Intro Vocals [00:00:02] You’re watching the block chain interviews hosted by Dan Weiskopf. Each episode features interviews with leading industry experts so that viewers can have a deeper understanding of today’s quickly evolving block chain marketplace.
Dan Weiskopf [00:00:22] Hey, Nic Carter, thanks for joining us today on the Blockchain Interview series. I’m really excited to have you. And you’ve released a super interesting white paper, Nic, for those who don’t know, you know, who you are. You’re a partner at Castle Island Ventures. And the title of the paper is called Bitcoin Net Zero Report.
Nic Carter [00:00:47] Thanks, Dan, excited to be here. I think it’s probably just actually Bitcoin Net Zero, you’re looking at an early draft.
Dan Weiskopf [00:00:56] OK, well, thanks for sharing, by the way. So we usually, you know, talk to a lot of CEOs and get a perspective of the industry that way. But, you know, given that this was done with, you know, NYDIG and Ross Stevens, you know, we got a look at it deeply. So, appreciate your time. And but I wanted to step back a little bit because you are a partner and arguably that makes you a CEO, right. And to that degree, tell us a little bit about Castle Island Ventures and how you had that Bitcoin epiphany.
Nic Carter [00:01:43] Yeah. So I have been into Bitcoin for a long time, just as an enthusiast. And then in 2016 I decided, well I got to actually get to work for Bitcoin. That’s what I wanted to do. And so I went to business school and then out of business school I joined Fidelity as their Bitcoin analyst, which was a role that didn’t exist before and, you know, helped them devise their bitcoin research perspective. And so that was a lot of educating leadership. That was in 2017, 2018. And then my then boss, Matt Walsh of Fidelity, decided to leave. There was a fund that we were both working on there at Fidelity and we decided, well, we need to spin out and create our own franchise here and pursue an early stage venture model to invest in effectively public blockchain startups. And that’s what we did. We started Castle Island Ventures in 2018 with the objective of operating at the earliest stage with these startups and in particular backing startups, building financial infrastructure. And so we’re on our second fund now. We’ve grown the investment team to four full timers and we’re pretty proud of what we’ve done so far, kind of precede and cede and incubation strategy. Backed around 35 startups.
Dan Weiskopf [00:03:09] 35. Wow. OK, so for those who are on the call now, I would say we’re going to probably highlight three key issues, right. You know why Bitcoin is a solution for so many looking for a decentralized monetary system? I think you have a definite different perspective than a lot of folks, the Bitcoin carbon emission, past and future. And then, you know, we’ll talk a little bit about the future of Bitcoin beyond just price. So, Nic, we were talking before the call a little bit about whether or not you’re a maximalist and your data set is designed to be, I think, you know, independent and agnostic on that fact. But, you know, it seems like you’re speaking to some degree in that context. Talk to us a little bit about your views on that issue.
Nic Carter [00:04:14] Yeah, it’s a great question. I mean, I think it’s changed over time. So for years I was just only exclusively interested in Bitcoin because Bitcoin needs a lot of help. I mean, you know, it’s still a project, but sort of in progress. And now it’s kind of reaching a state of maturity where, you know, I think it is stable and somewhat mature and has exit velocity. And I think Bitcoin is going to be fine, sort of regardless of what happens. And the future of Bitcoin is not uncertain to me. I, you know, I think there’s a definite pathway for what’s going to happen here. As we grew our fund and expanded our focus, we started investing in startups that were focusing or building on other blockchains just out of pragmatism, not out of some ideological desire to pursue one watching over the other. Just out of—while there’s certain things that I need to do as a startup that I can’t necessarily do on this or that blockchain. And so through that, we gained, I think, a bit more of a pragmatic attitude towards, you know, the inherent conflict between blockchains. And so I don’t consider myself a maximalist, frankly, I think the term is a little sort of semantically diffuse. So I’m not exactly sure what it means, but I’m definitely a bitcoiner, but that’s not to the exclusion of, at the very least, financing startups that are building elsewhere. And there’s a number of other blockchains that are startups built on. I mean, I co-founded a data company, Coin Metrics, and they run nodes for something like 50 or 60 different blockchains. And so I understand the view from the bitcoiner camp that, you know, promoting alternatives to Bitcoin without disclosing the sort of inherent tradeoffs those alternatives are making—that’s maybe morally questionable. But in terms of there being other objects of interest in the industry, I’m pretty open minded about that.
Dan Weiskopf [00:06:19] So in your mind, defining the difference between blockchain and DeFi is what?
Nic Carter [00:06:28] Well, I would say DeFi is probably an application of public blockchains, but you can obviously do a lot more than simply financial applications with blockchains. We see them used for all sorts of purposes, you know, time stamping, notarization, decentralized DNS, decentralized file storage and retrieval, things like that. So I think blockchain generally suggests finance, but it doesn’t necessarily imply it because blockchains are broader than that.
Dan Weiskopf [00:07:05] OK, cool. In the paper, coming back to the paper, in the paper you talk a lot about the emerging markets and how Bitcoin provides potentially a solution for hyperinflation as an example. Right. When I talk to U.S. investors, sometimes they are skeptical as to why we even need Bitcoin. What’s the benefit, you know, and from, frankly, from a U.S. investor perspective, I kind of get the reason right. U.S. dollar is stable, right, we’re comfortable. It’s traditional. But you really talk about the emerging markets in your paper and in a way that I think a lot of U.S. investors, frankly, don’t understand it. Right. They’re not thinking about it. So can we speak a little bit about the paper and that context?
Nic Carter [00:08:04] Yeah. So the premise of the paper is to talk about—to quantify rigorously Bitcoin’s energy consumption and historical carbon emissions and then make, you know, various simplifying assumptions about the future so that we can estimate the future energy consumption and carbon outlay. But the first section is just about the purpose and utility of Bitcoin, we don’t even really mention the energy consumption and I felt that was important because the Bitcoin energy debate is really a Bitcoin utility debate, right. When people consider sources of energy consumption, which are really material like air conditioning, heaters, dishwashers, tumble dryers, things that we use domestically and benefit from, no one is really complaining about the energy consumption of those use cases, even though each of them is greater than Bitcoins because they see obvious utility in them. So when the critics talk about Bitcoin’s energy consumption, the subtext is that Bitcoin has no utility. If it had obvious utility to them, they wouldn’t really be complaining and doing the stripped energy audit for Bitcoin because they don’t do that for other use cases. And so when me and Ross set out to write this paper, we said to ourselves, well, let’s first of all lay out the utility of Bitcoin because you can’t talk about the costs or the energy consumption without talking about the purpose and the benefits of the system. Now, the problem is westerner’s that have live in very stable regimes with functional property rights and a monetary system that works in an independent central bank and sovereign currency that doesn’t devalue that quickly, they don’t really it’s harder for them to apprehend the utility of a non state monetary system because their state monetary system is, by and large, functional. Now, of course, you can quibble about that. Year over year, inflation is 5.6% In the US right now. So clearly things are going a little bit haywire, but for the most part, the dollar is stable. And so what I wanted to do was decontextualize the reader, take them outside of their standard mental model of what currencies are like and invite them to think about the rest of the world, the global south, where currencies are not stable and people don’t have good instruments for their savings. Right. If they have savings, they will do it in the form of real estate or something like that. That’s probably more common. The local fiat currency in the developing world is oftentimes just not reliable and depreciates quickly. So the data also kind of supports this. So if you look at where Bitcoin has adoption disproportionately, and we’ve got this great data set from Cambridge, or from Chainalysis, sorry, they identify these hot zones for Bitcoin adoption globally. And it’s incredible because they’re almost all in the developing world. We’re looking at India, Ukraine, Pakistan, the Philippines, Argentina, Vietnam, Kenya, Nigeria, Venezuela, of course. And so these are relatively poor nations. But, so, what do they all have in common? Well, they have high inflation. They might even have hyperinflation. They have weak local governance, which is tied to inflation. They have central banks that don’t work or are non-independent and maybe they have capital controls, too. So you can’t really actually get your money out. And that drives Bitcoin that, you know, that’s part of the appeal of Bitcoin for people in these countries. And I think this data is incredibly elucidating, but most people are just not aware of it and they’re not aware of the fact or, you know, not consciously, you know, they don’t really understand the experience that billions of people have with inflation. And so that was the point in the first section is to explain, first of all, not everyone has access to the dollar and a stable monetary regime, over a billion people live in double or triple digit inflation, Bitcoin offers a pretty convenient opt out system for people in these states, and by the way, if you look at where Bitcoin adoption is occurring, it’s in these states that are highly inflationary. And so that was the purpose of the first section. I think people might understand the utility of Bitcoin better once they consider some of the data.
Dan Weiskopf [00:12:41] No, and I completely agree with you on the fact that a lot of people don’t understand the troubles that are outside the U.S. I think that here in the U.S. Sometimes we’re a little more narrow minded than we probably should be. So along those same lines, when I’m looking at some of your data set, I found some of your examples pretty shocking. I mean, Nigeria, 211 million people. I mean, how do you not try and find a solution for that many people?
Nic Carter [00:13:20] Yeah, I mean, it’s incredible, and if you look at the P2P transfer data, I believe Nigeria is actually the first in the world when it comes to peer-to-peer Bitcoin trading. And so Nigeria is, I believe, the most populous country in Africa, has this incredibly dynamic, entrepreneurial young population that could power it to being the number one country in Africa in terms of GDP and could make it a regional powerhouse. But they’re also dealing with high inflation and a number of other political issues, frankly. But, so, Nigerians just want to participate in commerce. They want to be integrated into the global economy. Bitcoin is one of those things that allows them to do that. And if you go on the ground, you see adoption of Bitcoin, you see Bitcoin being used as a bridge currency to import U.S. dollars, digital dollars into the country. People don’t just want cryptocurrency, they also just want stable foreign exchange. And it might be difficult to get dollars through other means. And so, you know, crypto in the country of Nigeria is a tool which better integrates into the global economy. It means that the Nigerian labor force can more easily contract with foreign firms and sell their labor, for instance, flattening out the payments hierarchy, meaning they don’t have to necessarily use the correspondent banking system, which is lots and lots of hops, to get to the key hubs, thus making it expensive. So, you know, Nigeria is I think number one, in terms of peer-to-peer adoption globally, and it definitely deserves kind of a second look here.
Dan Weiskopf [00:15:03] And there’s a certain irony on what’s happening in that. What we’re seeing here in the U.S. is more adoption by institutions buying Bitcoin and maybe more hedge funds and maybe more high net worth also adopting it. And yet the question becomes, sometimes, why? Why do people need to care? Is it just that they want that access because it’s going up in price? And the answer should be, you know, we’re all stronger as a global economy if the less fortunate have a means to lift themselves up. And I don’t think that message is completely clear to a lot of folks,
Nic Carter [00:15:53] And it is something I think about a lot, the fact that on the one side, you have enormous institutional participation in the Bitcoin market and then you also have a global retail investor base that’s also participating. And in some sense, the financial—people say, well, the financialization of Bitcoin in the West is kind of a waste because the only thing that matters is censorship resistant usage of Bitcoin like peer-to-peer usage and usage without KYC and without the walled gardens of Wall Street. But I see it the other way. The financialization of Bitcoin enabling large institutional allocators to get access to it effectively, for one, it makes it more liquid, generally. And then for two, it just means more funds, more capital can get access to the asset class, which ultimately in the long term drives up the price and it benefits individuals globally, retail investors that own a small amount of bitcoin. And so I actually see it as mutualistic. So institutional participation in the US occurs because there’s this groundswell of adoption worldwide. But that adoption also rewards the people in India and Vietnam and Nigeria that bought bitcoin so they can benefit from Wall Street adopting the asset class. So I think that’s like a really beautiful property, actually. It’s kind of incredible to think about.
Dan Weiskopf [00:17:20] Yeah, no, I definitely follow you and to a large degree, it makes the Bitcoin more stable.
Nic Carter [00:17:31] I believe so, yeah.
Dan Weiskopf [00:17:33] That’s the hope, right? You know,
Nic Carter [00:17:35] In theory, yeah.
Dan Weiskopf [00:17:41] OK, so Nic, let’s move forward a little bit and talk a little bit about your data in the way of ESG and put some context as to what a lot of this data means. I mean, you speak about—Bitcoin miners consume 62 terawatts of electricity in 2020. How does it compare to, you know, hair dryers or air conditioners or whatever metrics you want to use and we’ll later on go through some slides as further examples, because your paper has something like 30 different charts and graphs. Very impressive.
Nic Carter [00:18:23] Oh, yeah. It’s jam packed full of data. Well, you know, people often compare Bitcoin’s energy consumption to that of countries, but that doesn’t make sense. So we live in a globalized economy where a small number of countries do all the manufacturing for everyone, right? And so China is the world’s main manufacturing engine. And then you have other countries, but China is the number one. And so people export their emissions to China, right? And so if you want to compare an industry, Bitcoin is an industry with things that are similar from a taxonomy perspective. You should look at other industries. It doesn’t really make that much sense to look at countries because the countries Bitcoin gets compared to these sort of rural agrarian countries, they don’t do any manufacturing and so they have relatively low emissions. So the country level comparison never made sense to me. What does make sense is comparing Bitcoin and other industries. And so if you compare it to, for instance, domestic tumble dryers, dryers, you know, Bitcoin is roughly half of that. And that’s just for domestic non-industrial ones. If you compare it to refrigeration, domestic refrigeration, again, non-industrial, you’re looking at one tenth of that. If you compare it to air conditioning, you know, it’s around two thousand kilowatt hour-terawatt hours per year for air conditioning. And Bitcoin is 62, as you say. So, you know, we make a number of these industrial comparisons as opposed to country level comparisons. I think that those are the comparisons you want to make.
Dan Weiskopf [00:20:07] Yeah, and then when I look at certain banks as an example that have excess branches, you know, what exactly is the future of, you know, those branches? Because I would argue they’re not really that necessary.
Nic Carter [00:20:23] Yeah, and it’s trickier to add up all of the energy outlay of the financial sector for sure, but certainly if you did, you’d find it would be much, much greater than the energy consumption of Bitcoin.
Dan Weiskopf [00:20:36] But to your point, it’s challenging to figure out that data set. But we know it’s out there. Right. OK. You’ve done a lot of work in the space. What made you write this report? What was different about it?
Nic Carter [00:20:58] Well, I—as people that follow me now, I’ve written a lot on the topic. So typically that’s because I will investigate some piece of journalism or academia and I notice almost always some sort of mistake where the journalist or academic has misunderstood something about Bitcoin and is therefore doing a disservice when it comes to quantifying its present or future energy consumption. And that occupied me for a long time just responding to that. But those were just op eds and columns. It wasn’t anything substantive. So I really wanted to put something down and create a resource that would be educational and actually useful for people and would be durable and could be a reference and would give people the conceptual tools to reason about Bitcoin’s future energy consumption, which is one of the big, big questions in the academia. We see lots of terrible work done on it. You know, there’s this infamous University of Hawaii paper that posits that Bitcoin adoption is going to warm the Earth by two degrees on its own. And it’s based on the most preposterous methodology you can possibly imagine. I won’t get into it here, but if you want to read the paper, it’s called Mora et al., 2018 is the author and year. And if you know Bitcoin and you read the paper, you’ll immediately see the mistakes they’re making. So the point is, as a insider, I wanted to create tools that anyone could use so they could understand a maybe reason about Bitcoin. And when Ross Stevens approached me with—he had the same idea. I was very, very happy to collaborate with him. And we produced this body of work, which I’m enormously proud of.
Dan Weiskopf [00:22:53] So what is it that Mark Twain used to say something like “figures don’t lie, but liars do figure”?
Nic Carter [00:22:59] Oh, that’s good. So there’s a lot of data in here. Some of it are extrapolations and sort of educated guesses. Right. Because there’s things about the future we can’t know. So all we can do is build that into a model and defend our assumptions. But wherever we’ve made predictions, we’ve made it clear what our assumptions are.
Dan Weiskopf [00:23:19] Sure. So jumping right in, you know, we’re very involved in the miners and. You know, how green do you see the miners today and to that point, how confident are you on your data?
Nic Carter [00:23:40] So the minor greenness is probably one of the biggest sources of uncertainty in the data set, I would say, and we’ve assumed for the sake of this paper, the miners are mostly using on-grid sources of electricity.
Dan Weiskopf [00:23:56] Fair.
Nic Carter [00:23:57] Because as of right now, we don’t see enough evidence that miners are going off grid. Even though we have some anecdotal evidence. We know that there’s some flared gas mining happening here and there, but we don’t believe that that’s a truly material percentage such that it really affects the results that much. And then in terms of determining which grids those miners are operational on, we have the benefit of getting this refreshed data from Cambridge regarding the miner location, which is quite indicative. I would say it’s not perfect. It doesn’t cover the whole sample. And then also public company disclosures. All right. Just looking at this—well, this is what you do, I suppose, reading the disclosures for some of these miners, using that to infer or have direct knowledge of where these data centers are and what they’re using. And so we put together that patchwork and tried to ascertain the sustainability of Bitcoin mining. We’re not going to get a huge amount of precision in that, I think, in the future. Entities like the Bitcoin Mining Council, which is kind of this data sharing initiative, will be more informative and will give us more data on where miners are operational and what their sustainability is. And then individual miners have also begun doing these disclosures. So the data environment is getting better there. But we certainly had to make educated guesses, unfortunately.
Dan Weiskopf [00:25:25] Yeah, you know, in the ETF world, one of the exciting things about it is there’s so much transparency. And that’s, I think, part of the reason why a lot of folks from the ETF world, like myself, I suppose, came into the crypto world. It’s really relatively transparent. And when I look at the miners, I can kind of figure out that from a revenue perspective, there’s someplace around 20 to 30 billion dollars, Ethereum and, you know, Bitcoin. So the data set that you’re speaking about generally is available if you’re willing to dig through it. So thanks. So along those same lines, why don’t we jump into some slides? I’m going to just throw out some slides from your paper. OK, we’ll see if you can, you know, bang it away. We’re going to call this “highlights of slides”. Table 1, OK, where it says “Top 10 Most Crypto Active Countries”. What does this slide speak to? I think you covered a little bit, but…
Nic Carter [00:26:30] Yeah, this is what I was making reference to earlier. So this is brand new data that just came from Chainalysis and they used their pretty enormous resources
to put together an estimate of the countries where Bitcoin adoption is highest on a per capita basis. And what we’re doing here on this page, we also compare it to various indexes of property rights and financial and monetary freedom. We show first of all, Bitcoin is disproportionately adopted in places like Vietnam, India, Ukraine, Nigeria, places with generally, maybe weak governance or high inflation, things like that. And we list the top 20. And then we also say, if you look at those countries with high Bitcoin adoption, you see they’ve weak monetary freedom. They generally score poorly in terms of democracies. They have poor financial freedom, poor investment freedom and things like that. And so Bitcoin adoption correlates with institutional weakness in these places. That’s the point we’re making. It’s not a coincidence that Bitcoin is firing in these countries because Bitcoin is this independent institution. So you can see why people would be attracted to it.
Dan Weiskopf [00:27:43] And I see at the bottom, the top 10 is Argentina. And I remember when Argentina blew up, by the way, in 2001. I know I’m not going to call you out on what you remember from that period of time, but..
Nic Carter [00:27:55] I was eight.
Dan Weiskopf [00:27:56] But the effect that it had on the big banks in the US, it was scary, right. And that, again, goes back to my messaging. Why do we care as, maybe, selfish people? Because the financial system actually could be stronger if we help everybody out.
Nic Carter [00:28:16] And you could easily argue that the US, our current trajectory we’re on with our high indebtedness and our large level of welfare spending could be putting us on a path to Argentina not to get to, not to exaggerate it. But, you know, the parallels are certainly there. You can draw them if you want. And so, you know, monetary instability might have historically been largely contained to the global south. But that’s not to say it can’t reach us here in the West.
Dan Weiskopf [00:28:45] Well, you’re correct. We don’t disagree with you. There are lots of concerns at our firm about that and we often pull out that US dollar and we say “in God we trust,” just keep printing.
Nic Carter [00:29:03] It didn’t used to say “in God we trust.”
Dan Weiskopf [00:29:07] No, it didn’t, it didn’t, you’re correct. So now we’re going to go to Chart 1 where it says “Crypto Adoption Index and Other Key Social Economics”. You know, what is the key takeaway here on that?
Nic Carter [00:29:21] Yeah. So I briefly referred to this earlier. But the point is, the places we’re seeing high adoption of crypto are places where institutions have failed in some capacity and this just averages the index scores. So taking institutional qualities and converting them into a number. And so it’s a bit of a rough methodology. But, you know, it makes the point that if you’re looking at where crypto is widely used, it’s places where things just aren’t working very well, which is maybe why people are looking to these alternatives.
Dan Weiskopf [00:29:58] And now I’m skipping over to Chart 11 that talks about the annualized electricity of consumption for Bitcoin mining and, you know, what’s the key takeaway there? I’m not going to go over every one, but these are kind of like important slides, I think.
Nic Carter [00:30:21] Yeah, so this one is it’s not too hard to determine the electricity consumption. You just look at the hash rate and then you make an educated guess of the kinds of machines that are active on the network. And that’s not too difficult. And so what we found was that it peaked at around 92 terawatt hours on an annualized basis in March of this year. And then it actually drew down because China had their ban and that took 50% of Bitcoin’s hash rate offline temporarily, and now it’s started to climb again. And so, you know, the problem is nobody really has an intuition for what a terawatt hour is. And so then we sort of endeavor to actually compare it to other things so that maybe they can understand in context.
Dan Weiskopf [00:31:07] Yeah, one of the things I struggle with, and this is kind of going off subject, is trying to make an estimation of the difficulty, right? You know, when people are talking about mining, I don’t know if you have any views on that.
Nic Carter [00:31:24] Well, I mean, it’s incredible because the difficulty started at one when Bitcoin was released and now I believe it’s in the trillions, if I’m not mistaken. And so it’s just it’s a kind of unitless variable and alone, it’s hard to reason about, which I guess is one of those things that sort of trips people up with Bitcoin.
Dan Weiskopf [00:31:47] Yeah, it does. And if you’re a big miner, you’ve got to make some kind of estimation on it when you’re raising capital and buying equipment. So it’s one of those things that everybody kind of worries about, but not everybody puts their arms around in a proper way. You know, Chart 12 is something I don’t think we need to talk about because we’ve kind of covered it. It’s just talking about how China is 65% of the hash historically. Right.
Nic Carter [00:32:16] Yeah.
Dan Weiskopf [00:32:17] And then the question becomes where we are in the U.S. now. And you know what? I was just talking to somebody today and, you know, hypothetically, the guess, someplace around 15 to 20 percent here in the U.S., I think they were speaking about the U.S., but they could have been talking about U.S. and Canada.
Nic Carter [00:32:40] Yeah, no, my estimate falls in the same range. So the chart we have in the paper, we dated specifically to 2020, because, as everyone knows at this point, China had their serious crackdown. And so the Chinese hash rate share went from 65% in spring of this year to virtually nothing a few months later, by July. Today, it’s actually crept up a little bit based on miners I’ve talked to in China have told me that smaller miners have turned on some of their smaller installations. So it’s creeping back up in China. But for the most part, the industrial, the big industrial capacity for mining in China is over. And so the question is, you know, what about the rest of the world? And so Cambridge found in April 2021 that the US had about 16% of hash rate. If I had to guess I would say it’s probably closer to 20 today because we know that these large, publicly traded and private firms have been ordering almost all of the new mining units. So if you look at who’s buying watts miners in the bitmain units, they’re coming to US companies. And if you add it all up, you’ve got, you know, somewhere in the range of one to one and a half gigawatts of power’s worth of new machines that have been ordered through next year, you know, just looking at the disclosures. And so the US is the place that’s buying all the units because US miners have access to low cost of capital through going public on these markets. And, you know, through that advantage, the US is gradually becoming the center of global Bitcoin mining.
Dan Weiskopf [00:34:20] And low cost electricity to, right. Maybe not free, but it’s headed that way. Not free, but lower cost. So moving forward. So I just wanted to touch on some of the ESG issues. So Chart 14, “Carbon Emissions from Electricity Consumed and Bitcoin Mining”.
Nic Carter [00:34:44] Yeah, so here we take that last data set that I described, which is the electricity consumption, and then we try and transform it into a carbon emissions measure. And that is where it gets tricky because you have to determine the carbon intensity of all the electricity generated to support the miners. But the carbon intensity requires knowing what kind of power plants, you know, are producing the electricity molecules—the electrons that the miners are using. And that’s this enormously difficult task because miners are historically very secretive. They don’t actually tell you that. And so that’s where the guesswork really starts to come in. And we have to make a whole number of assumptions about are they on grid, are they off grid? Where are they located? Are they buying renewable energy certificates, things like that? Are they using renewable sources? Is hydro or is it coal? And you have to make a lot of educated guesses. We’ve generally gone into the more conservative guesses. And, you know, what we found is that at peak you’re looking at around 50 megatons on an annualized basis of carbon emissions that are attributable to Bitcoin mining.
Dan Weiskopf [00:35:57] Yeah, this is where some of our field work has helped out when you have to have visited a lot of these large scale facilities to really fully appreciate how location can have an effect on this issue.
Nic Carter [00:36:14] It’s hugely contingent. I mean, I know of miners that are 100% Canadian hydro and then there’s miners that are just taking advantage of wind in west Texas. And then, of course, you know, during the wet season, historically, 50% of Bitcoins hash rate would be Chinese hydro, which was hydro which was otherwise wasted in the past.
Dan Weiskopf [00:36:36] In the past.
Nic Carter [00:36:38] Not today.
Dan Weiskopf [00:36:39] Yeah.
Nic Carter [00:36:40] I mean, you’ll have some operations in Sichuan right now, but that won’t last. But then equivalently, you’ve got coal plants in Montana or coal in Kazakhstan. And so, you know, those are material as well. So there’s just so much guesswork there.
Dan Weiskopf [00:36:57] So Chart 16 kind of just brings a smile on my face, I got to say. I don’t know if it’s hugely important as a slide, but when I start talking about carbon emission on steel versus Bitcoin, it’s kind of like old and new in polar opposites, according to this data. Good work.
Nic Carter [00:37:21] Yeah. This is one of my favorite ones, actually. Just because Bitcoin, you know, I consider it like a synthetic metal in many ways, like a synthetic precious metal, because like gold—gold doesn’t really—I mean, it has an industrial use, but most of its value
comes from the monetary premium, right. From people using it in jewelry or people holding it in bars. And Bitcoin has no industrial use, so all of its value comes from the monetary premium. And so I like to compare Bitcoin to gold and silver. Like those comparisons seem very apt to me. And so we went and looked at all these metals to see what the extraction and refining of those metals accounts for in terms of energy. And as it turns out, Bitcoin scores better than even zinc or copper extraction. And then it’s around one third of the carbon emissions associated with gold production. And the interesting thing is people don’t really complain about gold production that much. And I think it comes back to this point I mentioned at the beginning, which is gold is kind of ubiquitous. Households all over the world stored their wealth in gold or people on jewelry and things like that. And so people don’t have to think hard about why you’d want gold. And so until Bitcoin reaches that same threshold of penetration as gold, we’re probably going to face this question of, well, Bitcoin, you know, what’s the point of it? And so I guess we just have work to do there.
Dan Weiskopf [00:38:52] Yeah, yeah, so Chart 17, “Total Mined Bitcoins Supply and Block Subsidy by Year”. Beautiful chart. What does it tell you? For people who don’t already know, really.
Nic Carter [00:39:08] Everyone should have seen this chart before if you have even a passing interest in Bitcoin. So here we show the decaying emission schedule for Bitcoin. And, you know, the important takeaway from this is something that people miss when they reason about Bitcoin is energy consumption, is that it’s the issuance that subsidizes most of the mining. The fees is a relatively small part. And so if you really extrapolate it out, the issuance drops off by half every four years. And so the energy spend, or at least the minor budget, is most likely going to decline over time. And our models show this because the issuance of Bitcoin is trailing off and now, you know, maybe fees are going to rise to compensate for that, but that seems a little far fetched. In my mind I think it’s likely that in dollar terms, the amount spent on mining actually declines in the distant future.
Dan Weiskopf [00:40:06] Interesting. Distant future, I hope?
Nic Carter [00:40:10] Yeah, well, we have it peaking, we have the energy spend peaking during the next decade and then declining. So it’s a weird industry, you know, Bitcoin mining, because according to the protocol, the revenue, the industry revenue is going to structurally decline. So it’s kind of like if just, you know, fewer and fewer tons of gold, we’re extractable every single year, which I guess is true because it’s getting harder to pull the gold out of the ground.
Dan Weiskopf [00:40:41] Well, point of clarification, though. I’m going to challenge you a little bit on that. So it’s going to decline because there’s going to be, after the having, fewer. Right. But theoretically, the price might be higher, which would offset that. Right.
Nic Carter [00:40:59] Correct, so if the price keeps doubling every four years, that offsets the issuance decline.
Dan Weiskopf [00:41:05] Yeah. So assuming we’re in 2025 right now, we need a much higher price of Bitcoin for these miners to remain, you know, strong growth companies.
Nic Carter [00:41:21] Yeah, but you know, in fairness, like mining will probably always be an industry. It’s just that the industry size could shrink alongside the security budget available. And so, you know, it’s just that their margins might compress or there might be consolidation or some will go out of business if the, you know, the revenue opportunity shrinks.
Dan Weiskopf [00:41:44] Right, so which is the reason why a lot of the large mining companies are so focused on the cost of electricity, which goes back to your study in your paper that speak to how basically the cost of electricity has to decline as a result of renewables. Is that fair to say?
Nic Carter [00:42:03] We believe that it will. I mean, it’s clear that renewables are, on a levelized basis, now competitive with thermal generation sources. That said, you can’t run a grid just on renewables. They don’t have the right generation profile. So you’re always going to have to have some sort of mixture.
Dan Weiskopf [00:42:24] So we had some fun here on price and then I got distracted. My apologies. So Chart 18 and 19 that speaks—18 speaks to the transaction model, right. And what does Chart 19 speak to it as far as price scenarios?
Nic Carter [00:42:48] To be clear, these aren’t predictions. This is just a sensitivity analysis. So you have to include the bullish and the bearish, but don’t read into it too much.
Dan Weiskopf [00:43:58] My compliance officer would agree.
Nic Carter [00:44:00] This is not my official price prediction. It is simply a model. So here we’re justifying our assumptions to go into the model. So we’re laying out four price scenarios, one where we’ve reached gold parity on the aggressive side and then one where it hopefully doesn’t happen, where Bitcoin trails to basically nothing. And then the other thing that determines mining revenue and hence their expenditure of energy is the fee level. And so we show the historical fee level. And if you have those two variables, the future price and the future fee intensity, which of course we can’t know, but if you know them, then you can know exactly what the size of the mining industry will be in the future.
Dan Weiskopf [00:43:45] Which I believe will be much greater than 25 billion in revenues. Nic Carter [00:43:49] I certainly hope so for the sake of the security of the protocol.
Dan Weiskopf [00:43:51] Yeah, yeah, exactly. So let’s move on to Chart 20 and 21 and then they will move to—we’ve teased everybody enough about the white paper and how important it is. So Chart 20 speaks to the historic and projected bitcoin electricity consumption under your model.
Nic Carter [00:44:16] Yeah, so this is really the key sort of payoff, or climax, you could say of the paper, really. This was the bulk of the work we did was constructing this model and building assumptions into it that we thought made sense. And so even under the high price scenario where Bitcoin reaches parity of gold, we see Bitcoin’s energy consumption peaking in, sort of, the late 2020s. But contrary to, sort of, the hysterical coverage, if you use the assumptions we use, it looks like it wouldn’t even reach half a percentage point of global primary energy consumption. And so even in the most aggressive scenario for us, where Bitcoin reaches parity with gold, which is 11 trillion dollars in total market cap, which is more than 10x from where it is today. So in my view, that’s aggressive. I know some bitcoiners have other more aggressive predictions and an aggressive fee assumption too.
We’re not even getting to half a percent of global primary energy consumption. And of course, under more conservative models, it’s less. And so, you know, that’s the point here is, you know, helping people reason about the future potential trajectory of the energy consumption.
Dan Weiskopf [00:45:40] So that also covers Slide 21, right?
Nic Carter [00:45:45] Yeah,.
Dan Weiskopf [00:45:47] Yeah, yeah, no. So at the end of the day, I really encourage everybody to read this paper. It’s eye opening. I’ve read it twice now and I’m still learning. Thanks for all that you do for Bitcoin. And, you know, frankly, one of the things about social media that not everybody fully appreciates because it’s just there, right. People are sharing information that’s important for free, right? This took an enormous amount of your time to do so, thanks for sharing it. Thanks for being on our little show. And let us know how we can help.
Nic Carter [00:46:29] Well, it was my pleasure, Dan. And yeah, the number one thing anyone can do would be to read this and then, you know, understand the variables that go into projecting the future energy and carbon emissions of Bitcoin and communicate it to people that aren’t as deep in the industry and communicate it to outsiders who don’t—they haven’t spent the time to build the conceptual tools to reason about this. And, you know, I think the facts are really on our side when it comes to Bitcoin’s ESG characteristics. The mining industry is moving in a really positive direction from my seat at least. And so hopefully this report can be a little tool in everyone’s arsenal.
Dan Weiskopf [00:47:15] Thanks, Nic. We’ll be in touch.
Nic Carter [00:47:17] Thank you very much.
Dan Weiskopf [00:47:18] Bye.