Cryptocurrency’s climate crisis — when single currencies use more energy than a country

Please note that this article was authored originally in October 2021 — but did not not end up getting published for its original publication. So, I decided to post it here if anyone is still interested on the topic and would like to test and share their thoughts.

‘Crypto is growing rapidly’.

No. To say that cryptocurrencies are growing rapidly would be a farcical understatement — it was growing quickly four years ago. Cryptocurrencies now have a combined market capitalisation of $2 trillion (USD), being worth almost 20% that of gold. There are more than 100 million estimated crypto users and inventors across the world (Business Insider), with a social media post being made about crypto once every 2 seconds. With that, I’m guessing some of you in the audience might be crypto holders too — welcome.

The application of cryptos are widespread — from facilitating private transactions, to being a financial instrument that hedges against inflation, all the way to being a national currency, when El Salvador made the news this year in September for being the first country to do exactly that. Following the advent of cryptos has been another issue — what are its impacts on the environment? Let’s see what our good friend Elon Musk has to say:

Bitcoin made headlines earlier this year when the Cambridge Bitcoin Electricity Consumption Index found that it consumed more energy than entire countries alone, such as Ireland and Argentina. Along with this comes astronomically high carbon emissions, with Bitcoin mining also generating more carbon emissions than nations such as New Zealand alone. At current prices, Bitcoin is projected to consume more electricity annually than all of the world’s data centres combined. What data scientist Alex de Vries notes is that whilst “data centres serve the most of global civilisation … Bitcoin serves almost no one but still manages to consume about an equal amount of electricity.” Of the 710 billion yearly transactions processed on all financial instruments, Bitcoin transactions make up just over 1/100th of a percent (120 million).

But why are cryptocurrencies so bad for the environment?

For sustainable and impact investors, [bitcoin] is the tobacco of currencies

— Erika Karp, Chief Impact Officer at $27b family office Pathstone

Bitcoin, like most other cryptocurrencies, is energy-intensive by design. Being a ‘decentralised’ currency that does not rely on one central or commercial bank, means that, for its ledgers to function and for users to make transactions, it must be ‘mined’ by millions of computers, all around the world.

Mining, in short, is “creating new blocks for the Bitcoin blockchain … Those transactions will return rewards, paid in Bitcoin” (De Vries, NYT). To make money, miners aim to mine bitcoin at a rate that covers the cost of electricity to power their energy-intensive computers, thus making them a profit. By this very nature, users are incentivised to mine in locations where energy is cheap, using the cheapest medium possible. It comes as no surprise, therefore, that China has the most Bitcoin miners in the world by a mile, and while it has made headlines for its recent shifts towards renewable energy, close to 70 percent (Source: Reuters) of their energy comes from coal (Reuters).

There’s another issue — with higher Bitcoin prices, comes more electricity consumption. Bitcoin mining is, in essence, a game of ‘guessing the number’, with some three million machines guessing the solution to some mathematical inequality 140 quintillion guesses every second (De Vries). The mining algorithm is varied so that on a large scale, to produce a constant number of bitcoins per unit of time are successfully mined (e.g. 1 bitcoin every 10 mins). Through this, we can see how mining for this digital gold can become so energy consuming — when the price of Bitcoin goes up, mining becomes more profitable, leading to the entry of new miners, making the mining process more difficult and thus, energy consuming.

The path forward

We shall examine three primary schools of thought amongst proponents of Bitcoin, but many others exist;

• ‘Take it as given’ — despite the environmental costs, it’s worth it
• ‘Be more optimistic’ — Bitcoin is net positive for the environment
• ‘Look elsewhere’ — Bitcoin isn’t the only cryptocurrency

Take it as a given

We’ll start with the first. Some claim that a hefty environmental footprint is the cost of maintaining a revolutionary currency which serves as a secure, rapid global value transfer and storage system. Tyler Winklevoss, the infamous brother who sued Mark Zuckerberg for stealing his idea and turning it into Facebook, said that “computers and smartphones have much larger carbon footprints than typewriters and telegraphs” and urges society to accept the tradeoffs inherent in Bitcoin usage.

Cryptos can produce net positive benefit for the environment

Taking this a step further is investment management firm, Ark Invest, led by the renowned Cathie Wood and producing 153% returns in 2020. Their analysts firmly stated that they “believe the impact of bitcoin mining could become a net positive for the environment”., They produced producing a data-driven model to show how a fully fledged solar, battery and Bitcoin mining model could actually contribute power to the grid through energy storage in intermittent periods, contrasting contrary to the common belief that bitcoin mining primarily draws upon ‘dirty’ energy.

Look elsewhere

Elon Musk’s tweets have stirred up scrutiny into the computational validity of Bitcoin’s model. Currently, 6826 cryptocurrencies exist worldwide — at the end of 2019 that number was only 2817 (Source: Statista). For example, consider the comparison between Ethereum’s mining model and Bitcoin’s. Bitcoin runs on a Proof of Work mining model, requiring huge amounts of energy as this fundamentally rewards miners who expend the most computational energy in the process. Ethereum, on the other hand, runs off a Proof of Stake model, where ‘winners’ are chosen based on how much they have ‘staked’ — i.e. how much of the coin the miner owns. This method is known to use less electricity than the POW model, driving Ethereum’s market capitalisation,and many ‘alternative’ coins which use POW, such as Cardano, Solana and Polkadot, rapidly closer to significance.

Another angle that blockchains have taken on environmentally sustainable crypto investing is by creating entire ESG investing markets on the blockchain. For example, BitGreen, a “purpose built blockchain for sustainability and impact” (BitGreen LinkedIn) utilises proprietary protocols to challenge Bitcoin’s inefficient mining mechanism, whilst allowing investors to invest their discretionary income into assets that are intended to have a rate of return whilst aligning with their ESG profiles. BitGreen will run on the Polkadot protocol.

‘This is a win-win, right?’ While this might seem to be the case, we shouldn’t get too excited yet, nor should we pour our life savings into these alt-coins that seem to offer the dream, especially when compared to Bitcoin. At its core, Christine Kim, a research analyst at CoinDesk sums the situation up well:

You would never buy a car just because it uses 99% less energy, but the car itself can’t start or make turns

At its core, Bitcoin and the larger ‘small-cap’ coins have value because investors trust them as a storer of value. Regardless of whether if they have a net positive or negative impact on the environment, we should ultimately consider that their function is to serve as a currency — a medium of payment. How environmentally costly they are, despite being important, comes as a secondary consideration to users, investors and developers of any blockchain, and so moving forward, the question is not ‘should we ditch Bitcoin or crypto’, but rather — How can we continue to leverage the benefits of crypto without ruining the world in other areas?

I’d love to hear your thoughts below — otherwise, until next time!

Sepehr