The energy cost of cryptocurrency

“I care about the environment very much.”, “I actively trade Bitcoin and promote its use.” – these are two statements that do not belong together. Yet, they are used by essentially the same set of people and few recognize the implications associated with them. 

Earlier in the year, Grimes, an artist, sold $6 million worth of digital artwork on the blockchain powered Nifty Gateway, a platform for NFT trading. For the uninitiated, Grimes is the life partner of renewable energy proponent and bitcoin czar, Elon Musk. Grimes was just following the NFT boom with heavy weights like Beeple (another artist, who sold his digital work for an astonishing $60.25m) and Damien Hirst leading the way. The fascinating (yet crazy) world of NFTs aside, what caught my attention about these transactions were the hidden costs behind them.

Grimes’ transactions alone cost the world 70 tonnes in CO₂ (carbon dioxide) emissions - the same electrical power an average EU resident would consume in 33 years. Alex de Vries, a data scientist at the Dutch Central Bank, estimates that each Bitcoin transaction requires an average 300 kg of CO₂ –equivalent to the carbon footprint produced by roughly 750,000 Visa swipes.

Digiconomist estimates that bitcoin mining consumes around 78.5 terawatt-hours of energy, almost equivalent to energy consumed by entire nations like Chile, Austria and Finland. University of Cambridge's Bitcoin Electricity Consumption Index calculates that in one year the machines behind bitcoin mining require more power than the Netherlands, a country with over 17 million inhabitants, would require in a year.

Another perspective, today all datacenters globally — ones that run Big Tech, the cloud, the internet and the current financial systems — need around 200 terawatt-hours of electricity a year. Bitcoin consumes half that at this point. And this is not including Ethereum or Doge or any other kind of cryptocurrencies in the market today (estimated to have added 50% on top of bitcoin's energy needs).

Compounding the problem, mining networks are largely based in China (65% of bitcoin miners followed by US and Russia, both with around 7%), which sources much of its power from fossil fuels like coal, and as cryptocurrency becomes more popular, China’s energy consumption has soared by a factor of 10 since just 2017. 

But can’t we just solve the energy problem with all the green energy from solar, wind and hydro? The case of the Bitcoin mine in Missoula County tells a different story. The mine was set up in an abandoned mill, made plans to recycle computers, and contracted with a nearby dam for cheap renewable power. It was expected to be a low-carbon, low-impact operation. But there was a different culprit: a giant coal plant halfway across the state. If energy from the dam went to bitcoin mining, the county as a whole would end up using more coal.

The problems are not with energy consumption alone, but also related to the electronic waste generated by mining operations. "Adding cryptocurrencies to a portfolio will make it less green" says Gerald Moser, the chief market strategist at Barclays Private Bank, adding that mining generates the same amount of electronic waste as countries like Luxembourg, given that mining equipment generally become obsolete every 18 months or so.

Should we be abandoning cryptocurrency trading? May be – if you are about sustainability. May be - if you follow Buffet and other gurus of value investing. May be not – if you follow investors like Musk and Chamath Palihapitiya. Regardless of one’s inclination to follow, Bitcoin has emerged as the millennial’s gold and I have to admit gets one thing right, like gold, the supply is limited, unlike the Federal Reserve which seems to be able to print currency at will. Anyways, that is a different conversation for a different time.

Let’s look at the possibilities and the future - it is impossible to talk about the implications without considering the broader impact of the underlying blockchain technology – something that I am very bullish about. Out of all the major trends impacting the industry, the quintessential disruptive power is democratization. Climate change is global, and, in my opinion for sustainability, any solution should be global. We all collectively contribute to emissions, not just the fossil fuel industry. A lasting impact will be driven by voluntary participation from the people, not by over reliance on governments and bureaucracy. Blockchain is all about democratization – taking out that central coordinating function and tapping into the power of peer-to-peer network to bring about lasting change. How cool will it be to have a global carbon currency that allows organizations to purchase carbon credits while participating in a global trading system? Imagine a farmer in India generating wind/solar power (where sun literally shines 365 days a year), getting a credit for it, and a manufacturer in the US being able to buy those credits to offset carbon emissions. In one master stroke, you have given the economic incentive for the farmer to invest in renewable generation, weaned the farmer off power from the coal-fired plant nearby, and given the manufacturer the social currency to invest and operate. Not only have we taken meaningful steps to address the climate crisis at a global scale but have also brought about meaningful impact to the farmer in India and the factory worker in the US alike. However, I do agree that this vision is overly simplistic and easier said than done.

Things are certainly moving in the right direction though, thanks to relentless innovation. IBM has published a fascinating list of 7 case studies where blockchain is being used to accelerate meaningful and sustainable energy transition, with each case study showing the possibilities of an exciting future. The CertiQ case study, one of the 7 case studies, is pretty close to the concept of a credit system that I have stated above.

Blockchain is also being used to drive real accountability and transparency in industries such as diamond mining and cobalt mining (don’t hold your breath – the part about electric cars that makes it not so green is the energy intensive mining and globally distributed supply chain for battery components).

We still haven’t solved the fundamental problem though - the huge energy cost of blockchain as it becomes mainstream. Thankfully, there are efforts underway to address this as well. Most prominently, with the introduction of Proof of Stake (POS) algorithms as opposed to Proof of Work (POW) algorithms that power bitcoin and Ethereum. Simply put, in POW algorithms you burn/invest energy to earn more coins as opposed to POS algorithms where you invest a portion of your digital currency to earn a portion of fees. Granted, you are not mining and winning 12.5 BTC every time you obtain the correct hash, but you stand to earn a portion of the fees by temporarily staking a portion of the digital currency you already hold. And you get to bring the energy consumption substantially down (by estimates, down to about 1% of the energy consumed today). There are several smaller cryptocurrencies like Tezos (a multipurpose blockchain with on-chain governance) already using POS. The massive opensource movement to move Ethereum to POS is already underway (led by Ethereum co-founder Vitalik Buterin). Perhaps, the highest profile move in recent times comes from the field of NFTs – Palm, a new token powered NFT eco-system promoted by Joseph Lublin (co-founder of Ethereum). Palm is designed to operate as a side chain to Ethereum and has collaborated with Damien Hirst as the first artist to drop 10,000 of his works onto its platform.

Note – As I was getting ready to publish this article, Musk tweeted that Tesla will not be using any Bitcoin for transactions, not unless mining starts using sustainable energy. Tesla will also be looking at other cryptocurrencies using less than 1% of Bitcoin’s energy usage – a nod to the efforts to make Ethereum 2 a reality. 

Cyrptocurrencies will make millionaires out of many and will cause financial ruin to many others. But undeniably, they are here to stay. Technology and innovation are energy intensive, at least for now – be it blockchain or AI that powers cognitive enterprises and our most efficient decisions. Humanity is on the verge of our next biggest migration – the energy transition. Investments in technology solutions are needed and will accelerate, along with the intensity of energy consumption. But the equilibrium is not far away - technology and innovation will lead us to solutions that will unlock efficient ways to sustainability. And solutions that democratize and decentralize have a major role to play in ushering in that sustainable future.

Disclaimer: This is a personal blog. Any views or opinions expressed in this blog are personal and do not represent those of people, institutions or organizations that the owner may or may not be associated with in a professional or personal capacity. Any views or opinions are not intended to malign any religion, ethnic group, organization, company or individual.