BITCOIN IS DESTROYING THE ENVIRONMENT
Coal mining is bad for the environment. The same could be said for copper mining, gold mining, lithium mining, and a plethora of other materials that humans dig from the earth. Hopefully none of those statements came as a surprise. Most people are fully aware that the process of stripping away layers of vegetation, destroying habitat, and displacing massive amounts of rock and dirt, can cause some serious problems. From the release of harmful chemicals, to the potential pollution of groundwater. Because of all of this governments around the world have spent the past several decades increasing regulation on such activities in an attempt to lessen their impacts. In many ways those regulations have been relatively effective in forcing mining companies to innovate new, less impactful ways to extract materials from the earth.
There is however another type of mining growing at a breakneck pace. It does not involve clearcut forests, or pits in the ground. You will not see construction equipment, or excavators. This mining takes place in warehouses in cities around the world. You could drive right past one of these mines and never even know it. They are easy to overlook because you wont see smokestacks belching black smoke, or equipment pumping out CO2. These mines are simply rooms full of computers working endlessly to crack codes, solve puzzles, and mine more bitcoin.
The most recent data from Cambridge University pegs the total energy consumption related to bitcoin at just over 121 terawatt hours. Don’t worry that made no sense to me when I first read it either. This did though; 121 terawatt hours is more than the country of Argentina uses. In fact, if bitcoin were a country, its overall energy use would rank 30th. If broken down from total numbers it actually looks even worse. The energy needed for a single bitcoin transaction, would power the average American home for three weeks.
I wish the follow up to this could be to tell you not to worry because most bitcoin miners are very environmentally savvy and use renewable energy to power their computing machines. But that would be a lie. By far the biggest source for the electricity needed in mining operations is coal fired power plants. That means that the carbon data on bitcoin is just as ugly as the raw power consumption.
That single bitcoin transaction that could power your home for three weeks, it has the same carbon footprint as streaming 50,000 hours of video to your TV. If you were wondering thats just under six years of streaming. And the aggregate total of bitcoin, 37 million tonnes of carbon; thats more than New Zealand puts out every year.
If you have ever seen the movie “The Big Short” there is a scene where Steve Carrell is talking to a CDO manager. The manager explains how the product works while a narrator voices over saying “this is the moment when Mark (Steve Carrel’s character) realized that we weren’t just talking about a housing crisis, we were talking about an atomic bomb capable of bringing down the entire system”. For todays topic of bitcoin, that moment is coming up right now.
In theory, what makes bitcoins valuable is that each one becomes harder and harder to mine. Put another way, the system is designed to be anti-efficient. That means that as horrible as the energy and carbon numbers already are, they will only continue to get worse. As more coins get mined the amount of energy required to produced the next one creeps ever higher.
To make matters worse, the decentralized nature of bitcoin makes it extremely difficult to regulate. There are examples of local governments trying to regulate bitcoin mining by increasing the cost of power to miners etc, however all these measures serve to do is displace the mining operations to other areas.
When it comes to mining for raw materials like copper, government regulations are easily imposed because the mine operators cannot simply move the resource to another country and mine it there. With bitcoin they can.
One of the most popular suggestions for how to decrease the energy consumption of bitcoin is to attempt to make it more difficult to exchange bitcoin, thus making it less valuable and potential reducing the incentive to produce more.
The most likely solution has to do with a concept known as proof of work, or proof of stake. It’s a pretty complex topic, and I won’t do it justice if I try to explain it, but you can learn more here. Both of these are methods of bitcoin mining, however they have key differences when it comes to energy use. Bitcoin, and many of the most popular currencies use the roof of work method. This method is the root cause of the escalating energy cost of each new coin. The proof of stake model however rewards miners in a different way that greatly reduces the escalation of resource use. Put simply, proof of work - BAD, proof of stake - GOOD.
The difference between the two is so compelling that Etherium, the second most popular cryptocurrency, has recently made the announcement that they will be attempting to transition from a proof of work system to a proof of stake system. If this experiment proves successful, our best bet to limit further climate impact caused by cryptocurrency, would be to provide incentive for other coins to make the switch as well. These incentives can come from government regulation, or an overall shift in investor sentiment. That shift would look similar to what we advocate with our green series by choosing portfolios of coins that align to a greener mindset.
There is a lot to be seen for how cryptos will affect our world to come. But my hope is that we solve this growing problem of the exponentially increasing demand for energy before the problem becomes too big.