As crypto goes mainstream, its carbon footprint can’t be ignored

Mining

For advocates of cryptocurrency, the promise of an economic future that is managed by a blockchain (a decentralized database that is shared among the nodes of a computer network, as opposed to being held in a single location, such as a central bank) is compelling.

For anyone paying attention, the rapid expansion of cryptocurrency has been stunning. In 2019, the global cryptocurrency market was approximately US$793 million. It’s now expected to reach nearly $5.2 billion by 2026, according to a report by the market research organization Facts and Factors. In just one year – between July 2020 and June 2021 – the global adoption of cryptocurrency surged by more than 880%.

But the increasing popularity of cryptocurrency has environmentalists on edge, as the digital “mining” of it creates a massive carbon footprint due to the staggering amount of energy it requires.

Based on data from the Bitcoin Energy Consumption Index from Digiconomist, an online tool created by data scientist Alex de Vries, the carbon footprint of Bitcoin, the world’s largest cryptocurrency, is equivalent to that of New Zealand, with both emitting nearly 37 megatons of carbon dioxide into the atmosphere every year, according to a February 2021 CNBC article.

How it works

To understand why this is a problem, it’s important to explain what goes into creating a cryptocurrency like Bitcoin.

Unlike fiat money, which is regulated through central banks, transactions in Bitcoin are tracked through a public ledger consisting of a network of computers around the world: the blockchain. “Mining” – a process in which computational puzzles are solved in order to verify transactions between users, which are then added to the blockchain – allows this validation to take place, which is an energy-intensive process.

It has been a bit of a wild ride for Bitcoin. The market price of a single bitcoin plunged below $30,000 in June 2021 for the first time since January 2021, falling by more than half from its April peak of around $65,000. Nevertheless, some analysts and billionaire investors are still feeling bullish about the crypto coin, as several leading businesses continue to adopt the currency.

Goldman Sachs started trading Bitcoin futures (agreeing to transact the coin at a predetermined future date and price). Tesla invested $1.5 billion in Bitcoin. PayPal announced last March that it would allow its US customers to use cryptocurrency to pay its millions of online merchants.

In September, El Salvador became the first country to make bitcoin legal tender. This, coupled with the fact that big-name brands like AT&T, Home Depot, Microsoft, Starbucks and Whole Foods now accept bitcoin payments, could pave the way for mainstream use.

But if the bulls are right and the price of a single bitcoin eventually hits $500,000, it could pump more carbon dioxide into the atmosphere than what is released by countries like Brazil or Mexico.

Another sector shaken up by digital assets is the art world, as digital artworks have been making headlines for the huge amounts they’ve been selling for on the market through the use of nonfungible tokens, more commonly known as NFTs, a type of guarantee backed by the Ethereum blockchain.

In simpler terms, the works are created, or “minted,” through a process called proof-of-work (PoW), which establishes its unique identity, as explained in an article on Hyperallergic.

This is arguably an improvement over the traditional art market when it comes to storing the value of the original work but is terrible for carbon emissions. The carbon footprint of a single Ethereum transaction as of December 2021 was 102.38 kilograms of CO2, which is “equivalent to the carbon footprint of 226,910 Visa [credit card] transactions or 17,063 hours of watching YouTube,” according to Digiconomist.

Meanwhile, the electrical-energy footprint of a single Ethereum transaction is about the same amount as the power that an average US household uses in 8.09 days, the website further states.

In March 2021, Austrian architect Chris Precht announced that he was abandoning “plans to sell digital artworks backed by NFTs due to the environmental impact of mining the digital tokens,” according to Dezeen magazine. He said he had created three digital artworks and wanted to sell them using blockchain technology.

“I wanted to create 300 tokens because I had three art pieces and I wanted to make each one in an edition of 100.… I would have used the amount of electricity I usually use in two decades,” Precht explained.

“We’re largely powering 21st-century technology with 19th-century energy sources,” Andrew Hatton, head of information technology at Greenpeace United Kingdom, told the US cable network CNBC.

He attributes this energy usage to the “huge amount of data-crunching needed to create and maintain this cyber-currency,” a process that demands a lot of electricity. The problem, according to Hatton, is that “only about a fifth of the electricity used in the world’s data centers comes from renewable sources.”

Another crucial aspect of cryptocurrency is that there is only a limited supply available. So, over time, as more Bitcoin is mined, the complex math problems needed for transactions get harder to solve, demanding more energy in turn.

The system is designed this way so that each digital token that gets issued contains its own unique cryptographic reference to the blockchain, ensuring its security. The issue of energy usage over time is further exacerbated by incentives attached to mining.

In terms of Bitcoin, each time a miner solves the complex hashing algorithm required to produce a bitcoin (the “PoW”), he or she receive a small amount of the cryptocurrency itself.

The inherent problem with this, as Charles Hoskinson, co-founder of Ethereum, told CNBC, is that “the more successful Bitcoin gets, the higher the price goes; the higher the price goes, the more competition for Bitcoin; and thus the more energy is expended to mine [it].” As the price continues to rise, so will the incentive to mine the cryptocurrency, creating a feedback loop that spells trouble for the climate.

Energy use

According to December 2021 figures from the Cambridge Bitcoin Electricity Consumption Index, Bitcoin makes up around 0.52% of the total global electricity consumption. That might not sound like much, but Digiconomist calculates Bitcoin’s total annual power consumption to be around 204.5 terawatt-hours, equivalent to the power consumption of Thailand.

“Such numbers should be taken with a good deal of salt. Bitcoin’s energy use depends crucially on its price, which swings wildly,” noted the Economist.

“The authors [of a paper published in April in the journal Nature Communications] assume that the long-term trend will be upward because the rate at which new bitcoins are created is designed to halve every four years. Reality will doubtless prove more complicated.

“But the general picture – that Bitcoin is a dirty business – fits with other research. One oft-cited model, which uses publicly available blockchain data, reckons its global energy consumption is already equal to that of Kazakhstan, and that its carbon footprint matches Hong Kong’s.”

Another problem besides the gargantuan energy usage is where that energy comes from. There is no definitive statistic related to the proportion of renewable versus fossil-fuel-powered electricity used for Bitcoin mining.

Earth.org cites two conflicting measures of Bitcoin’s energy usage: CoinShares, a cryptocurrency asset management and analysis firm, reported in 2019 that 74.1% of Bitcoin’s electricity comes from renewables, while the University of Cambridge puts that number at 39%, according to a report it issued in 2020.