There’s no doubt that Bitcoin, along with other cryptocurrencies, has ignited public imagination. With its growing acceptance in the mainstream, it certainly seems like Bitcoin is here to stay.
But Bitcoin has its fair share of skeptics. For many critics, the elephant in the room is Bitcoin’s massive environmental impact.
This issue isn’t new but was famously brought into the mainstream conversation by Tesla CEO (and on-again, off-again Bitcoin proponent) Elon Musk in May 2021.
“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel," he tweeted.
He has a point. In a world that’s battling climate change and prioritising sustainability, can there even be a place for Bitcoin?
In this article, we’ll explain the extent and origins of Bitcoin’s sustainability problem and discuss whether this will be a major roadblock for investors.
Is Bitcoin really bad for the environment?
As things stand today, Bitcoin’s environmental impact is undoubtedly huge. Sustainability research website Digiconomist has some sobering statistics:
Bitcoin mining generates 69.63 megatons of carbon dioxide annually, equivalent to Greece’s national emissions in a year
Each Bitcoin transaction consumes 1700.46 kWh, equivalent to the average US household’s energy consumption for almost two months
The carbon footprint per Bitcoin transaction is equivalent to over 1 million Visa transactions
It’s worth noting that the bulk of Bitcoin’s energy consumption is from mining — not from transactions as the language implies.
One reason why emissions are so high is because a lot of Bitcoin mining is powered by fossil fuels rather than clean energy sources. This comes down to where it is mined.
Historically, much of the world’s Bitcoin has been mined in places with coal-based power, such as China (which has banned crypto mining since June 2021). Coal is, as Musk pointed out in his tweet, one of the worst offenders when it comes to carbon emissions.
If we could somehow relocate Bitcoin mining to places with renewable energy sources (like solar, wind or hydroelectric energy), carbon emissions would fall even as Bitcoin’s energy consumption metrics remain high.
Why does Bitcoin mining consume so much energy?
To understand why Bitcoin mining is so energy-intensive, we need to understand its Proof of Work (PoW) validation method.
In PoW, Bitcoin transactions are represented as mathematical (cryptographic) puzzles. Each puzzle is released on the blockchain network and Bitcoin miners compete to solve it as quickly as possible.
The winner is then rewarded with a small amount of “fresh” Bitcoin, and the transactions (which have now been cryptographically verified) are added to the blockchain ledger.
However, the more Bitcoins get mined, the harder it becomes to mine “fresh” Bitcoins. The pool of possible solutions to the cryptographic puzzles gets narrower and narrower, thus requiring more computational power.
In Bitcoin’s early days, solving these mathematical puzzles was not all that energy intensive. Early users could mine with just their home PCs.
This eventually became impossible. Bitcoin mining required so much computational power that you had to use an advanced mining rig, which was considerably more energy intensive.
Today, it’s gotten to the point where just one mining rig won’t do. Mining Bitcoin efficiently is only possible in mining farms — warehouses containing thousands of energy intensive mining rigs running at the same time.
Are there solutions to Bitcoin’s sustainability problem?
Since most carbon emissions are caused by mining, the best way to make Bitcoin more sustainable is to ensure that mining farms move away from fossil fuels and switch to renewable energy such as solar, wind, hydro, geothermal and so on.
In the past, the majority of the world’s Bitcoin was mined in China, which relies heavily on coal-based energy. But as of July 2021, China has banned crypto mining, forcing miners to relocate their farms to locations with renewable energy. Today, the percentage of mining powered by clean energy is estimated at about 56%, and looks set to improve as the private mining sector and governments continue to work together. .
Unlike other industries, which tend to be bound to geographic locations, cryptocurrency mining is uniquely mobile and can be moved to wherever there is surplus power. Advocates of Bitcoin mining even go as far as to say that their activities could encourage investment in renewable carbon-free energy sources.
This hyper-mobility could even help level the global playing field by giving developing economies a way to tap into surplus resources. For example, Laos recently approved crypto mining using hydropower. Hydropower is an energy source that the nation has in abundance, but has not found a market to export it to — until now.
Apart from relocating mining farms to make use of clean energy, there are other proposed solutions that address Bitcoin’s energy-intensive Proof of Work (PoW) validation method.
One popular alternative to PoW is Proof of Stake (PoS), a validation model that could save as much as 99.95% of energy. Cardano is already PoS-based, while Ethereum is gradually shifting from PoW to PoS. Another option is to use a third party “layer”, such as Lightning Network Layer 2, to verify transactions.
However, Bitcoin fans are reluctant to embrace such wholesale changes to the cryptocurrency’s core features. After all, PoW is the original basis for Bitcoin’s decentralised, yet indisputable, blockchain ledger.
Can the Bitcoin problem solve itself?
Supporters believe that Bitcoin’s sustainability “problem” is not as bad as it used to be, and is in fact showing signs of resolving itself.
Following his original tweet, Elon Musk has formed a Bitcoin Mining Council along with various members of the blockchain community. This largely North American council aims to encourage miners worldwide to adhere to renewable energy usage.
The Bitcoin Mining Council joins other initiatives like the Crypto Climate Accord (the equivalent of the Paris Agreement) in attempting to solve crypto’s environmental issues.
Other supporters look on the positive side of the (Bit)coin, noting that Bitcoin mining can help once-marginalised economies by creating jobs and using excess energy that would otherwise go to waste.
There may be good reason to be skeptical about how much Bitcoin adoption will actually impact the earth. If it’s mining that’s at the heart of emissions, then the situation may very well resolve itself once there is no more Bitcoin left to mine.
Key takeaways for Bitcoin investors
It’s important for long-term investors to understand Bitcoin’s sustainability issues and keep an eye on developments. These impact us on several levels:
● ESG investing: Those who adhere to ESG (environmental, social, and governance) guidelines would need to determine if Bitcoin is aligned with their goals.
● Scalability: Bitcoin’s extreme environmental impact stands in the way of its scalability and potential for widespread acceptance. Unless corrected, Bitcoin will forever remain a gold-like commodity instead of a true currency.
● Regulatory threat: Governments have largely remained silent on this issue, but already there are calls for them to step in to “bury” Bitcoin. If regulators take action, this would no doubt impact the value of Bitcoin.
The world may grapple with its scalability and environmental problems, but it is unlikely that Bitcoin will suffer damage because of these. After all, the mechanics of Bitcoin mining are hardly new.
Given that Bitcoin has survived more than a decade and is growing in both market share and institutional acceptance, we expect that the ever-growing cryptocurrency community will be motivated to find solutions.