I've recently watched the Bitcoin energy consumption Q&A part by Andreas Antonopoulos (watch here) and wondered what this all is gonna mean for the price of Bitcoin in the long-run.

Before I get to that, it's probably worth stating that I don't necessarily agree with the argumentation also brought up in this article that there has to be a proof-of-work involved to secure a (or THE) blockchain network. It may also be that we haven't found the right solution yet - but we can argue over the different consensus mechanisms in a different post.

So, energy consumption. I think independently of whether Bitcoin will help save energy or helps arbitraging on price or to foster renewables, it can be stated that all in all using a difficult computational problem to confirm transactions is generally wasteful, or to make it sound less negative, inefficient. This also doesn't really depend on the absolute amount of electricity consumed, especially as this amount does not depend on the number of transactions confirmed.

Why does Bitcoin need so much energy?

Without going into detail, this is to make sure nobody can tamper with the transactions on the blockchain. If somebody would really want to try, he or she would have to buy huge amounts of hardware and spent a lot of money on energy. This is how proof-of-work leads to a certain extend of decentralization, both by ownership and by geography.

Do we need more energy if the Bitcoin price goes up?

In general, yes. The amount of computational power that is used to secure the Bitcoin blockchain should be in an equilibrium with the rewards the miners are getting. If the price of Bitcoin is very high, miners get more rewards in form of newly created Bitcoins when mining. However, they also get the fees for the transactions in the newly-found block, so if transaction fees are high, mining also becomes more lucrative.

If we have a look at a recent block, we can see that the reward is currently split around roughly 12.5:5 of block reward vs. transaction fees:

As the block reward is slowly declining through the halving events (next one is in roughly 2.5 years as can be seen here), the importance of the fee share in mining will grow over time, which was also originally intended.

Price - number & price of transactions - mining rewards

How do these three factors interfere with each others? Let's have a look:

Price vs. number & price of transactions

In general, as the maximum number of transactions per block and therefore per time is limited, a bigger number of transactions should generally lead to higher fees per transaction as they compete for being confirmed. This would lead to a smaller fraction of users being willing to transfer Bitcoin at all if the number of users is growing (which is true for now). This means that on average, a smaller fraction of the total amount of availble Bitcoins is being moved, reducing the so-called churn factor of Bitcoin.

If fewer people are hodling Bitcoin instead of moving and spending them, it is likely the price goes up as the supply on the markets is even scarcer than originally.

Price vs. mining rewards

This is a rather obvious one - the higher the price, the higher is the general interest in Bitcoin mining. On the other hand, it is also important for owners of Bitcoin to have a stable network and therefore a lot of mining power.

Number & price of transactions vs. mining rewards

Again, rather obvious, if the number and therefore price for fees increases, it becomes more lucrative to mine.

Conclusion

If we put these mechanisms together, we can probably expect something like the following to happen:

1. Bitcoin price goes up even more
2. More miners will start mining -> more energy consumption
3. Fees will go up due to increased price -> mining will get even more profitable
4. Bitcoin price goes up even more due to reduced churn
5. People start looking for (less wasteful) alternatives as Bitcoin becomes less and less transferable
6. Price goes down a bit, the number of transactions and thus the fees go down
7. Mining becomes less profitable, miners choose alternatives
8. Bitcoin becomes more attractive again due to cheaper transactions and we can basically start at #1 again

So, where will this circle (end therefore the increase of energy consumption) end? Probably when miners stop increasing their capacities because their hardware has generated enough profit or needs to be renewed. This may also mean that other blockchains they can mine with the same hardware will become more attractive even though they aren't used that much.

All in all, it means that the price increase of Bitcoin is also limited by the amount of mining power which is available to secure the network.