Billionaire Elon Musk did a shock 180 degree on his decision to let customers buy their new Tesla with Bitcoin. But was he right to do so? What is Bitcoin’s real environmental impact?
Key takeaways: Bitcoin and the environment
- It’s important to question the carbon footprint of Bitcoin because mining it now consumes as much electricity as the entire country of Argentina
- It’s equally important to get the right answer: the architecture of Bitcoin might not be so much at fault as where it is mostly mined: China, where two thirds of the country’s energy is powered by coal
- Argument of BTC detractors: “Energy inefficiency is built into Bitcoin's DNA”
- Argument of the BTC proponents: Competition from other coins and demand for ESG investments will reduce Bitcoin’s environmental impact over time.
- Cardano (ADA/USDT) stands out among the other more Eco-friendly Cryptos
- What Else? To compare like-for-like, we compare Bitcoin energy usage with the other traditional store of value investment – Gold!
What’s all the fuss about Elon?
It all comes down to Bitcoin mining. Completing complex cryptographic algorithms takes computing power and computers need electricity.
Reminder: Mining is a distributed consensus system that is used to confirm pending transactions by including them in the block chain... To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. (Source: Bitcoin.org).
Charles Hoskinson, CEO of leading cryptography firm IOHK put it this way to the Independent newspaper: "Bitcoin's energy consumption has more than quadrupled since the beginning of its last peak in 2017 and it is set to get worse because energy inefficiency is built into bitcoin's DNA."
The surge in popularity of cryptocurrencies including Bitcoin, especially since the onset of the pandemic, has focused attention on what was already a known issue, arguably the elephant in the room before mass adoption.
The price of Bitcoin has tripled over its previous peak in 2018 and that has generated even more interest in mining it because of the handsome profits on offer. The electricity consumed by mining Bitcoin is now greater than many entire developed countries.
If the question of Bitcoin’s electricity usage goes unanswered, and it does indeed go on to get widespread public acceptance as a currency – every aspect of it will need to be considered, that includes:
- Currency creation, destruction
- Computer hardware production
- Loss etc
Is Bitcoin at fault for its own carbon footprint?
Of course, if all electricity used toward Bitcoin came from renewable energy, then it would have no environmental impact. While this might be true, it is perhaps a slightly shallow argument until all energy is produced by renewable means because there are always opportunity costs. The renewable energy that was used towards Bitcoin might have gone to some other economic productive activity.
Still, if we extend this argument – it is not Bitcoin itself that is the issue, rather where it is mined. The biggest crypto miners are based in China, where two thirds of power is from coal. It is precisely for this reason that miners are in China – large scale coal power plants with none of the ‘clean coal’ filtering process that are mandated in Western countries is very cheap and also consistent.
But China is not the entire story of Bitcoin. Cheap hydro-electric energy has made Scandinavian countries like Norway, Sweden and Iceland big hubs for cryptocurrency miners. In fact, Cambridge University’s third Global Crypto asset Benchmarking Study found that 76 percent of cryptocurrency miners use electricity from renewable sources in their operations. That’s up from 60 percent in 2018.
As renewable energy sources become increasingly more cost-efficient, market forces suggest the trend of the Bitcoin community moving towards renewable energy is inevitable.
If not Bitcoin, what is the best Eco-friendly cryptocurrency?
In fact, most other cryptocurrency blockchains – including no.2 Ethereum with its Ether token consumer less power than Bitcoin and are actively innovating their systems to make them more energy-efficient with updates to the respective blockchains and processes.
Of them all, Cardano (ADA/USDT) is the one that has made its Eco credentials one of its selling points. In fact as of now, before it has reached serious scale, the entire Cardano network consumes about the same amount of energy as a large family home. It’s ‘proof-of-stake’ model differs wildly from Bitcoin’s proof-of-work. It validates transactions based on how many coins are held by a network participant, rather than the amount of computational processing power that went into them.
This short term chart, showing the sudden sell-off after Elon Musk’s tweet and quick reversal suggests ADA traders are putting greater value on the environmental credentials of Cardano.
Read more about Cardano in our blog: Disrupting financial structures for social good: Cardano
The energy cost of Bitcoin as a ‘store of value’
Arguably the best justification for holding Bitcoin in the era of zero interest rates is as a store of value. That is why many call it ‘digital gold’.
If we assume investors will always want a store of value that is away from central bank and government interference, then we should compare Bitcoin with the main alternatives, namely gold.
According to a paper published by Max J.Krouse and Thabet Tolaymat in the Nature International Journal of Science, it requires seventeen megajoules of energy to mine a dollar’s worth of Bitcoin, while it takes between five and seven megajoules of energy to mine gold and platinum of the same value.
Finally Let’s remember that Bitcoin has a finite supply. Once the 21 million Bitcoins have been mined, its energy usage will plummet.