We talked about Bitcoin mining and the network hash rate in TRH #11. If you would like a refresher please go back and give it another read. In that edition we noted the Bitcoin hash rate and how it took a big hit when China “banned” Bitcoin mining. Why did they do this? How did it effect the network? Where have we gone since? These are a couple questions I would like to answer.
Bitcoin mining is the heart and soul of Bitcoin. Miners are taking a large capital risk spending thousands of dollars on machines, electricity, storage, maintenance. Even paying employees to upkeep the equipment. They do this though because the incentives to mine Bitcoin are so strong. The name of the game is efficiency. It is ultra competitive and the reward is freshly minted Bitcoin. They wouldn’t do all this if they didn’t see Bitcoin as being a highly valuable asset. One of the ways to drive your overhead costs down as a miner is to have the cheapest possible electricity costs. One of the best ways to do this is via energy that is stranded or otherwise wasted. In China miners were able to set up shop on the governments coal plants and harvest the extra energy to run their Bitcoin mining rigs which gave them extremely cheap costs of energy making them highly efficient. This sounds great, right? It is until China decides it doesn't want to let the miners do this anymore and this is when China “banned Bitcoin mining" this summer in an attempt to cut back on energy costs. I say this in quotes because the country has come out against Bitcoin several times throughout the last decade without much of a material impact. This time however they seemed to be a little more serious and it was very noticeable as we watched the amount of hash rate on the network drop off rather drastically. It was estimated that China had about 60% of the network mining within its borders before this move.
To give this a little more perspective let’s look at the all time chart rather than just the last year.
That’s a lot of hash rate falling off the network! Think about this for a second. I would define this is a nationstate level attack on Bitcoin. How did Bitcoin react? No problem. Bitcoin continued to produce blocks and send transactions like it was designed. It became easier for the miners still on the network via the difficultly adjustment also discussed in TRH #11. The hash that fell off the network has been able to relocate and has since steadily comeback online. This is a net positive for Bitcoin as that hash is now more geographically dispersed and the network is further decentralized. It also puts to rest any narrative that states, “China controls Bitcoin.”
I like to think of the Bitcoin hash rate as being a core fundamental of the network. If hash rate were to stop increasing and instead start to decrease it would cause some worry as it signals that the incentive to mine Bitcoin has changed. The ones putting their capital on the line are no longer willing to do so. Luckily, I do not see this happening but it is always good to think about what may change your view point on Bitcoin going forward. In the Bitcoin community on Twitter, Reddit, different forums, and telegrams we are constantly looking for ways that Bitcoin could fail.
I believe Bitcoin mining will change the world as we know it because we are able to harness energy from anywhere on the Earth! Bitcoin mining allows humans a profitable way to extract energy no matter where it is located. Before Bitcoin is has not be worth while to harness energy that is located too far from large cities because it goes unused. Attempting to transport energy is expensive and it becomes impossible if the distant is too great. With Bitcoin all you need is a satellite internet connection. In fact, increasing energy usage can be tied to human prosperity via the Henry Adams Curve.
Here is the Henry Adams Curve, the centuries-long historical trend, as the smooth red line. Since the scale is power per capita, this is only the 2% component. The blue curve is actual energy use in the US, which up to the 70s matched the trend quite well. But then energy consumption flatlined.
In other words, we have had a very long-term trend in history going back at least to the Newcomen and Savery engines of 300 years ago, a steady trend of about 7% per year growth in usable energy available to our civilization. Let us call it the “Henry Adams Curve.” The optimism and constant improvement of life in the 19th and first half of the 20th centuries can quite readily be seen as predicated on it. To a first approximation, it can be factored into a 3% population growth rate, a 2% energy efficiency growth rate, and a 2% growth in actual energy consumed per capita.
Conclusion
The Henry Adams Curve is saying that increasing energy consumption is directly related to a prosperous civilization. Our current government is decommissioning nuclear energy plants and attempting to remove fossil fuels and introduce a green energy standard. This sounds good in theory but in practice it is not plausible. We can harness wind and solar energy in addition to fossil fuels but the world can not operate solely on these inconsistent “green energy” models. This is leading to increased fuel costs and is going to become a severe problem in the winter when people either can’t afford to heat their homes or there simply isn’t enough supply of heating fuels!
The Bitcoin network is very resilient and has proven itself time and time again. Bitcoin will continue to provide the best money the world has ever seen and with it unlocking new potentials for humanity. Bitcoin will offer us a more energy abundant world and allow civilization to truly thrive. When looking at the Henry Adams curve, Bitcoin will allow us to catch back up with the historical trend. It is pretty eye opening that the flatlining of human energy consumption directly coincides with 1971, the year Nixon removed the gold standard, the year he took the world off a sound monetary system. To see more effects since removing the gold standard in 1971 check out wtfhappenedin1971.com