Concerns over Bitcoin’s environmental impact aren’t new—but with institutions driving up prices by gobbling up cryptocurrency with gusto, and a new administration in the White House, the issue has now become a hot-button topic.
Most recently, U.S. Treasury Secretary Janet Yellen, who has criticized BTC on multiple occasions since being appointed, dismissed the digital asset as “an extremely inefficient way of conducting transactions” on Feb. 22. Speaking at The New York Times DealBook conference, she went on to describe Bitcoin’s energy consumption as “staggering.”
Microsoft founder Bill Gates, who has reinvented himself as a climate activist in recent years, echoed the concerns days later. While he said that digital assets show a lot of promise, his stance is unflinchingly clear: Bitcoin is best avoided.
Then on Feb. 26, BCA Research’s chief global strategist, Peter Berezin, predicted that Bitcoin’s Achilles heel will begin to scare off corporate investors off and cause governments to erect more obstacles to it success, Bloomberg reported. The first to flee will be environmental, social, and governance-focused funds he said, adding that they will shun companies involved with Bitcoin, not just the cryptocurrency itself:
“Many companies have cozied up to Bitcoin in order to associate themselves with the digital currency’s technological mystique. As ESG funds start to flee Bitcoin, its price will begin a downward spiral. Stay away.”
The combination of governments’ opposition and the power required to mine it will cause the cryptocurrency to lose “most of its value over time,” he added.
Tesla’s awkward dilemma
President Joe Biden’s ascension to the Oval Office was on the wave of a clear message: the U.S. needs to step up and play a leading role in averting a climate disaster.
His administration is planning to invest aggressively in clean energy solutions over the coming years, and penalize businesses that are falling short. For all of the frothy excess in its share price, Tesla would have been positioned as a shining example of a company that is helping the world wean itself off fossil fuels… but its $1.5 billion Bitcoin buy-in has created a rather uncomfortable image problem.
One Financial Times columnist said that Tesla’s big bet on cryptocurrency amounted to “environmental idiocy,” writing:
“It is hard to see how shares in Tesla can remain in any green portfolio while the company is investing in Bitcoin.”
Another recent high-profile Bitcoin investor that touts its environmental commitment is the insurance giant Mass Mutual, which invested $100 million in December. That announcement was hailed as “another milestone in the Bitcoin adoption by institutional investors,” by JPMorgan Managing Director Nikolaos Panigirtzoglou. “One can see the potential demand that could arise over the coming years as other insurance companies and pension funds follow MassMutual’s example.”
However, the company lists its “commitment to the environment” as a major corporate responsibility objective, saying “MassMutual is a big company, but we try to leave a small environmental footprint by focusing on conservation, efficiency and renewable energy.”
Assuming that Mass Mutual bought its $100 million in BTC at the Dec. 10 price—the day it was announced—that’s 5,391 bitcoins. At 682.43 kilowatt-hours to mine a bitcoin, that’s 3.67 million kWh worth of power.
Quantifying BTC’s climate impact
The Cambridge Center for Alternative Finance has been doing a lot of research that attempts to quantify the environmental footprint that Bitcoin is leaving. Its latest estimates suggest that Bitcoin accounts for 0.6% of the world’s electricity consumption. While this may seem rather modest, do remember there’s seven billion people on the planet and more than 200 countries.
A series of jaw-dropping comparisons help bring the message home. Bitcoin now consumes more power per year than Argentina and Ukraine, and it’s coming perilously close to overtaking the likes of Sweden and Malaysia. The BTC network could power Britain’s tea kettles for a staggering 29 years… and trust me, they drink a lot of tea.
Why does Bitcoin use so much energy? Well, all of this is linked to how the cryptocurrency is mined—and how transactions on the blockchain are verified. BTC uses a consensus mechanism that’s known as Proof-of-Work, with miners competing to validate blocks by completing a series of complex mathematical puzzles. The rationale behind getting miners to jump through these hoops is to keep the network secure—making it prohibitively difficult for malicious actors to double-spend crypto and reverse old transactions.
For what it’s worth, analysts at Cambridge stress that there’s little evidence that Bitcoin directly contributes to climate change… yet. Their concern centers on the risk that BTC’s continually growing electricity consumption could make it harder to achieve sustainable development goals set by the United Nations in the future.
There’s also a lot of uncertainty behind the data, something that the academics are trying to address. To appreciate Bitcoin’s actual environmental footprint, we need to know where the electricity that powers the network comes from. Unhelpfully, estimates currently suggest that anywhere between 20% and 70% of the electricity BTC uses is derived from renewable sources—and there’s no clear indication of where the truth lies. But much of the rest of that power comes from China, where bitcoin mining is done in the Xinjiang region that relies heavily on dirty coal-powered electricity generation.
Cambridge says that it’s planning to offer specifics in the future by starting to track the location and energy mix of Bitcoin mining facilities.
Even if the use of renewable energy is toward the higher end of this expansive scale, it’s highly likely that many miners will be reluctant to embrace it fully. Eco-friendly methods of generating electricity can be intermittent at best—and this is bad news for miners who need their machines to be operational 24 hours a day, seven days a week, no exceptions.
Alex de Vries, the founder of Digiconomist—another site that tracks Bitcoin’s energy usage—set out the problem with Bitcoin’s burgeoning popularity in an eye-opening interview with the BBC. He said: “If Bitcoin were to be adopted as a global reserve currency, BTC’s price will probably be in the millions, and those miners will have more money than the entire federal budget to spend on electricity. We’d have to double our global energy production. For Bitcoin.”
Many central banks and governments don’t like Bitcoin because they fear it could foster financial instability and undermine sovereign currencies. But as extreme weather events and global warming continues, another context for regulating Bitcoin may emerge.
The defense’s case
Beyond the fig leaf that renewable energy provides, some in the crypto community are adamant that the environmental threat posed by Bitcoin is overblown.
Coin Metrics founder Nic Carter was among those who was exasperated by Yellen’s remarks. On Twitter, he claimed that issuing new Bitcoin accounts for 85% of the energy used by this blockchain. Given how BTC’s supply is fixed at 21 million, and more than 18.6 million are already in circulation, this would suggest that we should see the cryptocurrency’s consumption tumble over time—especially as the number of BTC being generated is halving every four years.
But there’s a bigger issue with the criticism of Bitcoin that really sticks in the craw of crypto enthusiasts. Carter wrote:
“Before Bitcoin, did anyone reason about energy usage by selectively declaring certain uses of energy immoral?”
Of course, the answer is yes. The carbon footprint associated with everything from cars to cattle has come under the scrutiny of environmental campaigners over the years.
Yet those who are pro-Bitcoin have a potent argument: that the advantages it delivers to the global economy far outweigh its electricity usage, even if math puzzles completed by miners have no purpose and are discarded immediately after use.
In a recent think piece for Forbes, Roger Huang claimed that those protesting over the environmental impact of BTC are “missing the mark”—arguing that the cryptocurrency is serving a higher purpose by tackling waste in the financial system… and taking on a world where the rich continue to get richer, even in a global pandemic.