The environmental impact of cryptocurrencies
Bitcoin uses the proof of work (PoW) consensus, which has the benefit of being highly secure and resilient but can also be energy intensive. Under PoW, Bitcoin’s energy consumption is a function of the network’s hash rate, which refers to the amount of computing power used to mine BTC.
The algorithm monitors the hash rate and block production time to maintain the latter at ten minutes. If there is enough hash rate on the network to reduce the block production time, the algorithm increases the difficulty to a level where mining a block will still take ten minutes. This mechanism prevents any one party from attacking the network by flooding it with hash power.
Therefore, the more demand there is to mine BTC, the more difficult it becomes, and the computing power and energy consumption of the network increase accordingly.
In the early days of Bitcoin, there were few people trying to mine BTC, so the network hash rate was low. It didn’t take a lot of computer power or energy to become a miner, and individual users could set up a mining rig using home computing hardware. However, as the network has grown over time, the hash rate and difficulty have increased exponentially.
Now, BTC mining requires the use of specialist hardware called Application Specific Integrated Circuits (ASICs), which consume a significant amount of energy. These days, Bitcoin mining is typically a more industrialized operation, run out of data centers with the necessary facilities to effectively cool dozens, or even thousands, of ASICs.
This industrial-level energy consumption has led to environmental criticisms of Bitcoin mining since much of the world’s energy supply is still dependent on burning fossil fuels. Estimates of Bitcoin’s energy consumption can vary, but it’s thought to have increased by around 15 times between 2017 and the peak of the 2022 bull market.
How the impact of mining is changing
The state of mining has also been in flux over recent years since China outlawed the practice in 2021 – a seismic move for the industry, considering that Chinese miners accounted for the majority of hash rate up until that point. The move has forced miners to set up in other countries, notably the United States and Kazakhstan.
This shift has brought about mixed results for the environmental impact of crypto mining. China’s partial use of hydropower mitigated the industry’s dependence on fossil fuel energy. However, mining operations in Kazakhstan are largely dependent on coal-powered energy. Industry proponents have argued that mining operations in the United States are well-positioned to support the transition to green energy by creating more demand for renewables.
Another development resulting from China’s mining ban is that many old and more inefficient mining rigs were put out of service, with increased adoption of newer models that can produce a higher hash rate using lower energy.
According to research from the Bitcoin Mining Council, the Bitcoin mining industry is one of the most sustainable industries globally, with an estimate of 60% of the energy coming from a sustainable source.
Crypto and climate change
It’s difficult to quantify the precise climate impact of cryptocurrency mining. One website that tracks the estimated energy consumption of Bitcoin and other associated metrics, estimates that the network has a carbon footprint comparable to the country of Libya, which had a 2021 population of around 6.7 million.
Anecdotal evidence from ongoing disputes also suggests that Bitcoin mining activities are having a negative impact on local ecosystems. In upstate New York, the presence of a mining facility at the site of a former power plant on Seneca Lake caused much controversy in 2022 following allegations from environmentalists that the lake is heating up, although the evidence appears to be disputed. However, the incident was enough to stir up regulatory interest in the matter, and Bitcoin’s impact on climate change has led several lawmakers and many green campaigners to call for bans on mining operations.
Can cryptocurrency be sustainable?
The most obvious way to make cryptocurrency mining more sustainable is to transition to renewable energy sources. However, achieving a full transition comes with several barriers. Not only would it involve every mining operation across the entire decentralized Bitcoin network to switch to renewables, but it would also require the energy infrastructure to be in place, which is arguably beyond the control of many mining entities.
More efficient mining equipment could also deliver some sustainability benefits by requiring less energy to deliver hash power, but these benefits would be incremental.
Other proof of work currencies, such as Litecoin, use less energy than Bitcoin despite having a similar consensus protocol. This is because it requires less hash power to mine PoW altcoins since the networks are smaller and there is less competition to mine new blocks.
Alternatives to proof of work (PoW)
Another proven way to reduce the energy consumption of a blockchain network is to adopt proof of stake (PoS).
Many other consensus protocols, including variations of the PoS model, typically have a far lower energy consumption than PoW protocols.
Balancing environmental concerns with economic benefits of cryptocurrency
Along with the case for moving to green energy, cryptocurrency proponents argue that there are many other benefits to cryptocurrencies that should be considered alongside criticisms regarding their carbon footprint.
Decentralized blockchain networks are permissionless and censorship-resistant, which allow cryptocurrencies to support financial inclusion and provide a medium of exchange and store of value globally, particularly in countries with unstable economies and volatile local currencies. Many countries that fit this description, such as Nigeria, the Philippines, and Indonesia, have a high percentage of crypto users.
Furthermore, Bitcoin and crypto have been used for causes such as crowdfunding for catastrophic events around the world, including the war effort in Ukraine.
It is also undeniable that despite its environmental impact, Bitcoin represents a significant source of value for investors across the globe. At its peak, Bitcoin’s market capitalization exceeded $1 trillion, delivering substantial financial returns to users, particularly early adopters.
Cryptocurrency and the environment essentials
- Bitcoin consumes significant energy due to the proof of work algorithm, which requires more energy as the network grows.
- Fossil fuels are thought to account for around 40% of all Bitcoin’s energy consumption. While this is a high number, Bitcoin mining is still one of the most sustainable industries globally.
- A shift to renewables would make Bitcoin greener, while other networks are moving away from proof of work in favor of proof of stake which Ethereum has proved can deliver a substantial reduction in energy consumption.