How Green is Cryptocurrency?

Cryptocurrency has been the latest fanfare of the modern economy. Be it the hysteria ensuing Elon Musk’s tweets or the frauds committed by Mt Gox, a Japan based bitcoin exchange; cryptocurrency has never failed to captivate its supporters or detractors. Despite the fact that a major chunk of people is bullish on cryptocurrency, few critics have figured out a major flaw in the mining process —cryptocurrency mining is highly energy-intensive.

How are new coins in a cryptocurrency created?

To have more clarity over the environmental impact of crypto mining, we first need to understand how new coins in a cryptocurrency are created. Since cryptocurrencies aren’t regulated by any central authority, the blockchain relies on users to validate transactions and update the blockchain with new blocks of information. To protect against Trojans attempting to manipulate this new information, these blockchains are required to be very difficult and costly to verify. Thus, proof of work has been implemented into most cryptocurrencies.

Proof of work is a consensus mechanism that allows users to validate cryptocurrency transactions by solving a complex mathematical problem. The first person to solve the puzzle validates the transaction and is awarded a fixed amount of cryptocurrency. Then the circle starts again. It’s the most widely used mechanism.

When someone “mines” cryptocurrency, they’re in fact running programs on their computers that are trying to crack the problem. The greater the power behind a computer, the greater chance it has to win the right to update the blockchain and gain the rewards. Therefore, miners are incentivized to put more power behind their mining operations to beat their competition.

The transaction validation process requires large amounts of energy because the network depends on the computational power of thousands of mining machines. The higher the dependency, the higher the security of cryptocurrency blockchains.

Energy consumption of cryptocurrency mining

Although, there is no accurate method to compute the amount of energy consumption involved in Bitcoin and cryptocurrency mining, we can estimate the figure from the network’s hash rate and the consumption by commercially available mining rigs. The Cambridge Bitcoin Electricity Consumption Index estimated that Bitcoin used approximately 85 Terawatt-hours (TWh) of electricity (0.38% of global electricity use) and about 218 TWh of energy (0.13% of global energy production) at the point of production, more than the consumption of many countries, such as Belgium and Finland

Digiconomist, a cryptocurrency analytics site, calculated a figure of 130.3 TWh, based on energy consumption through July 9, 2022. This computes to ~1,455.8 KWh of electricity per transaction which is equivalent to the power consumed by an average American household over 49.9 days.

Calculating the carbon footprint of cryptocurrency is more intricate. Digiconomist estimates that the Bitcoin network is responsible for ~73 million tons of CO2 per year which is equivalent to the amounts generated by Turkmenistan.

Researchers at the University of Cambridge analyzed that most Bitcoin mining occurs in the US, China, and Kazakhstan. According to the Center for Strategic and International Studies, ~76% of the energy consumed in China is generated from coal and crude oil. China contributes 21% to the global hash rate. Since these three countries are heavily dependent on fossil fuels and are responsible for around 72% of the world’s Bitcoin mining, they are more vulnerable to the carbon footprint. The pace of decarbonization initiatives in these countries is not satisfactory as it is, and the emission from Bitcoin mining makes the situation even more concerning.

Mining facilities in developing countries

The miners are also now targeting to establish their mining facilities in developing countries in order to take advantage of economic instabilities, weak regulations, and cheap resources. Congo has already started facing the heat of this, as the locals are now competing with the miners for access to clean energy.

Cryptocurrency mining also generates significant amount of electronic waste, as mining hardware becomes obsolete more quickly, especially the Application-Specific Integrated Circuit (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies. According to Digiconomist, the Bitcoin network generates approximately 38,000 tons of electronic waste annually.

Is there an alternative?

Since cryptocurrencies have intense energy and special equipment requirements, and generates lots of waste, we can conclude that some of the cryptocurrencies are not environmentally friendly. Also, the validation process is energy-intensive, competitive, and rewards-based; reducing the energy footprint seems to be like herding cats. Even after the last bitcoin is rewarded, the network will still require large amounts of electricity to validate transactions. Therefore, it is unlikely that Bitcoin would be able to reduce its carbon footprint.

However, the proof-of-stake (PoS) method of validating cryptocurrency transactions and mining new coins is an alternative to cryptocurrency mining that does not use extensive computing power. Ethereum has retired the existing proof-of-work method, but Bitcoin has no such plans as of now. The other way of reducing the carbon footprint from mining is using renewable sources of energy, however, currently there is no large-scale initiative to execute this. We can hope that the regulators will keep the carbon footprint aspect into consideration during the process of creating regulations for cryptocurrency.

Ritu Yadav (MBA 2024) spent five years in finance roles before enrolling in the MBA programme at LBS. During her five years’ experience, she primarily worked with the top global investment banks in multiple roles such as financial reporting, investment deal accounting, and financial advisory. She is passionate about sustainability, impact investing, and technological solutions to address climate change. 

The Wheeler Institute is seeking to understand, illuminate and offer solutions to the challenges faced by the developing world, with an aim to identify the role of business in addressing these challenges and a focus on the implications and actions for those in developing countries. In support of our students, we approach this blog section as a reflective platform and a space where individuals can generate debate as long term agents of positive change.

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