in the U.S. and European black markets. When you take into account the vast imbalance between the total Bitcoin market capitalization to that of the U.S. dollar, it becomes evident that Bitcoin is dwarfed by traditional currencies in funding illegal activities ($100 B, 2010).”

The report also challenges the notion that Bitcoin is an environmental disaster, debunking reports that it will zap the globe of energy and instead comparing the nascent technology to other innovations that require electricity, such as refrigeration.

“Is there a problem with Bitcoin because it needs electricity? The same argument could be made for refrigeration, which is completely reliant on electricity to keep products cool. Does that mean that refrigeration has a systemic problem?”

While the total energy consumption of the Bitcoin network is more than the entire electricity expenditure of Colombia, and is roughly on par with Switzerland and all gaming systems, the study argues that the energy in use is converted, not wasted.

“The notion that Bitcoin is wasting unnecessary energy is false – Bitcoin is more often than not using surplus energy that is expended whether or not it is put to use. Energy generators operate under peak capacity, meaning that there is often too much energy produced in case of a surge in energy demand.”

When compared with the energy consumption of the legacy financial system, according to the report, Bitcoin is on par with gold mining. Bitcoin’s 0.27% share of the entire world’s electricity expenditure equals gold’s crude oil usage for mining: 0.27%.

Fleyshman argues, however, that comparing legacy systems, such as the US Federal Reserve, to Bitcoin in terms of raw usage of power is a misunderstanding of what the blockchain network is intended to do.

“While Bitcoin also consumes a seemingly enormous amount of energy, the purpose of that ‘energy conversion’ is not to function, but to strengthen the underlying security of the system.”

Crypto mining is also increasingly reliant on renewable energy sources as it drives innovation in the sector.

“With the main operational costs of running a mining operation boiling down to electricity cost, it comes as no surprise that Bitcoin mining farms are turning towards large scale renewable energy sources, subsidized to a rate that minimizes the electricity expenditure in the overall cost equation.”

You can check out the full report here.

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