Bitcoin’s value reached an all-time high of over $58,000 on February 21, following Tesla’s acquisition of $1.5 billion of the cryptocurrency. Despite Bitcoin’s growth, many are concerned about the effects cryptocurrency has on the environment. Bitcoin is extremely energy consuming, with the carbon footprint of a single bitcoin transaction totaling the same as 685,656 Visa transactions, according to a report by Digiconomist.
When you buy an item from a store, a bank must verify that transaction and record in its ledger that the money was transferred from your account to the store. With Bitcoin and other cryptocurrency like it, there is no middleman to verify the transaction and record it in its ledger. Instead, all of this is done in the Blockchain database. This allows people to trade money directly to each other through peer-to-peer transactions regardless of where they are in the world or whether they have a bank account. Other benefits of cryptocurrency include low transaction fees and strong security measures.
In blockchain technology, data—or in Bitcoin’s case a ledger for transactions—is stored in “blocks,” and these blocks are chronologically organized into “chains.” The process of “mining” bitcoin consists of computers validating recent transactions by combining data and solving an equation. Once a computer achieves this, a new block is added to the blockchain and the miner is rewarded with new bitcoin plus the transaction fees of the transactions they validated.
The nature of bitcoin mining is competitive. The faster a miner’s computers are and the more of them the miner has, the more likely they will be the winner for the most recent block’s bitcoin. This has resulted in companies creating and investing in specialized bitcoin mining hardware and setting up enormous warehouses in areas where electricity is cheap to maximize their bitcoin mining production.
All of this computing power consumes a large amount of electricity. Sources vary as to how much electricity Bitcoin consumes each year, but estimates include 45.8 TWh (terawatt hours) per year from a study published in Joule, which is roughly the amount of electricity that Kansas City consumes annually. In a report, the University of Cambridge concluded bitcoin uses 130.66 TWh per year, which is more electricity than Argentina consumes each year.
Cryptocurrency supporters argue that most of the electricity bitcoin miners use is from renewable sources. A study done in 2018 by the University of Cambridge found the majority of bitcoin mining facilities use renewables in their energy mix and tend to be located in places with unused excess energy, consuming electricity that would otherwise be wasted. However, the reliance on fossil fuels isn’t zero. The study identifies the Xinjiang province in China as being especially reliant on fossil fuels, which also happens to be the province that most bitcoin mining takes place in.
A Nov. 2020 study entitled “Bitcoin’s Future Carbon Footprint” proposes some solutions to Bitcoin’s energy problem. The study, which was a collaboration between researchers from the Technical University of Munich, Massachusetts Institute of Technology, and the Institute of Energy, Environment and Economy from the Tsinghua University, hypothesizes different outcomes for what the long-term effect Bitcoin will have on the environment.
They theorize if the electricity sector achieves carbon neutrality by the mid-century then “Bitcoin’s carbon footprint has peaked already” and will gradually decline, leading to cumulative CO2 emissions of around 200 megatons by 2100. They say that the number isn’t negligible but it is “not decisive for climate goals.” This hypothesis depends on the world achieving carbon neutrality at a faster rate than it is already.
“My understanding is that the technologies are there and the prices of the technologies are dropping rapidly,” said Randy Bluffstone, professor of economics and director of the Institute for Economics and the Environment at Portland State. “In that regard, it’s a very hopeful sign.”
However, in a “business-as-usual” scenario where decarbonization rates happen at the world’s current speed, the cumulative CO2 emissions would be around two gigatons by 2100, or around 10 times more than the previous scenario. These estimates could be even higher if the price of bitcoin continues to grow.
The study suggests a variety of policies that may help reduce Bitcoin’s carbon footprint. Raising the price of electricity, for example, will encourage miners to find ways to limit their electricity usage. An example of this is moving mining facilities to colder climates, since some mining facilities spend 30–40% of their electricity on just cooling their mining computers. R&D subsidies could also result in technological advances in energy efficiency. The study also suggests economy-wide carbon pricing—creating a standard price for CO2 emissions—as a way to incentivize decarbonization. Additionally, they claim that “taxing mining activities or restricting the use of bitcoin” could also lower Bitcoin’s carbon footprint.
“That’s the essence of so-called internalizing externality—getting the market itself to feel the cost that we’re feeling,” Bluffstone said. “Without those types of policies of some sort, then why would there be change?”