Is Cryptomining Harming the Environment?

Contributor: Alice Feng

Bitcoin and other cryptocurrencies have been slated as the future of finance. With Tesla’s recent purchase of Bitcoin and the rise in popularity of day trading in the current pandemic, a surge in bitcoin price and renewed interests in cryptocurrencies followed. But what's typically overlooked is the non-virtual side of Bitcoin transactions—its energy consumption. What’s cryptomining's impact on the environment? What are some solutions to address these impacts?

What is Cryptomining?

Simply put, cryptocurrencies like Bitcoin replace payments intermediation with an open network of independent users, or "miners", who compete to validate transactions. Their majority agreement is required for any transaction to be approved. Their goal is to add individual blocks to the blockchain by solving complex mathematical problems. Computing the correct value to satisfy the hash function in the blockchain is called "mining".

Ultimately, a reward, in the form of cryptocurrencies, is given to whoever solves for the correct value. Oftentimes, people would pool their computing power together and split the reward when they solved for the correct value. If one can accumulate enough computing power, they can solve for the value more efficiently and, in turn, acquire a substantial amount of cryptocurrency.

Environmental Impact

In traditional transactions, payment networks like Visa or Mastercard typically have large corporate structures and distribute a lot of resources to facilitate these transactions. While many think that there's no cost attached to cryptocurrency transactions, that is not the case when taking its environmental impact into consideration—Cryptomining, as mentioned above, is extremely energy-intensive.

Special computers used for mining Bitcoin are required to be high-powered enough to solve complex computational math problems. Here are some statistics about cryptomining’s energy consumption:

The share of electricity costs in all cryptomining costs is around 60 to 70 percent;
Bitcoin accounts for 0.40% of the world’s total electricity consumption;
The annual carbon footprint of Bitcoin is 34.76 megatons of CO2, comparable to that of Denmark or New Zealand;
Bitcoin’s annual energy consumption has risen from 9.6 TWh (terawatt-hours) in February 2017 to 73.2 TWh in January 2020;
A report by Nature Climate Change made an alarming statement that Bitcoin alone could produce enough CO2 emissions to push global warming above 2°C in less than three decades.

To put these figures into perspective:

The annual electricity consumption of Bitcoin is greater than the total energy required to power all the tea kettles in the UK for 19 years;
If compared to other countries, Bitcoin would be ranked the 40th highest energy-consuming country in the world, above Colombia and the Czech Republic;
A single Bitcoin transaction consumes more energy than 100,000 Visa transactions and could power the average US household for a month. It also generates the CO2 equivalent to over 700,000 swipes of a Visa card;
Mining one Bitcoin usually consumes 100 MWh (Megawatt-hours) of electricity, which is the same amount of electricity used to watch contents on a 65'' Samsung 4k Smart TV continuously for 98 years.

In addition, the amount of Bitcoin released is halved around every four years, making the supply more scarce and the coin more valuable over time. However, this makes cryptomining more expensive and time-consuming for miners, increasing its total energy consumption even further. Moreover, thousands of cryptocurrencies are currently in use in addition to Bitcoin. Other cryptocurrencies, including Ethereum, Litecoin, and the “meme currency” Dogecoin are continuing to grow in popularity, increasing global energy consumption even further.

It's difficult to determine the exact carbon footprint of cryptocurrencies because of their volatility, but various organizations have given their estimates. Coinshares, a cryptocurrency asset management firm, claims that 74.1% of the electricity used by Bitcoin is generated from renewables, making it "more renewable-driven than almost every other large-scale industry in the world". However, a study from the University of Cambridge reports that although 76% of hashers have renewable energies in their energy mix, the share of renewables in hashers’ total energy consumption remains at 39%, and coal accounts for 38% of miner power.

Crypto Farm in Russia Source: Ars Technica — **Crypto Farm in Russia Source:** **Ars Technica**

Current Solutions

Sustainable Energy Farms

In recent years, a growing number of crypto farms are transitioning to sustainable energy. For example, in Iceland, many crypto farms are built due to their lower power costs and lower temperatures (to cool the computers). Their electricity is mostly generated from renewable geothermal sources, which also emit much lower amounts of carbon than coal or gas-powered plants. Moreover, Iceland also participates in the European Union’s emissions trading system. While the system is imperfect in design, sources have found that it “does a good job of internalizing the social cost of power generation”.

Quebec, Canada is another favorite location for miners. 95 percent of power is hydroelectric, and the power costs are particularly low. While the overall environmental impact of hydropower is contested, there is an agreement that its carbon footprint is a fraction of those of gas- and coal-fired plants. Canada has also recently implemented a nationwide cap-and-trade scheme in a bid to price carbon emissions.

Policies

Because electricity prices vary widely across countries, miners tend to locate in countries where electricity is comparably cheap, since Bitcoin price is the same worldwide. One kilowatt-hour of electricity in China, reportedly the location of 80 percent of Bitcoin mining capacity, costs 8.6 U.S. cents. In contrast, in countries like Sweden, which has a carbon tax of approximately more than 100 euros per metric ton of CO2, cryptomining would be less profitable. Researchers have also suggested that more direct taxation of mining could be beneficial to reducing the total emission of cryptomining. Regardless, the environmental impact of electricity-intensive cryptocurrencies like Bitcoin depends heavily on the energy policies where the mining takes place.

Alternative Mechanisms

“Proof of work”, or the promise of a reward after the miner solves the mathematical problems, is the key incentive of some cryptocurrencies model. Under this premise, the higher the price of Bitcoin goes, the more competition there is for mining. Hence, the electricity consumption of Bitcoin is only likely to increase over time due to this mechanism.

In contrast, some alternative cryptocurrencies like Cardano and Polkadot rely on a “proof of stake” consensus mechanism, where participants buy tokens that allow them to join the network. This mechanism is far less energy-intensive. For example, the Cardano network consumes 6 GWh of power, only a fraction of Bitcoin’s total energy consumption.

Reusing Waste Energy

Some Bitcoin supporters argue that although the total amount of energy usage is high, it’s still only half as much as inactive home appliances in the U.S. consumed. The amount of energy wasted on idle home devices like phone chargers and microwaves in the U.S. could power the bitcoin network for two years.

There are various proposals where miners started to utilize excess energy that was initially going to waste. For example, Sichuan, China, where the majority of Chinese miners mine, suffers from overcapacity—the state-driven Three Gorges Dam project produced a surplus of power that can’t find usage at optimal prices. Instead of wasting this power, a hyper-mobile fleet of hardware miners can come in and out and take advantage of that excess power.

As bitcoin's price rises, so does its energy consumption Source: CNBC

The Counterargument

While there are various solutions to address the issue regarding cryptomining's energy consumption, many are asking the question—Ultimately, is cryptomining necessarily a bad use of energy?

One mainstream argument is that energy use in itself is not bad. For example, sending texts on our cell phones and storing emails on our personal laptops also use energy. However, we rarely infer email or digital applications to be bad because they consume energy.

Another argument is that Bitcoin is transparent in its energy use while other traditional industries like banking are much more opaque. Bitcoin miners were “incentivized to use renewables” because it’s getting cheaper to produce them. Andrew Hatton, head of IT at Greenpeace U.K., said in an interview with CNBC that the broader issue is that “we’re largely powering 21st-century technology with 19th-century energy sources.” He added that “Bitcoin’s spiraling energy usage is largely down to the huge amount of data-crunching needed to create and maintain this cyber-currency, but their fast-growing hunger for electricity is just an early symptom of a much bigger problem to come.” As the demand for more advanced and powerful computing power is inevitably going to increase in the upcoming decades, finding solutions to promote renewable and sustainable energy for all sectors should be the current priority.

Conclusion

Cryptocurrencies are sometimes called “virtual money with a real carbon footprint”. While they have the potential to be the future of finance, one thing is certain: if they are here to stay, the global energy consumption will increase significantly. With the impact of the climate crisis worsening, the tradeoff between the benefits of cryptocurrencies and their environmental costs should be brought to attention.