22nd Mar 2021

The Environmental Impact of Crypto

Cryptocurrencies have come under scrutiny as of late due to the environmental impact caused by their high energy usage. The main focus of which is bitcoin (BTC) since it is the most valued cryptocurrency today. Indexes such as the Cambridge Bitcoin Electricity Consumption Index (CBECI) are tracking the energy usage of bitcoin mining. The high energy usage involved with bitcoin is not so much in the buying and selling, although there is some energy consumption in those transactions, it is mainly in the mining process. Mining is a complex process that is crucial to the method of verifying transactions to ensure there is no double-spending of the same bitcoin.

Mining involves doing a cryptographic process called proof-of-work which requires miners to estimate a hexadecimal number or hash, that is less than or equal to a given target number. If the miner is the first to find the correct hash, then that miner can be rewarded with bitcoin for their efforts in ensuring that the Bitcoin network is functioning properly. In order for miners to be finding hashes at a high rate, so it can be profitable for them, it requires a lot of computing power and therefore a lot of energy. Miners in a way are minting new bitcoin that will enter wider circulation. The rewards for miners are being halved every 210,000 blocks or approximately every four years to ensure that as more bitcoin enters circulation, the supply is slowly decreasing. Keep in mind that the total number of bitcoin in circulation will be capped at 21 million BTC. 

Over the last ten years, mining has become a popular investment for those who believe in the future of bitcoin and crypto in general. At the start of bitcoin mining in 2009 when there were still 21 million bitcoins left to be mined, the reward for completing a block was 50 BTC. In November of 2020 the fourth halving occurred, which means mining today will result in 6.25 BTC per block completed. As the rewards for mining continue dropping and the value of bitcoin is consistently rising at an accelerated rate, the competition for mining has increased and energy usage is at an all-time high. According to a CNBC article by Ryan Browne and information from the CBECI, bitcoin mining uses about 110.53 TWh of energy, or about the same as the entire country of Chile. So, it is without a doubt that mining as a process uses a lot of energy, but is that really the cause of negative environmental impacts? 

Energy consumption in and of itself is not necessarily a bad thing as it is a vital part of modern life. The environmental impact comes from the type of energy used. If bitcoin mining were to use all renewable energy such as solar power then its environmental impact would not be as severe. Unfortunately, this does not seem to be the case since the majority of the world still uses mainly fossil fuels as energy sources. This means that the added energy usage of crypto mining is currently adding a large amount of extra energy consumption which primarily is fossil fuel dependent. The country with the largest amount of ongoing mining is China, specifically the Sichuan province due to its cheap electricity costs based on coal. China is in the midst of adapting to more renewable energies, but its efforts have been slower than expected and China still relies largely on cheap fossil fuels for its large energy demand. It seems that 21st-century technologies are being powered by energy sources from two centuries ago. 

As energy consumption in the world of crypto increases, it puts more pressure on miners to find alternate sources of energy, in particular clean energy. This is producing advantages for countries like Iceland, which rely on geothermal power, and areas where there is excess solar capacity. As wind, solar and geothermal technologies become more widely available and less expensive, they can work hand-in-hand with bitcoin to scale clean energy use. Over time, Bitcoin and its cousins could become a driver of the transition to clean energy across wider swaths of the economy through traditional market mechansims based on demand for lower priced or free energy. For instance, solar power in some markets can be generated and sold at under 3 cents pkwh, making it far more productive to use solar energy to mine bitcoin than coal, gas or oil.

On the other hand, there are digital currencies like Ven which determine value is in part from holding reserves of carbon futures and other natural assets. This incentives a decrease in global carbon emissions while maintaining stability in its pricing. The more Ven in circulation, the more carbon held in reserve, resulting in less carbon futures available in the markets. This could potentially be a template for some other cryptocurrencies to follow suit in order to expand the positive effect of cryptocurrencies on the environment. 

The issue of cryptocurrency carbon footprints might not be the cryptocurrencies or the mining itself, but simply the outdated energy sources and infrastructure that are being to power the systems. Wider adoption creates incentives for cleaner energy sources, which can benefit the clean energy transition at large.