Gold vs. Bitcoin: Clarifying the Energy Debate

It’s Saturday, which means nearly everyone is settled in for a relaxing weekend free from the turmoils of crunching numbers. Because Bitcoin is important and everyone uses electricity, here are a bunch of numbers to throw those people off.

I didn’t major in math so here goes nothing. First, here’s a dose of sobering perspective: Back when people talked to each other for entertainment, given the lack of iPhone chargers in the mid-1800s, people would look into the distance and say something to the effect of “There’s gold in them there hills,” and they actually dug gold out of the dirt all day long. That takes a lot of energy, right?

Cut back to today, mining still exists, but in two contexts. The first is actually sifting through the earth looking for the shiny yellow stuff, i.e. gold. The other is Bitcoin mining, which has some skeptics red-faced and sputtering about the amount of electricity it takes to make a blockchain. Those haters should probably calm down.

Here’s why: Bitcoin mining costs $4.3 billion dollars. That’s not exactly chump change, but compared to the $87.3 billion iceberg that sank the Titanic (AKA gold mining), there’s a sizable difference to be considered. Bitcoin and physical gold both have value, but their respective contexts are the decisive factor here. Because Bitcoin is decentralized in its approach and has no structure for measuring power usage, the millions of miners building blockchains don’t care how much power is consumed to do their job.

However, there are two ways in which power can be estimated per Panda Analytics Inc. investor Vladimir Jelisavcic’s calculations.

Number One: The Top-Down Approach

Generally, it takes 10 minutes to confirm the block transaction, and, according to LongHash.com, for every 12.5 BTC mined per newly created block, miners earn $562,500 per megawatt hour (MWh). The price of electricity is subjective, but if one MWh costs $100 and 30 percent of the total earnings is used to buy electricity, the end result is almost 1,700 MWh for powering the Bitcoin chain.

Number Two: Bottoms Up!

When Bitcoin is created, a function called hashing computes the Bitcoin code. The faster the hash rate, the faster new blocks can be discovered and rewards reaped. The software being used affects the rate at which hashing operates. For example, the Antiminer S9 looks like a kooky air conditioner but is capable of performing 14.5 terahashes per second.

That’s 14.5 trillion hashing operations every second. If the total Bitcoin network facilitates 50 billion trillion hashes per second (this sounds made up, I know), at least 3.45 million S9 units are necessary to support the blockchain. We’re left with 7,000 MWh and a total energy cost of 4,344 MWh, or $4.3 billion.

So what the deal with gold? Well, according to the world’s largest gold mining company, Barrick Gold Corporation, energy costs are $288 million per year. Based on the corporation’s annual report, gold production costs $794 per ounce. Last year, the company mined 5.3 million ounces—$4.2 billion worth of the precious metal. Net earnings increased drastically from $-2.9 billion in 2014 to $1.4 billion in 2017.

Global Gold Mining

Gold is mined literally everywhere, save for Antarctica. So if the global average for gold mined every year is 88 million ounces, according to the World Gold Council, it’s fair to say gold production costs $70 billion every year. Newly discovered mines are set for excavation starting in 2021 and expected to be sustained by 2023, meaning millions in additional gold reserves and millions more in production costs.

Barrick employees own 1.5 million shares of the company, so they have a fair interest in the gold hedge. Investing in Bitcoin, however, is too volatile for investors to risk their treasure chests on, so they’re content for the moment to stick to their laurels. In an interview with Forbes, financial author John Wasik advises investing no more than 10 percent of one’s total portfolio until cryptocurrency continues to establish itself as a regulated entity.

There’s no question that Bitcoin mining energy is the lesser of two evils. It’s more a problem of tangibility (and gold is pretty). But as cryptocurrency leaders continue to prove by example, there is a middle ground closing in on Bitcoin investing. The solution presented is regulation in technology that has its eye on the gold.