Are Energy Costs and CapEx Invested in Bitcoin Worth It?

Bitcoin capital expenditure and energy overhead are often criticized to be unsustainably high. But are they worth it in relation to the value provided by the Bitcoin network?

TLDR;

Capex and energy costs are estimated using the USD value of the transaction fees paid by the Bitcoin traders. The value of the Bitcoin monetary system is estimated as its market capitalization. The cost-benefit ratio as measured by the transaction fees divided by the market cap is only 0.17% in 2021. Thus, the Bitcoin network is the most efficient monetary network in the world and the economic benefits compensate for the economic costs.

Bitcoin is often attacked for its costs that is commonly assumed to be extremely high in relation to its utility. Today, I wondered: how is the relationship of the costs of Bitcoin in relation to its utility?

  • Economic costs: To keep the Bitcoin network running, we need to buy and maintain hardware. The collective tangible costs of the Bitcoin monetary network mainly consist of computing infrastructure and energy.
  • Economic benefit: The Bitcoin network has a certain economic benefit. Its value proposition is clear: the Bitcoin network allows humanity to store value safely and independently of any central entity and without inflating its value. Bitcoin is the perfect store of value because, unlike any other asset or commodity, it cannot be inflated or easily destroyed.

But how much value do we really get for the costs?

To examine this question, I use the following two proxy metrics:

Metrics

  • Transaction costs: If you want to move Bitcoin from one wallet to another, you need to pay a certain transaction cost in Bitcoin. Depending on the current price of Bitcoin, this gives us the yearly costs of operating the Bitcoin network in USD. This is the current economic compensation we pay to miners to keep the network running. While miners will make a small profit on this, the yearly USD-worth of transaction costs will approximately match the CapEx and energy costs for mining. The reason is simple: if the costs were far below the compensation, the miners would quickly scale up their computations to earn more which would drive the compensation down. If the costs were far above the compensation, many miners would scale down their computations to avoid burning too much money which would drive costs down to the compensation. Thus, the collective USD-worth of transaction costs is a solid proxy for the economic costs (in USD) to operate the network.
  • Market capitalization: The main economic benefit of the network is to store value. How much value is currently stored in the Bitcoin network? A solid proxy for this number is the market capitalization of the Bitcoin network as this is the theoretical lower-bound price you’d have to pay to existing Bitcoin owners to buy all of their coins. In other words, this is the USD-converted current lower-bound value of the Bitcoin network. The true value may be higher as a buyer of the whole Bitcoin network would have to pay much higher prices to convince many owners to actually sell.

Let’s determine these numbers next.

Transaction costs are calculated using the number of transactions in a given year multiplied with the average transaction fee in USD.

Number of Bitcoin Transactions in Years 2009-2021

To get the number of Bitcoin transactions in the years 2009-2021, I first obtained a raw data set of the number of confirmed transactions per day from here. As the data granularity takes only every third day into account, I summed up all daily transactions for each year and multiplied this number by 3 to obtain the total number of Bitcoin transactions in a given year.

Here’s the resulting table:

YearNumber of Bitcoin Transactions
200931,332
2010177,351
20111,890,924
20128,389,788
201319,874,874
201425,453,938
201545,923,877
201683,349,948
2017105,640,596
201881,474,975
2019118,543,191
2020112,683,183
202180,974,300
Number of Bitcoin transactions per year between 2009 and 2021 (currently: 21th of May 2021)

What is the Transaction Fee for Bitcoin in Years 2009 to 2021?

There’s a large fluctuation of transaction fees on the Bitcoin network. Let’s examine the transaction fees in March 2009 to March 2021 measured as a yearly granularity.

Here’s the table of the transaction fees on March in every year:

YearTransaction Fee in March (USD)
20090
20100
20110.001
20120.003
20130.024
20140.133
20150.034
20160.093
20170.878
20182.399
20190.742
20200.727
202120.718

This data is drawn from here:

Figure: Transaction Fees of the Bitcoin network in USD. (source)

What Are the Costs of the Bitcoin Network?

Given these data values, we can approximate the yearly costs or overhead of the Bitcoin network as the product of the yearly transactions and the costs per transaction. We obtain the following table:

YearNumber of Bitcoin TransactionsTransaction Fee in March (USD)Total Yearly
Transaction Fees
 (USD)
2009313320,000 $                                   
20101773510,000 $                                   
201118909240,001 $                    1.890,92
201283897880,003 $                  25.169,36
2013198748740,024 $                476.996,98
2014254539380,133 $            3.385.373,75
2015459238770,034 $            1.561.411,82
2016833499480,093 $            7.751.545,16
20171056405960,878 $          92.752.443,29
2018814749752,399 $        195.458.465,03
20191185431910,742 $          87.959.047,72
20201126831830,727 $          81.920.674,04
20218097430020,718 $    1.677.625.547,40

You can see that the costs of operating the Bitcoin network are $1.6 billion in 2021. This sounds like much but consider that the market capitilization of Bitcoin is $582 billion!

Let’s explore the frictional costs of operating the Bitcoin network.

The Economic Energy Efficiency of the Bitcoin Network

Let’s consider the costs in relation to the economic benefit of the Bitcoin network. Remember, we used the transaction fees as a proxy for costs because this may be taken as a realistic bound of the capex and energy overhead. And we used market capitalization as a proxy metric for benefit because this is the amount of money that is stored in the network and that can be moved without any further frictional costs.

The last column of the resulting table shows that when dividing the costs by the benefit, i.e., Costs/Marketcap, we obtain the friction overhead of the network. This is the percentage of value destroyed in relation to the percentage of value stored. The proportional costs have never even crossed 1% of the value stored in the network. This means that the Bitcoin network is highly efficient with very little costs.

YearNumber of Bitcoin TransactionsTransaction Fee in March (USD)Total Yearly
Transaction Fees
 (USD)
Marketcap
(USD)
Costs/
Market Cap
2009313320,000 $                                     $                       50.0000,00%
20101773510,000 $                                     $                    169.0000,00%
201118909240,001 $                          1.891 $                 1.400.0000,14%
201283897880,003 $                        25.169 $               35.000.0000,07%
2013198748740,024 $                     476.997 $            140.000.0000,34%
2014254539380,133 $                  3.385.374 $         8.000.000.0000,04%
2015459238770,034 $                  1.561.412 $         4.200.000.0000,04%
2016833499480,093 $                  7.751.545 $         6.500.000.0000,12%
20171056405960,878 $                92.752.443 $       14.000.000.0000,66%
2018814749752,399 $             195.458.465 $    225.000.000.0000,09%
20191185431910,742 $                87.959.048 $       66.000.000.0000,13%
20201126831830,727 $                81.920.674 $    157.000.000.0000,05%
20218097430020,718 $          1.677.625.547 $ 1.000.000.000.0000,17%

Also, the trend shows that even though the transaction overhead exploded with increasing market capitalization, the overhead scales gracefully:

Friction or Relative Costs of the Bitcoin Network
Figure: The total costs of maintaining capital expenditures and energy are extremely small when compared to the value of the Bitcoin network.

Conclusion

  • We asked the question whether the capital expenditure and energy overhead to maintain the Bitcoin network are really worth it.
  • We bounded the capex and energy costs using the USD value of the transaction fees paid by the Bitcoin traders.
  • We measured the value of the Bitcoin monetary system as its market capitalization as the capital energy stored by the network.
  • The costs benefit ratio as measured by the costs divided by the market cap is still extremely low — only 0.17% in 2021.
  • We conclude that the Bitcoin network is the most efficient monetary network in the world and the economic benefits compensate for the economic costs.
  • We don’t argue from an ecological point of view which may skew this conclusion.