Bitcoin, Ethereum, Litecoin, Dogecoin—these represent only a few major cryptocurrencies trading 24 hours a day across the globe. Crypto’s sizable volatility attracts all kinds of investors, although recently, a newer generation of financial neophytes consisting primarily of college-aged students have found leisure in gamifying the exchange of major cryptocurrencies. Many questions still remain about the legitimacy of the decentralized exchange of virtual currency, but one thing is certain: its demand is ever increasing.
What are the consequences of this increasing demand? Foreseeably, the unprecedented rise in exchange rates for Bitcoin, Ethereum, and other major cryptocurrencies has triggered an expansion in the industry supplying the digital assets: cryptocurrency miners. “Mining” is a rather new phenomenon, though. What does the vast employment of energy-intensive technological resources mean for a world already plagued with the consequences of climate change? Is this financial fad here to stay, and if so, how can we mitigate its carbon footprint?
Unsurprisingly, there is quite a bit of nuance. Before diving into how cryptocurrency mining impacts the environment, however, a little more on the origins of digital currency. The advent of blockchain technology came in early 2009 when a creator or group of creators under the pseudonym “Satoshi Nakamoto” mined the first block of Bitcoin (BTC). Despite slow growth in the following years, BTC hit its first major milestone in 2011, peaking at around $32.
Fast forward to 2021, and interest in Bitcoin and other cryptocurrencies has caused their price to soar. With demand at an all time high, a new wave of businesses and opportunistic individuals have invested thousands of dollars into ensuring the supply of digital currency will continue to increase well into the 2020s. Cryptocurrency mining, in simplest terms, involves the verification of transactions between users in a blockchain network. Verifying transactions between users in a universal ledger helps establish the legitimacy of a cryptocurrency within financial markets. As a reward, miners are granted some amount of that currency from the network. The new cryptocurrency that miners receive represents an addition to the existing supply, and miners are free to exchange their earned assets for U.S. dollars or other fiat currencies. “Mining” a cryptocurrency therefore refers to the reward received for properly authorizing and organizing transactions with the aid of a computer.
In the year following the authorization of the genesis (first) block in the Bitcoin ledger, technological prophets could theoretically mine several Bitcoins a day in the background of their PC. The computational power and energy input required to authorize transactions in 2010 was relatively low, so hardly anyone envisioned drastic long-term environmental consequences. Now, almost 11 years later, the story is completely different. Mining rigs consist of hundreds of processors sorting through unimaginable amounts of data. The reason for this is that as more pioneers join the mining race, the network makes the process of organizing transactions in the ledger more difficult, creating a need for more powerful computers. Some estimate that in 2019 alone, the Bitcoin network was responsible for consuming around 87.1 terawatt-hours (TWh) of electricity, roughly the same as the annual electrical consumption of the entire country of Belgium. That is not to mention the impact of the ~8,000 other cryptocurrencies including Ethereum (ETH), Ripple (XRP), and Dogecoin (DOGE). This has led many to believe that mining cryptocurrencies demands a comparable amount of energy to mining precious metals.
These networks rely on electricity, though, so that has to limit greenhouse gas emissions, right? Unfortunately, not quite. A Cambridge study determined that well over 50% of Bitcoin mining is done in China and found that the cryptocurrency centers relied primarily on coal as a fuel for their electricity. Although those numbers are slightly outdated, other estimates still place Bitcoin’s total carbon dioxide emissions at around 60 million Metric Tons of CO2 Equivalent (MTCO2e), which would be third in the USA only behind Exxonmobil and the United States Federal Government. This news is rather disheartening, especially amidst warnings from climate scientists of the quickly approaching +2° C. threshold. The world is in a state of climate crisis and the carbon footprint created by miners is only intensifying with each successive year.
To make matters worse, cryptocurrency mining leads to a tremendous build-up of environmental waste as old mining technologies become obsolete. Researchers predict that given the current supply of Bitcoin mining technologies, the amount of electronic waste as a result of BTC is likely to be similar to that of the small European nation of Luxembourg (Population approx. 600,000). Even Elon Musk, the eccentric billionaire and public cryptocurrency enthusiast, has decided that his automotive giant, Tesla, will no longer accept Bitcoin as a form of payment due to “environmental concerns.”
It is also important to consider the fact that traditional fiat currencies have environmental consequences. While there is not a lot of recent data on the United States Mint’s carbon footprint, a sustainability report from 2011 reveals the government agency releases around 26,437 MTCO2e printing money annually. Even if every recognized nation in the world emitted a comparable amount of carbon producing money every year, their total emissions would only be around 8.8% of Bitcoin’s total worldwide emissions. The current system is by no means perfect, but it does a substantially better job at minimizing its carbon footprint than cryptocurrencies do.
The future is not entirely grim, however. Some businesses such as the Swedish mining firm KnCMiner have made the decision to place their computers in the Arctic Circle to help maximize the use of sustainable energy sources like hydroelectric power. KnCMiner unfortunately went bankrupt back in 2016, although many other mining companies across the globe have followed their lead such as Genesis Mining, an Icelandic company that relies on 100% renewable energy sources.
That’s not all, either. Bitcoin, relative to other cryptocurrencies, uses substantially more energy as a result of an inefficiency embedded in the BTC network’s source code. Bitcoin mining relies on a concept known as “proof-of-work,” which essentially requires all miners to pursue the same block until one miner correctly solves the mathematical “puzzle.” Such a process is rather imprudent: all of the electricity used by miners who are not the first to organize the series of transactions in the decentralized ledger goes to waste. Minimizing electricity usage may mean transitioning away from proof-of-work mechanisms, something that many newer cryptos have already begun to do.
What does that look like? The leading alternative to a proof-of-work blockchain ledger is one that relies on proof-of-stake mechanisms to verify transactions. These cryptocurrencies are much more carbon-efficient than their proof-of-work counterparts, giving eco-friendly alternatives to the growing movement of individuals that have begun to evaluate assets using ESG criteria. ETH 2.0, a redesigned Ethereum network that is slated to become fully operational at some point in 2022, will rely solely on proof-of-stake mechanisms. Other projects like Cosmos (ATOM) and Polkadot (DOT) represent smaller attempts by entrepreneurs and investors to move away from proof-of-work mechanisms and have already launched. While these cryptos do not currently have the clout of Bitcoin, it is very possible that, within the next decade, their popularity will soar as carbon conscious investors begin to self-sort.
Will governments some day play a role in environmental mining regulation? Is it too late to prevent the deleterious impacts of cryptocurrency mining? It is hard to tell. Despite warnings from climate scientists that China’s emissions from BTC alone could hit 130 million MTCO2e by 2024, the latest actions by the SEC suggest that government officials first plan to take policy action addressing some of the financial consequences of cryptocurrencies. The next 10 years could bring all sorts of new regulation to the crypto sphere, though; provided the emerging global environmental consciousness, nothing is out of the question.