Debunking the environmental impact of crypto
To say it’s been a rollercoaster ride is an understatement. 🙄
One of the main reasons bitcoin has been getting bad rep is its environmental impact.
But is bitcoin bad for the environment? And is crypto, in general, not climate-friendly?
Read on, as we dive into all things bitcoin, mining, crypto, and dissect how it all affects energy consumption.
1. Bitcoin is the world’s first cryptocurrency, invented in 2009. Its supply is limited to 21 million coins and is portioned by mining. Kind of like gold.
2. Miners can earn bitcoin by solving complex computational problems, which require very powerful computers. The more computing power they have, the higher your chances of mining bitcoins. To sustain those complex computers you need a lot of energy.
3. The most cost-efficient way to do this is to locate energy-intensive computers where electricity is cheap. Currently, that place is China, where 65% of bitcoin mining operations take place. In China, most electricity is obtained by burning coal.
4. Only 39% of the energy used by bitcoin miners globally comes from renewables.
Before jumping into discussion of whether or not bitcoin is bad for the environment, let’s first talk about what bitcoin is and how it’s mined.
Bitcoin, the pioneer of crypto, began its use in 2009, just a year after crypto was invented as such by the anonymous (yet very notorious) Satoshi Nakamoto.
Initially designed as a medium for everyday monetary transactions, bitcoin has had one of the most volatile trading histories among all asset classes.With little more than a 10-year price history, bitcoin remains a financial phenomenon in terms of return.
According to our calculations, if you had invested €10.000 in 2016, for example, bitcoin would have delivered an approximate annual rate of return of 128% and your investment would be worth roughly €620.000,00 today. “Just imagine if you would have invested from the start!” (have probably said a lot of people).
Back in 2008, bitcoin was the world’s first entirely digital currency — and a major technological disruption, as it enabled transactions to work without banks in a so-called decentralized blockchain database. Even though it still has to gain momentum as an actual currency, bitcoin offers various advantages over traditional money market instruments.
As the “asset of the 21st century”, one of the main narratives for bitcoin's extreme price rise is the idea that the cryptocurrency could become a replacement for gold as an internationally recognized store of value. Bitcoin’s supply is limited (in fact, the limit lies at 21 million coins) and is portioned by “mining” (just like gold).
Also just like gold, bitcoin is scarce and durable — but unlike gold, it also is divisible (meaning that you can make purchases with e.g. 0.1 bitcoin), verifiable (meaning it has high security framework), portable (meaning you don’t have to carry it around), and transferable (meaning it’s easy to transfer), which makes bitcoin a more liquid asset than gold. But that’s not it! Its deflationary properties make it also the perfect hedge against inflation. Despite its volatility, bitcoin could serve as a strategic allocation in well-diversified portfolios thanks to its low correlation with all other asset classes.
So far, so good. But let’s get to the juicy part: is bitcoin bad for the environment?
First things first, remember this: as you are reading this article, you are consuming electricity. Electricity is used for every Google search, for every email sent, for every photo saved in the cloud... As digitalization increases, so does power consumption. With the value of bitcoin rising over the past years, so has its hunger for electricity.
In fact, bitcoin requires a tremendous amount of electricity to satisfy the demand! According to this study, the huge server farms behind this cryptocurrency eat up about as much electricity in a year as Argentina, a country with nearly 45 million people! 😱
Let’s have a closer look at facts and figures.
Shockingly, there are only 30 countries in the world which consume more electricity than bitcoin.
Looking at a single bitcoin transaction must strike fear into the hearts of more than just climate activists: one bitcoin transaction consumes the same amount of electricity as one million (!) credit card transactions. The carbon footprint of one single transaction is as enormous as watching 54,000 hours of Internet videos and the resulting electrical waste is the size of two golf balls.
“The carbon footprint of one bitcoin transaction equals to watching 54,000 hours of videos on the Internet.“
Looking at all these numbers, it doesn’t come as a surprise that bitcoin went from the “assets of the 21st century” to the world’s “dirtiest currency”, just because of how much electricity is wasted. Quite recently, Iran even had to ban bitcoin mining, as the country has experienced power shortages and blackouts resulting from illegal bitcoin mining (those operating without a license).
To answer this question, you first need to understand the mining process.
Bitcoin mining is the process by which new bitcoins are entered into circulation and is performed by using very sophisticated computers that solve extremely complex computational math problems or puzzles. The puzzles are so complex, in fact, that they can’t be solved by hand, which is the reason you have to use incredibly powerful computers.
Because bitcoin is an entirely decentralized system, you need a decentralized workforce to keep it running. Miners are this workforce, which help to keep the infrastructure running — and they’re paid for their services in newly minted bitcoins. To mine bitcoin, you need to run a specific software (the bitcoin client). In order to protect the blockchain from manipulation and corruption, all transactions are documented and distributed over the network — this makes the bitcoin payment network trustworthy and secure since miners verify its transaction information.
As you can imagine, this requires 24/7 operations and very powerful, purpose-built computers.
As a miner, you would be incentivized to invest into the newest and most efficient technologies since the more computing power you have, the higher your chances of mining bitcoins. And with the value of bitcoin increasing and the network growing, the computational tasks have become increasingly difficult, requiring even better technology — and even more electrical power.
From a purely economic point of view, the most cost-efficient thing to do is to locate these computers somewhere where electricity is cheap. It thus comes to no surprise that around 65% of bitcoins mining operations take place in China where electricity is subsidized by the government — and where most of it is obtained by burning coal.
And according to the Global Cryptoasset Benchmarks Study by the University of Cambridge, only 39% of the energy used by bitcoin miners come from renewables.
Here’s how the share of cryptominers (so, not only bitcoin) that use each energy type vary across four global regions:
As the bitcoin network is constantly growing, so is the consumption of electricity generated from fossil fuels. Without stricter regulations, this could undermine all other global sustainability efforts one day.
Another problem arising is that many countries with unstable power grids can't handle the increased demand from bitcoin — just as we saw in the case of Iran.
As always, things are not only black and white and it’s worth reading between the lines.
There are several other cryptocurrencies — Ethereum, Cardano, and Chia, just to name a few — and, of course, they all need electricity.
As you can see from the graph, bitcoin still steps out of the line. But why? Why is bitcoin’s energy consumption so much higher than Etherum’s, for example?
It’s argued that Etherum is “greener” as its mining processes can be performed on so-called “general-purpose graphics processing units” (GPUs) that you can find in almost every computer. Bitcoin, on the contrary, requires specialised computers, which produce more e-waste and become valueless once they are not used any more.
Yet, the major environmental issue lies in the mining itself.
Currently, both cryptos rely on a so-called “proof of work” algorithm which is known to be highly energy intensive. Ethereum actually plans to change its “proof of work” algorithm to a more electricity efficient “proof of stake” algorithm. In this way, they would minimize electricity consumption since there will be less demand for high computing power.
What is Proof of Work (PoW)?
Since Bitcoin is both decentralized and based on a peer-to-peer network, it requires some form of validation and security. Proof of work (PoW) is a method which is so resource-intensive that it prevents frivolous or malicious uses of the network from happening. Essentially, PoW describes a decentralized mechanism which requires bitcoin miners/computers to continuously solve computational problems. Here, miners compete with each other to see who can solve the problem the fastest in return for a reward. In that way, hackers are prevented from entering the system and transactions can be processed in a secure manner. On the downside, this process requires a tremendous amount of energy which increases as more miners join the network. In comparison, proof-of-stake (PoS) doesn’t require the continuous mining operations, making it less energy-intensive. Here, validators are randomly selected to generate the respective block. With PoS, miners generate or validate blocks based on the amount of coins they hold. Removing the element of competition saves a lot of energy, as the PoS system is working on one problem at a time instead of having several PoW systems working to solve one same problem.
However, there are also cryptocurrencies that don’t rely on the energy-exhaustive proof-of-work algorithm. Chia, now often claimed as the “eco-friendly bitcoin alternative”, marks an example for this as they do not rely on computing power but on storage space for their “farming” operations, thus being more power-savvy. Yet, one could also argue that Chia is equally environmentally bad for running lots of hard drives, whose life expectancy decreases significantly with use creating a lot of waste. Other proof of stake projects (e.g. Cardano (ADA), another crypto that is now 5th in crypto rankings with over $60bn market cap) are much better than Chia, and Ethereum is also moving in that direction with the upcoming changes for ETFH 2.0.
Bitcoin’s major environmental issues that yet need to be addressed are the need for ever more efficient technology and the resulting electricity usage, and the amount of non-recyclable e-waste. Unsurprisingly, this imposes a great burden on the Paris Agreement and the world’s goal to limit global warming to 1.5°C.
There are already a number of small-scale bitcoin mines that are more sustainable, in a sense that they are mostly relying on renewable energy (e.g. from hydropower). Whilst small-scale, this is already a good starting point.
Despite some green efforts, there is still a long way ahead.
Bitcoin is clearly not a climate hero. Its annual carbon footprint exceeds that of some countries and this fact cannot simply be ignored by those investors who care about sustainability.
What is important to note, however, is that the problem lies a bit deeper than simply saying that bitcoin is bad for the environment. The real problem is that in many countries where mining operations take place, unsustainable energy sources still make up the majority. If countries at a whole do not shift to entirely renewable energy, how can we then blame bitcoin for using the energy sources which are available in the country?
In the end, the best way to make crypto currencies eco-friendly is to incentivize green energy for future blockchains and to encourage mining in regions that already have underutilized energy sources.