Is Bitcoin bad for the environment?

Discover the climatic and environmental impact of cryptocurrencies.

The 'Musk' impact

After declaring that his company would accept Bitcoins as a means of payment, Elon Musk has raised doubt about the environmental impact of Bitcoin Mining. One of the main reasons bitcoin has been getting a bad rep is its environmental impact.

But is Bitcoin really bad for the environment? And is crypto, in general, not climate-friendly?

Keep reading, as we dive into all things bitcoin, mining, crypto, and see how it all affects energy consumption.

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In a Nutshell:

• Bitcoin was first invented in 2009, and it is the world's first cryptocurrency.
  

• It can be earned with computers by a process called mining, a process that involves the solution of complex algorithms.
  

• The most efficient way to mine Bitcoins is through re-locating these 'factories' in countries where electricity costs little.
  

• 65% of Bitcoin mining operations take place in China, where energy is mostly obtained from coal.
  

• Globally, only 39% of Bitcoin Mining is powered by renewable energies.

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A quick dive into Bitcoin's history

Before jumping into a discussion of whether Bitcoin is harmful or not for the environment, let’s first talk about what it is and how it’s mined.

Bitcoin is considered the pioneer of crypto, and its use has begun in 2009, just a year after crypto was invented as such by the anonymous (yet very notorious) Satoshi Nakamoto.

Initially, it was designed as a medium for everyday economic transactions, but bitcoin is having one of the most volatile trading histories among all asset classes.

With little more than a 10-year price history, bitcoin remains one of the most performing assets in terms of return.

According to the data available, if you, for example, had invested 10.000€ in 2016, Bitcoin would have delivered an approximate annual rate of return of 128%, and your investment would be worth around 620.000,00€ today.

In 2008, Bitcoin was the first entirely digital currency on a global scale — and 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.

It has been recognized “asset of the 21st century”, as one of the main narratives for Bitcoin's extreme price rise is the idea that the cryptocurrency could become a replacement for internationally recognized stores of value, as, for instance, gold. Bitcoin’s supply is limited by the restriction of 21MLN coins and is portioned by “mining”, just like gold.

Also, just like gold, Bitcoin is distinguished for its scarcity and durability — but, unlike gold, it also is divisible in very small pieces, meaning that you can make purchases with, for example, 0.01 bitcoin; it is verifiable since it has high-security frameworks; it is portable, as you don’t have to carry it around; and transferable, which makes bitcoin a more liquid asset than gold. Also, its deflationary properties make it the perfect hedge against inflation. Despite its volatility, bitcoin could serve as a strategic allocation in well-diversified portfolios due to its low correlation with all other asset classes.

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Is Bitcoin bad for the environment?

So far, it seems so good. But let’s get to the key part: is bitcoin bad for the environment?

First of all, take into consideration that even as you are reading this article, you are consuming electricity. Electricity is used for every Google search, email sent, photo saved in the cloud. As digitalization increases, power consumption also does. With the value of Bitcoin rising over the past years, so has its hunger for electricity.

Bitcoin requires a tremendous amount of electricity to satisfy the demand.

According to this study, the Cambridge Bitcoin Electricity Consumption Index, the huge mining farms behind this cryptocurrency consume about as much electricity in a year as Argentina, and its 45 million people.

Source: Cambridge Bitcoin Energy Consumption Index.

A closer look at the facts and the figures:

• In 2017, Bitcoin consumed approximately 6.6 terawatt-hours of electricity annually.

• Until 2020, this has increased tenfold to 67 terawatt-hours a year.

• Until now, Bitcoin's annual electricity consumption has again doubled to 115 terawatt-hours a year.

There are only 30 countries in the world that consume more electricity than Bitcoin, but following this flow, not many will be left.

The horror comes with a single bitcoin transaction: one bitcoin transaction consumes the same amount of electricity as 1MLN 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 h. of videos on the Youtube.“

Looking at all these numbers, it is not surprising that bitcoin went from the “assets of the 21st century” to the world’s “dirtiest currency”, just because of how much electricity is consumed and wasted. Quite recently, Iran even had to ban bitcoin mining, as the country has experienced power shortages and blackouts resulting from illegal bitcoin mining.

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But why does Bitcoin require so much electricity?

To answer this question, we 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, that they can’t even be solved by hand, which is the reason you have to use incredibly powerful computers.

Since Bitcoin is an entirely decentralized currency, you need decentralized workforces to keep it running. The miners are these workforces, which help to keep the infrastructure running — and they’re paid for their services in newly minted bitcoins.

To mine bitcoin, you first need to run the Bitcoin software (the bitcoin client). To protect the blockchain from shady corruption and manipulation, all of the transactions are documented and distributed over the network — which makes the bitcoin payment network trustworthy and secure since miners verify its transaction information.

Source: The Financial Times.

This requires 24/7 operations and very powerful, purpose-built computers.

As a miner, you are incentivized to invest in the newest and most efficient technologies and computer pieces since the more computing power you have, the higher your chances of mining bitcoins are.

And with the value of bitcoin increasing and its network growing, the computational tasks have become increasingly difficult, requiring even better and advanced technology — and even more electricity.

From a purely economic point of view, the most cost-efficient thing to do is to locate these computers in places where electricity is not expensive.

Thus, it comes as 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, one of the worst fossil energies.

Here’s how the share of crypto miners (so, not only bitcoin) that use each energy type varies across four global regions.

Source: Cambridge Bitcoin Energy Consumption Index.

According to the Global Cryptoasset Benchmarks Study by the University of Cambridge, only 39% of the energy used by bitcoin miners comes from renewable energies.

Another issue with crypto mining operations is that the computers used to produce a lot of heat during the process. To solve that, the cooling systems need to regulate the temperature, which consumes a lot of electricity. In countries with rather low average temperatures, e.g. Iceland, bitcoin mining has therefore less environmental impact.

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.

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So are all cryptos bad for the environment?

As always, it’s worth reading between the lines.

There are several other cryptocurrencies — Ethereum, Cardano, and Ripple, just to name a few — and, of course, they all need electricity.

Seeing the graph, it undeniable that Bitcoin’s energy consumption is so much higher than Etherum’s.

It’s argued that Etherum is more sustainable as its mining processes can be performed on “general-purpose graphics processing units” (GPUs) that you can find in almost every computer. Bitcoin, on the contrary, requires specialized sophisticated computers, which produce more electronic waste and become valueless once they are not used anymore.

Yet, the major environmental issue lies in the mining itself.

Both cryptos rely on a so-called “proof of work” algorithm known to be highly energy-intensive. Ethereum is actually planning 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.

Source: Blockgeeks.

There are also cryptocurrencies that don’t rely on the energy-exhaustive proof-of-work algorithm. Chia is often claimed the “eco-friendly bitcoin alternative”, and marks an example for this as they do not rely on computing power but storage space for their “farming” operations, thus being more power-savvy. Yet, 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.

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Can Bitcoin be green(er)?

Bitcoin’s major environmental issues that yet need to be addressed are the need for ever more efficient technology and the resulting electro power 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 several small-sized bitcoin mines that are more sustainable, in the sense that they are mostly relying on renewable energy. Whilst small-scale, this is already a good starting point. Despite some green efforts, there is still a long way to go.

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Conclusion:

So is Bitcoin bad for the environment? Bitcoin is clearly not a climate friend. Its annual carbon footprint exceeds that of some countries and this fact cannot simply be ignored by the 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 as 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 countries? In the end, the best way to make cryptocurrencies eco-friendly is to incentivize green energy for future blockchains and to encourage mining in regions that already have under-utilized energy sources.