The world’s most popular cryptocurrency, Bitcoin, has recently eclipsed the United Arab Emirates in terms of annualized electricity consumption, according to the Cambridge Bitcoin Electricity Consumption Index (CBECI). Amid the fresh surge in excitement around cryptocurrency, the debate over Bitcoin’s sustainability credentials has once again entered the fore. Estimates suggest bitcoin mining uses approximately 0.5% of the world’s electricity.
The process that generates bitcoins – mining – involves computers solving complex math problems, wherein ‘miners’ use programs that have to, essentially, guess a randomly generated number. Miners which successfully guess the number validate the transactions on the blockchain, and receive an amount of new bitcoin as an incentive.
The rewards for those at the forefront of bitcoin mining are vast. One of the world’s largest bitcoin ‘farms’, a warehouse in an undisclosed location somewhere near Moscow, mines 600 BTC per month – equivalent to roughly $20.4m at the time of writing. Elite Fixtures estimate that it costs $4675 to mine one BTC in Russia, costing the farm about $2.8m per month in electricity costs. Not a bad investment.
Watts the problem with bitcoin
Across the globe, bitcoin farms accrue considerable consumption. At 2pm on February 19 2021, the total global energy consumption of Bitcoin is 14.73GW, according to the CBECI. For context, at the same time, electricity generation from gas in the UK was 9.73GW. However, the environmental footprint due to bitcoin mining is a nuanced topic.
Proponents of bitcoin argue that is not necessarily the consumption of energy that is the issue, but the source of the energy. If renewable power is used to mine, then the process can be sustainable. Yet, estimates for the amount of renewable power used in mining vary wildly.
CoinShares Research, which estimates that 74.1% of mining energy comes from renewables, says that mining is concentrated in areas of the globe where there is ample renewable energy available. Indeed, Sichuan Province, China, responsible for 11% of BTC mining in Q1 2020, has approximately 90% renewable penetration.
Analysts without a vested interest disagree. The University of Cambridge found that only 28% of the energy used for bitcoin mining comes from renewable sources. A Nature Climate Change paper argues that bitcoin emissions alone could push global warming to above 2°C. The recent surge in interest in cryptocurrency will do little to dispel fears about its environmental impact.
Sustainability is becoming an issue
A less carbon-intensive approach would be to use excess nuclear energy to mine bitcoin, as has been discussed by Ukraine’s Ministry of Energy just this month.
As more and more institutional investors look to use cryptocurrency as a diverse hedge against inflation, those who have become millionaires off the back of bitcoin will look to downplay its ecological cost. Niklas Nikolajsen, the founder of Swiss crypto broker Bitcoin Suisse, draws comparisons with the tech and banking industry: “How much energy does Facebook consume? They have 21 huge data centers worldwide, I’d say probably more than Bitcoin. The banking system for sure consumes a lot more energy.”
The problem for Nikolajsen, however, is that these industries generate intrinsic value, something which bitcoin doesn’t. The application of carbon taxes, a much-touted method to reduce carbon emissions, would effectively drive the intrinsic value of mined cryptocurrencies to negative, potentially toppling the house of cards bitcoin finds itself standing atop.
The debate around bitcoin’s environmental footprint is here to stay. GlobalData has identified sustainability as the main theme of 2021, so investors will look to bitcoin miners that take a more carbon-efficient approach.