Cryptocurrency Versus the Environment

‘Cryptocurrency’ seems to be a buzzword used throughout the media and news, alongside newly coined terms such as ‘Bitcoin’, and ‘NFTs’. Cryptocurrencies such as Bitcoin are a digital means of exchange, which use cryptography as a means of security. Despite their recent spike in popularity, cryptocurrencies have been in circulation since 2009, illustrating that there is a high likelihood that they are here to stay. However, many people still misunderstand, if not know nothing about this digital currency, and many doubts circulate about their practicality and value.

It is actually achievable to use cryptocurrency to make purchases and sell goods or services. The worldwide payment company PayPal has recently announced a service allowing its American customers to in fact buy, hold and sell cryptocurrencies through their Paypal accounts. What’s more, Libra, a Facebook (or more recently, ‘Meta’)-backed digital currency launched earlier this year.

Concern over the safety of cryptocurrencies as an investment class has prompted the UK’s Financial Conduct Authority, to describing them as “very high risk, speculative investments”. Additionally, the investment into these currencies has been hypothesised as equating to ‘no more than glorified gambling’ due to how relatively new to the market they are. However, in this article, I will be delving deeper into the environmental impact of this digital exchange and as a result, its potential future in our monetary system. In considering the environmental issues behind cryptocurrency, one must start by taking a look at blockchain, which is Bitcoin’s underlying technology, which makes this cryptocurrency extremely energy-intensive.

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Blockchain

A blockchain is a distributed database that is shared across the intricacies of computer networks. As a database, the blockchain itself stores information electronically in digital format. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.

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Mining

Bitcoin’s public record-keeping system is decentralised, meaning it is not actually controlled by any single authority. Rather, Bitcoin is constantly updated by a network of computers around the globe operated by so-called “miners”. Bitcoin mining is the process by which new bitcoins are entered into circulation. Moreover, it is the way that new transactions are confirmed by the network and is therefore a critical component of the maintenance and development of the blockchain ledger. "Mining" is performed using sophisticated hardware that solves an extremely complex computational mathematical problem.

These miners use purpose-built computers to solve these complex math puzzles in order to allow transactions to be authorised in exchange for being rewarded a small fraction of the very Bitcoins transactioned.

Over the last few years, with the price of Bitcoin reaching new highs (and lows, as illustrated in what happened recently with Elon Musk’s Bitcoin Tweet), the attractiveness of mining Bitcoin lead the total energy consumption of the Bitcoin network to grow to enormous proportions. Since mining can provide a solid stream of revenue, the number of people – aka miners – willing to run energy-hungry machines to make a small profit out of every Bitcoin transaction they help approve has skyrocketed.

As a result, the Bitcoin network now consumes more energy than many countries.

In effect, Bitcoin’s annual energy consumption is comparable to some entire countries, such as Ukraine or Argentinia. Bitcoin itself produces 36.95 megatons of carbon dioxide (CO2) annually (which is comparable to New Zealand) and it is actually estimated that in thirty years, Bitcoin could alone increase global temperatures 2 degrees Celsius. This is a huge deal when considering the existing concerns about climate change as a result of transport, over-population and other digitalisation alone. Moreover, about 65 percent of cryptocurrency mining occurs in China, where electricity is cheaper, meaning there is a monetary incentive to push this digital currency without regard for the environmental impact it is having.. Other countries with major mining operations include the United States, Russia, and Kazakhstan.

It is unclear exactly what sources that energy comes from. A study done by Coinshares, claims that Bitcoin gets 74.1 percent of its energy from renewable sources, however, many people are skeptical of this finding and say it does not match other calculations that have been done. Using renewables for mining can also be complicated. For example, hydropower has become more popular for cryptocurrencies since it is cheap, however, it often has to be backed up by fossil fuels because of large regional and seasonal differences in its availability.

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The future

It is also unclear what will happen to digital currencies in the future. For example, Bitcoin suffered a crash in 2018 but yet regained its popularity in 2020. This may be partly as a result of the pandemic, and fears of more traditional (and in fact unhygienic) assets such as cash in such uncertain times. Some experts fear this has created a bubble, and a similar crash to 2018 might actuslly be on the horizon. Furthemore, althoug cryptocurrencies have increased in popularity and allowed for the introduction of platforms such as ‘Binance’ and ‘Revolut’,, they have yet to be adopted by stores for everyday use. The government’s failure to consider the environmental consequences of this digital technology and regulate digital currency companies could not only seriously negatively effect the environment but also discourage new digital currencies from taking steps to reduce their energy use and carbon emissions. As digital currencies potentially continue to increase in their popularity, their environmental impact should certainly not be overlooked.