Mar 21, 2021

Bitcoin as Battery

An aluminum smelter in Iceland

An aluminum smelter in Iceland

One of my favorite things about crypto is that, every so often, your conception of what it is changes.

Bitcoin at first was “weird internet money” and then it was “a protocol” and then it was “digital gold”. Ethereum is “ICOs”, or maybe “DeFi”, or maybe “Web3”, or maybe all three, or maybe something else. Crypto wallets are a place to hold money, or maybe they’re also your digital identity. Crypto protocols like Maker, Compound, Helium, Arweave and Uniswap are marketplaces, or maybe APIs, or maybe inverted companies, or maybe ecosystems, or all of the above. The IRS sees crypto as property, the SEC as securities, the CFTC as commodities, FinCEN as currencies. And on and on.

Point is, we are still very early in the process of learning how to think about crypto networks, let alone what we can build with them.

One area where I think we are going to see our conception of Crypto change dramatically over time is its relationship to energy.

The narrative today is, overwhelmingly: crypto mining (specifically: Proof-of-Work mining for Bitcoin and Ethereum) is a dangerously large consumer of energy. Where I expect the narrative to move to over time is: crypto mining is driving the energy transition from fossil fuels to renewables.

To explain why, let’s start with Iceland.

I’ll never forget the first time I visited Iceland in 2012 with Brad and Gudjon. We were passing one of Iceland’s many aluminum smelters and Brad said to me: “You see there? That’s Iceland exporting its electricity”.

An aluminum smelter in Iceland

That was a head-scratcher for me at the time. But what he meant was: Iceland has vast amounts of accessible, inexpensive renewable energy in the form of geothermal. But you can’t build power lines in every direction under the Atlantic. So instead of selling it directly, you convert the electricity into aluminum and you ship that around the world. In other words, you convert stranded renewable energy into value.

In a sense, the aluminum coming from Iceland is like a battery. What is a battery? A way of shifting both the location and the time-of-use of energy. Whereas live electricity (whether produced by coal, gas, wind or solar) must be used right then and there, electricity converted to aluminum can be used anywhere, anytime.

Dams are batteries; gasoline is a battery. And in a way, aluminum is a battery. Of course, while traditional batteries start and end with energy directly, aluminum’s battery is economic, converting energy to value. And that value can be re-used elsewhere (even converted back into energy!)

Which brings us back to crypto mining. Crypto mining converts electricity into value, in the form of crypto assets (BTC, ETH, etc). Those assets, like the aluminum produced in Iceland, can then be moved, transferred and transformed. But unlike aluminum, which must be physically shipped to its final destination, crypto assets are programmable, and can move there instantly via an internet connection.

So, if we think of Bitcoin as a battery, what can we do with it?  The key properties of Bitcoin’s battery are: 1) always on and permissionless (no need to find customers, just plug and go) and 2) naturally seeking low-cost electricity: it will always buy when the price is right.

Given those properties, Bitcoin’s battery can assist renewable builds (and electric grids more generally) in a number of ways:

  • Interconnection queues: when you develop new energy resources, you must apply to get them connected to the grid. Texas alone has over 100 GW of renewables in its queue. These queues can take years to clear. In the meantime, these assets could be online and earning Bitcoin.

  • Project finance: Renewable developers need capital to finance build-outs before they have customers. Bitcoin’s battery is always ready to be the first customer.

  • Geographic issues: Sometimes the sunniest, windiest places are not the ones with the most customers, so it’s hard to justify the development of new renewables. Bitcoin’s battery solves this, becoming a “virtual transmission line” of sorts.

  • Timing & grid balance: Sometimes when the sun shines and when the wind blows is not when we need the most electricity. Yet, electric grids are marketplaces that must stay in perfect balance between supply and demand. Therefore, grid-connected renewables often have to “curtail” (turn off) if the are producing too much energy at the wrong time. Bitcoin’s battery is ready to buy 24/7/365 when the price is right, and turning up and down as needed, and participating via direct power purchase agreements as well as via demand response programs.

  • Underperformance: Related to the timing & balance issues above, often times, renewables produce more energy than is needed on their grid, leading to subpar financial performance. Bitcoin’s battery is ready to buy if no one else will.

  • Cleaning the grid: Even outside of renewable generation, Bitcoin’s battery can help improve both emissions and the energy mix. For example, Crusoe Energy attaches efficient turbines and mining equipment to existing gas flaring sites, both improving emissions and converting energy into Bitcoin’s battery. Taking this a step further, you could even then take those profits and reinvest them in on-grid renewables elsewhere, another twist on the idea of Bitcoin as a “virtual transmission line” (aka battery).

These are just high level ideas. There are many ways they could be implemented (power purchase agreements, feed-in tarrifscontracts for differences, etc) — those details are way above my pay grade.

While I am certainly an optimistic tech VC and not an expert on energy infrastructure, these are not just hand-wavy rosy ideas. Just recently the energy giant Aker announced a major Bitcoin-related initiative, Seetee. The shareholder letter where they lay out the vision is worth a read — it’s broader than the ideas I’m focusing on here, but indeed they describe Bitcoin as an “economic battery”, and intend to use it to solve some of the problems I mention above, among others.

I believe the properties of Bitcoin’s battery are powerful and profound, and will lead to the kinds of solutions I point to here. And as we have learned from our experience with this technology so far, that’s certainly only the beginning of what will be possible.


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