“The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.” — Adam Smith, Wealth of Nations

Money and energy have a lot in common. Fundamentally, they are the only two things that can do work according to the Newtonian-physics definition. For this reason, money is virtual energy. Compared with “real energy” such as electrical, gravitational, spring, and nuclear energy, virtual energy (money) is, in many ways superior:

Virtual energy is easy to store. It can be put it in a safe, a bank account, or on app on your phone. Electrical energy is hard to store because it requires a battery, which themselves require energy to build. Same with hydro energy, which requires water dams to store. Although some forms of virtual energy weaken over time, like the Venezuelan Bolivar, and to a lesser extent the US dollar, others, like gold and bitcoin, gain energy over time. Easy storage makes converting real energy into virtual energy an attractive proposition.

2. Virtual energy is easy to move. Electrical energy requires transformers, towers, power lines, and maintenance of all that infrastructure. Gold is super heavy and subject to theft. Dollars and Euros are subject to theft and have their value diminishes outside their home jurisdiction. Bitcoin can be moved anywhere in ten minutes for almost nothing.

Bitcoin has entangled the relationship between real and virtual energy more than ever, because new bitcoin are generated from one, and only one, input: real energy.

The fact that new bitcoin be exchanged on the free market for a greater amount of energy than was required in their creation, seems like a violation of the law of conservation of energy. However, the absurdity dissolves when it’s recognized that solar, nuclear, and fossil fuel energy are less scarce. They are continually produced and non-finite, whereas bitcoin is finite at 21 million. Supply and demand inflates the price of virtual energy over and above the value of the real energy required to create it.

Implications

Bitcoin aren’t mined unless the returned value is greater than the input value. This has been true everyday since a market price for bitcoin first emerged in 2010.

Since bitcoin mining has occurred round-the-clock since 2009, the value of all bitcoin in circulation (aka market cap) in terms of kWh those bitcoins can buy, should be greater than the total energy eaten by bitcoin (TEEBB.) Below, I evaluate the market cap-to-TEEBB ratio and graph it over time in order to gain new insights into the historical, current, and future values of bitcoin.

Estimates

I estimated the efficiency of mining chips on a year by year basis as per chip-maker spec’s: 2009 0.1 MH/J (CPU’s), 2010 1 MH/J (GPU’s), 2011 10 MH/J, 2012 150 MH/J (ASIC’s), 2013 1500 MH/J, 2014 3000 MH/J, 2015 6000 MH/J, 2016 9000 MH/J

Raw Info

I downloaded the historical daily hash rates and market caps from blockchain.info and put them in a spreadsheet. I was then able to calculate energy eaten each day and market cap (in kWh) each day.

Results

Since both TEEBB and Market Cap are in the same unit (kWh), they can be divided to obtain a ratio.

Conclusions

I’m surprised the graph dips below one. Currently the ratio is near 0.6. Honestly I’m still trying to wrap my head around what this data really means. Here are a few possible explanations:

I over-estimated the TEEBB by under-estimating the efficiency of miners.

I under-estimated the market cap by using $0.10/kWh, which is the US average, but energy only costs $0.02/kWh in parts of Washington, for example.

Miners are generating bitcoin worth less than the electricity consumed because they value the storage and transport aspects and/or the price of bitcoin in certain countries is high due to laws and regulations.

While the price of bitcoin is undoubtedly a function of psychology, I believe it is also a function of TEEBB. I believe that in the long term, the market-cap to TEEBB ratio will plateau at some number greater than 1.

Thanks for reading. I want to hear your feedback. I made a video about this topic, which goes into a bitcoin more detail. I also have a podcast.