Sustainability

Climate & Cryptocurrency: Can there be resolve?

An Explosion in Popularity and Energy Demand

Whether it’s been the uncertainty surrounding traditional stock investments, challenges faced by national authorities in the wake of the pandemic, public endorsement by celebrities and financial institutions, or the more primal lure of making a small fortune overnight, interest in cryptocurrency has skyrocketed since the beginning of the year and sees its adoption inch further into the mainstream. 

The original and most well-known cryptocurrency, Bitcoin, saw a 200% increase in value over the first three months of this year, with one coin now setting you back a staggering €41,000. Similar stories can be said for other “alt-coins”, or digital tokens, as they can also be called. With surging prices come further investors, drawn in by the climbing figures, who are eager to capitalise on the movement. 

As Bitcoin and its ilk continue to grow in popularity, a darker side to the crypto world is being given greater attention. The first thoughts on digital currency, having done away with paper money and physical banks, is not normally on its resource usage. Much like sending emails or searching the web, the resource-hungry data centres powering these services are often tucked away and dissociated from the service itself. Unlike emails or searching the web however, which are resource hungry due to the sheer scale of the operation, what makes Bitcoin’s energy usage truly astronomical is due to the “new” technologies employed to allow it to function without a central authority. 

Keeping in mind that Bitcoin is currently only used by approximately 100 million individuals worldwide, it is currently estimated it consumes 131 terawatt-hours (TWh) of electricity to operate annually. For perspective, that’s slightly more than the whole of Ukraine (128.8 TWh), and 18% higher than the annual consumption of The Netherlands (110.6 TWh). 

This figure appears incredibly high, particularly when considering how many transactions are currently made with the coin. It does not paint an appealing image then to consider what that value may become as crypto transactions veer closer to becoming the norm. However, the environmental impact of cryptocurrency is less clear cut. Whilst high energy usage raises alarms of a high carbon footprint, it’s important to consider the kind of energy it uses, as well as what we may be gaining through its use. 

This post looks to provide an introduction into cryptocurrency – namely, what’s the reason for it and why it uses the same amount of energy as a country – as well as to discuss how that energy usage translates to environmental impact. 

What is Bitcoin and why was it made?

Starting back in July 2010, (with an initial price of €0.067!), the story of Bitcoin is very much that of an underdog, challenging the goliath that is the global banking and monetary industry. At its core, the objective of Bitcoin, as with other coins, is decentralisation – it’s about removing dependency on our financial institutions and national authorities. 

Whilst it’s not so apparent, or necessary, for those of us who can rely on our euro being worth the same tomorrow as it is today, other national currencies are far less reliable. Google Trends shows that the most popular place for new Bitcoin searches this year was Nigeria, where the Naira is at a four-year low after suffering three successive devaluations by the central bank in the last year – leaving its holders roughly 20% less well off. Cryptocurrencies provide a potential way out, a chance to escape national economic fallouts, and hopefully protect your hard-earned cash.

Secondly, cryptocurrencies also circumvent many of the snags of traditional banking, such as slow transfers between banks, expensive fees for currency conversations, or more fees sending money across a border. Crypto does away with all of that. Decentralisation entails being borderless, meaning it doesn’t matter where you are, you can access your funds and make your transactions at the same speed and cost as anywhere else. 

Why does it use so much energy?

The energy demands for Bitcoin, and its like, arise from its need for security whilst having no singular “controller”. In the absence of a centralised Bank or authority, cryptocurrencies need a safeguard to ensure that transactions are carried out correctly and that no-one tampers with funds – such as by spending more coins than they have or altering transaction information. This is the reason for the use of blockchain. A blockchain is a ledger of every transaction made with the digital token. In the Bitcoin “chain”, a new “block” is added every ten minutes or so, which contains all the new Bitcoin transactions that have been made – much like adding a new folder in your filing system. Shortly after, this block is locked in, it can’t be altered at all, and just becomes part of the chain. So, in theory, if you were able to edit the block before it is added, then you could rewrite what transactions were made, etc.

To prevent this, the blockchain system underlying Bitcoin runs on a mechanism called ‘Proof-of-work.’ Without complicating it, the mechanism is a reward system. Individuals “work” by contributing computing power to authenticate the ledger, and more importantly, to try and solve a puzzle. Roughly every ten minutes a new puzzle is set. The puzzle is more a guess-the-number game, though a very large number. The individual who solves the puzzle is rewarded with (currently) 5 “newly minted” Bitcoin, worth around €200k at the time of writing, and additionally, must add the next block to the chain. The individual is coaxed into honesty by the fact that the prize Bitcoin will be removed if the block’s contents prove to be inauthentic. Add that to the difficulty of solving the puzzle in the first place and you have a system that makes compliance the profitable option.

The puzzle is the energy black hole. With the size of the prize up for grabs, Bitcoin mining, as it’s called, has become quite a profitable enterprise. It has driven interested entrepreneurs to invest in more computing power to be in with a better chance of being the first to crack the puzzle. This is what leads to the racks on racks of graphics processing units (GPUs) stacked in warehouses that you may have seen in the news.

You may expect in this instance that the puzzle is cracked faster and faster as the tech power put towards it increases, which would mean more prizes given out. If this was the case, Bitcoin would face a devaluation as new coin numbers would grow uncontrollably. To manage this, the puzzle adapts to the speed in which it is being cracked by increasing or decreasing its difficulty in order to maintain an average time of 10 minutes per block.

It creates an infinite loop as entrepreneurs continue to increase their computing power to get a better chance of cracking the puzzle, with the puzzle responding by increasing how difficult it is to crack. All of which results in an incredible expenditure of electricity which will continue to grow until a plateau is reached where energy costs outweigh potential profit. 

Bitcoin mining as it currently stands does have a limit. In order to protect the token’s value, the number of Bitcoin that can be created is capped within its source code to 21 million. As it stands, now around 11 years since the first, over 80% of the coins have already been mined. The last coins are not predicted though until 2140, due to a fact that the reward for cracking the puzzle is halved every four years. At the end, when all coins are made, bitcoin miners (perhaps called something else at this point) will be kept incentivised to continue working on the blockchain with the reward collected from the transfer fees which are attached to making purchases or transfers with the token. 

Considering the environmental impact

How does Bitcoin’s annual 131 TWh energy consumption translate into environmental impact? The flexibility of Bitcoin’s energy demands plays an important role in how to approach this question. Unlike more traditional industries, where the determining factor for location of business is access to customers or availability of primary materials or labour, the driving force for Bitcoin mining is the price of energy. Coupled with the fact that a decentralised network can be operated from almost anywhere, it means that low energy price areas will naturally attract crypto-mining operations. 

The majority of Bitcoin mining currently takes place in China, which has some of the world’s lowest energy costs, but also where over 2/3 of energy is produced from burning coal. This statement can however be misleading. Almost half of all Bitcoin mining is carried out in Sichuan, China, where due to the vast availability of very cheap hydroelectricity, 95% of all operations there use renewable sources. Large crypto-mining operators can also be found in Iceland and Norway where remote, yet cheap hydroelectric and geothermal energy, has attracted new facilities. Globally, it’s currently estimated that 74% of Bitcoin energy usage comes from renewable sources.

These renewable sources may frequently appear as the cheapest option for new operations as their often remote location makes them unfeasible for other uses, meaning less price competition. Cryptocurrencies then have a special quality – they can often seek out energy sources that cannot be so easily reached by traditional industries.

That being said, it still means over 33 TWh of energy used per year comes from non-renewable sources. For perspective, that’s not too far short of the 40 TWh used by Hungary each year. It is also unclear how this number will increase with the growing popularity of cryptocurrencies. An optimistic account could see that the estimated total of 4164 TWh of hydropower currently produced globally per year demonstrates that there is the capability to sustain the system wholly on renewable energy and that further adoption of cryptocurrencies may turn remote hydropower stations, along with other renewable sources, into more viable investments. A more pessimistic approach would say that the use of non-renewable energy sources will remain profitable for the foreseeable future, which cements cryptocurrency’s heavy carbon footprint. 

Does it need to be so high?

Cryptocurrency presents an environmental dilemma. There is no doubt that it has the potential to revolutionise the way we keep and use our financial assets. Much like plane travel, it brings everything closer, transcends borders, and makes the world more accessible. Equally like plane travel, however, there’s a significant environmental price to be paid. 

Before committing to an environmental trade-off, it must be asked – is this the only way? Can we achieve the same result, that is a decentralising banking system, whilst avoiding the immense energy usage? 

There have been significant developments since Bitcoin’s conception, and a new wave of cryptocurrencies have been introduced that perhaps may hold a solution. The majority of cryptocurrencies work on the energy-intensive proof-of-work system developed for Bitcoin, though there are a growing number that employ an alternative honesty system, termed ‘proof-of-stake’. This system does away with the puzzle and rather requires individuals to “stake”, that is risk, their own assets in order to contribute to the blockchain. Again, the individual is rewarded by contributing to the chain, and the more they have staked, the more they can contribute. Any undue interference in the chain results in the individual losing their reward, along with their staked assets. In comparison, current proof-of-stake cryptocurrencies require no more energy to operate than what’s provided by a wind turbine or two.

Concluding remarks

Bitcoin was ground-breaking at its inception and continues to surprise the traditional establishment with its increasing adoption. What has long been an obscure preoccupation for technology enthusiasts and professional investors is starting to trickle into the mainstream. Waves of activity can already be seen in countries where national currencies are struggling, and for many people, cryptocurrencies may already be the standard for transferring money between family and friends, or even paying for certain goods. There is definitely a place for crypto in the future. It’s about doing away with our current financial borders, providing security for those who cannot rely on national authorities, and allowing more people to participate in the globalised world.

There is however the environmental cost. As Bitcoin and the like continue their transition from hypothetical experiment to mass adoption, the growing concern is on long-term sustainability. Can we, or the planet, manage the soaring energy demands of cryptocurrencies like Bitcoin? The answer is not so clear-cut. There is potential for cryptocurrency to stimulate innovation and investment into renewable-energy production – making use of crypto’s special ability to easily move its operations to potentially remote locations. On the other hand, crypto mining will always be drawn to wherever energy is cheap, which for the considerable future will no doubt include a vast amount of energy produced through coal and fossil fuels. A potential solution comes in the form of new cryptocurrencies utilising the proof-of-stake model as a way to significantly reduce energy consumption. Their success though will largely be determined by public uptake. Bitcoin’s current momentum appears hard to slow, but as the initial heat dies down, the public will have a choice where to keep their assets – let us hope that choice is green. 

George is a graduate of the LL.M in European and International Law at the University of Amsterdam and a European Studies alumnus. He has a keen interest in EU Policy and Regulation, particularly in Competition, Sustainability, Risk Regulation, and Foreign Affairs.

Image: Shutterstock

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