Cryptocurrency demand has skyrocketed in the last decade, unlike few other trade commodities. Today, the total crypto market cap has surpassed $3 trillion, and the price of Bitcoin in early 2022 will be nearly double what it was a year ago. The price increase for these online currencies has prompted hysterical demand, encouraging millions of people to try their hand at the crypto pie – without understanding or taking into account the collateral environmental impact. Many social and environmental activists have stated that cryptocurrency is environmentally harmful and has a high carbon footprint.
WHY IS CRYPTO BAD FOR THE ENVIRONMENT?
The main environmental impact of cryptocurrency stems from the energy-intensive activities required for each transaction and for “mining” new coins. The amount of energy required varies between crypto; some require very little energy (as we’ll see later), while others, such as the most popular – Bitcoin – require a lot. Each Bitcoin transaction is estimated to consume around 2100 kilowatt hours (kWh), which is roughly what an average US household consumes in 75 days. When this energy comes from nonrenewable sources, cryptocurrencies like Bitcoin can generate massive amounts of greenhouse gas emissions. Bitcoin’s annual carbon footprint is comparable to the release of 97.2 megatonnes of CO2 – roughly the annual emissions of Argentina as a whole.
WHAT IS BITCOIN MINING?
In a nutshell, bitcoin mining is the process of generating, or “winning,” new bitcoins by solving increasingly difficult mathematical puzzles – a process known as proof-of-work (PoW). While these puzzles could be solved with standard computers (CPUs) in the beginning, Bitcoin’s creator, Satoshi Nakamoto, designed a system in which the mathematical puzzles would become more difficult to solve as competition for bitcoin mining increased. As a result, as the price of Bitcoin – and the potential profit from mining them – has skyrocketed over the last decade, better technology has become essential for solving these puzzles.
WHAT’S THE ENVIRONMENTAL IMPACT OF BITCOIN MINING?
Higher processing power increases the likelihood of guessing the PoW solution, incentivizing miners to form mining pools or establish mining farm facilities. A mining pool is a collection of miners who, each with their own power-intensive equipment, attempt to solve the puzzle at the same time and then split the profits based on how much “effort,” or computing power, each miner contributed.
A mining farm, on the other hand, is a data center that houses hundreds, if not thousands, of ASIC servers that continuously mine for Bitcoins. While the consolidation of these servers into a single location encourages energy consumption reduction, and the specialized ASIC hardware was designed to use energy more efficiently, these mining farms still require large amounts of energy.
HOW TO REDUCE THE ENVIRONMENTAL IMPACT OF BITCOIN MINING?
Bitcoin miners do not all have the same environmental impact. Renewable energy sources and location climate are two factors that can contribute to greener cryptocurrency mining. BTC farms in countries that rely heavily on fossil fuels have a greater environmental impact than those in countries that diversify their energy sources by using hydropower, wind power, solar power, or nuclear power. Until recently, a large proportion of Bitcoin farms were located in China’s coal-burning regions, a relatively cheap energy source that encouraged profitability but also increased carbon dioxide emissions.
The Chinese government cracked down on BTC mining in 2021, causing a mass exodus of bitcoin miners to other countries with cheap energy sources. Farms in places that use green energy sources, such as those in Scandinavia that use hydropower, have significantly lower, or even neutral, carbon footprints.
However, limitations in renewable energy availability, which can be affected by seasonality or production constraints, can deter miners from opting for more reliable fossil fuel-based energy. Similarly, the climate surrounding these data centers can have an impact on bitcoin(BTC) mining’s carbon footprint, as those in colder environments rely less on artificial cooling systems to keep ASIC servers from overheating, resulting in lower total energy consumption.
HOW DOES CRYPTOCURRENCY’S ENVIRONMENTAL IMPACT COMPARE TO THE BANKING SYSTEM’S?
In response to climate activists, BTC supporters point out that Bitcoin has a much lower environmental impact than the financial and banking sectors. According to one report, Bitcoin consumes less than half the energy of the entire banking system, with the largest energy consumption coming from its large data centers.
While cryptocurrency’s energy consumption pales in comparison to the financial system, it is essential to note that, because cryptocurrency has yet to replace traditional banking or financial systems, the energy used by crypto does not replace, but rather adds to, the banking system’s energy consumption.
ARE THERE ENVIRONMENTALLY FRIENDLY CRYPTOCURRENCIES?
Bitcoin is harmful to the environment because of the energy-intensive proof-of-work process, which necessitates massive amounts of electricity to continuously power millions of servers. However, other cryptocurrencies, such as Cardano, Nano, and Chia, are not based on the same mining process as Bitcoin.
In response to activist criticism, Ethereum, the second largest cryptocurrency, has hinted at switching from a proof-of-work (PoW) system to a proof-of-stake (PoS) system, which randomly selects one person at a time to solve the block, reducing energy consumption by 99%.
THE SOCIAL COST OF CRYPTOCURRENCY MINING
Apart from contributing to environmental degradation and the acceleration of global warming toward the dangerous 1.5-degree level, cryptocurrencies have also had other social consequences. Crypto mining has been linked to the jeopardization of fragile energy grids in countries with inadequate infrastructure to handle the power-consuming activity. Several cities in Iran, Kazakhstan, China, and Kosovo have experienced blackouts as a result of Bitcoin mining activities, leaving thousands of people without power and heat for days at a time.
SHOULD CRYPTO MINING BE REGULATED?
Several countries have already moved to outright ban cryptocurrencies in response to the threats to energy supplies, increasing frequency of blackouts, and environmental damage caused by crypto mining. Several countries, including China, Iran, Qatar, Morocco, Algeria, and Egypt, have formally banned cryptocurrencies and mining activities. While some of these countries have ostensibly justified their decision with environmental concerns, others may be motivated by a desire to protect their financial systems, particularly in tight-fisted regimes such as China and Iran.
CRYPTO AS A HUMANITARIAN ASSET
It is also worth noting that cryptocurrencies have the positive effect of assisting those who have been disenfranchised by the global financial system, reducing the accumulation of wealth by the banking system, and acting as a store of value for people in countries experiencing rampant inflation. Many people in Venezuela, Argentina, and Zimbabwe have turned to Bitcoin to protect their monetary assets from the devastating inflation that has reduced their purchasing power and ability to survive their respective countries’ economic crises.